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Published in Nigeria by: Springfield Publishers

Copyright © 2002 Nwaeke 1. Lawrence DEDICATION
ISBN : , 978-8020-37-2
~

I'll is book is dedicated to all members of the NWAEKE

All Rights Reserved
Thi s book will not be reproduced in' part or in
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1
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This book is sold subject tothe condition that it
should not byway of trade or otherwise be lent,
rc-sold, hired , Blit or '-otherwise ", circulated
I 'A M il Y in Odufor Etche, Port Harcourt, Rivers State, Nigeria
i II II VI Ilg or dead and those permanently residing in Aflington,
Ill. ' I,S.A.
II is especially dedicated to my daughter, Miss. Orluchi
',iV,I oIchi Nnenna , Nwaeke, a pre-law student studying
u.lJllllling at the University of Texas, Arlington (U.T.
i i i lllj lllll) Texas, U.S.A whose thrilling poems "The River of
l't'ars" and "The Paragon of Beauty" challenged my
II IIiVlly. You are all very speciaL

without' thec6pyright'o~ne(s consent,ih any

form of bin'ding or cover than that' ilJ which it is
published and thisCbpditiofi being 'i;TIposed on
the subseq!lent purchaser.
. <'~. '

Lawrence I. Nwaeke '

." Business: Concepts and Perspectives

vi
PREFACE
The practice of Business is no longer a 'monocultural
issue. It is multicultural, transactional, and highly globalized. Its
principles and systems are no longer the dictates of any given
political, economic, social or ethnic entity. They are purely
universal in approach, appiication and procedure. Th,,;y cu t
across the entire globe.
This book "Business: Concepts and- Perspectives"
therefore offers a cross-cultural. approach. in the study of the basic
tenets of Business Adm(nistration. It is an introductory text
designed to disseminate thorough and better understanding of the
funct ional areas of Business Administration and how the efficient
and effective management of any given organization is the
absolute function of the environments that either precede or
proceed its formation and functions.
It is also designtd to clarify some basic Management,
Marketing, Accounting and Financial concepts and terminology
and to spread the human and material benefits resulting from the
enlightened application of these concepts, to help students of
Business Administration at all levels and the public identify and
analyze the nexus between a business organization and its
environments and the dynamic and integrated roles this
knowledge plays in the efficient operation of business entity.
Finally the book offers to help improve readers' abilities
in developing, organizing, synthesizing, and appreciating some
unique conceptualizations of the business world as the science or
art of management is practised.
As a first edition, the author assumes all responsibilities
arising from errors in the design, structure, content and
publication of the text.
Lawrence I. Nwaeke
vii
ACKNOWLEDGMENTS
, '
I have been .blessed to work with a lot of professionals
who found themselves in their right professions. These unique
professionals in their various givens spurred me in making this
text a reality.
As a lecturer ,of. M~magement in the Department of
Business Administration, Faculty of Management .Sciences at the .
Riv'ers State U'n iversityof: ' SCience and 'Technology, Port
Harcourt; Rivers. State,Nigerl~, ' I~annot but appreciate the
efforts ' ofmy peans, both ,:pa:~t ' -and ~ pres~nt, 'professor B..A
F~bara, Professor A.1. · Ahia~zu and Pvoress~rP.B. Johnnie, in
encouraging .medi[ectly O'r .indir¢ctly to put in p~int the .pr9ducts.
of my efforts at reyoluticipizirig th~' teaching of manag~ment to
smdefits of the FacultyatalU~vets of learning in,the University ,
I am particularly ' grateful to them. ' - They are wonderful
administrators. The same ievel of gratitude goes to my Heads of
Departnlent, Dr. D.W Maclayton. Dr. G.A. Okwandu and Dr.
P.P. Ekerete whose invaluable advice during their various periods
of headship kept me oil my toes.
The efforts of my colleagues in the field., Dr. L. O. Ottih, ,
Dr. S. A. Jaja,Dr. P.U.C Agundu, Dr. Momodu, Dr. S.A.
Amadi , M~. N.A. Ukpai, Mr. M.D. Tamuonomiebi ,
Mr. D.r. Hamilton. Mr. C.c Ihtinda, Mr. D.S. Mac' ado, Mr.
T.A. Amangala,
Chief . I. Zeb':'Obipi, Mr J.1. Owunary, Mr. F .A. Amadi, Mr.
Bassey Okon, and .
Mr. M. Omodu (JP), are highly commendable.,
Their artistic and scholarly ;contributions in the field of
Business Administration are over whelming and ignited my desire
 Vlll
ix
not to stop writing. I am indeed grateful to all of you. I love you
all . Table of Contents
Each time I was offered to teach a course in management
to students of the Faculty of Management Sciences, I saw in them 1. INTRO])UCTION
a yearning for a written material framme to enable them The Concept ofMan " . . . . . .. . . . . . . . ..... . 1
conceptualize and articulate. The desire was so great in them Meaning of Business . ..... , ..' . . ... . ..... '.. .. 3
that any piece of paper forming my lecture note was not spared. The Concept of Profit ......... . ......... . 5
This great expectations , from these ,students coupled , with the'ir Types of Activities' People Engage With On
many challenges to me in their various classes was the beginning a Daily Basis . . . . . . ..... . . . . ..... • 5
of my articulate wisdom. My gratitude to you all , is beyond What is An Organization? . . ............... . 6
expression . I was reriewed ,by all of you .' Theory ofthe Organization , ' . , .' .. ', ' .. .... , 7
When I established ~ Str~tegic Research, Centre at No . Constraints and the Theory of the Organization 9
460 Ikwerre Road, Rumuokwuta, Port Harcourt, Rivers State, Limitations ofthe T~eory of the Organiza~ion " .. . 10
Nigeria, in 1998 to 'p inY out sustained research in the area of Profits,. " " .. : .. , ... '. .. : . . '..' .. . , , ,. . ...... . 16
Management and Contemporary Business, I started with one
FrictionalTheory ofEconomic .profits" . ... " .. 18
staff, Mr. P.B Normakoh, as my research assistant. He has now
The Monopoly Theory of Economic Profits . ~ , . , . 19
risen to occupy the position of General Manager and Senior
Research Officer in the organization. His ingenuity and The Inl1'ova~ion of Economic Profits .... . ... " . ." 20
creativity in addition to the untiring efforts of Miss Kate Amadi , The Compensatory Theory of Economic Profits 20
and The Role bfProfits in the Economy., . , ..... . .. . 21
Miss Chinyere Obiokpe with the computers are worth ­ Importance of Organizations to Society .. .. .. . . . 22
mentioning. I am over-joyed and very grateful to all of you. Enterpreneurs' Role in a Free Enterprise System 24
Without your efforts this book would have bee,n a mere dream. Basic Rights of the Entrepreneur Under the
Keep the fl ag flying. , Free Enterprise System ............ . 26
The ' steadfastness of Miss Dibabari Siedoma - who Factors of Production .............. , .... . 27
appeared in my world not only as a brilliant scholar in the
Types of Industries Existing Under a Free
, University, but also as a mentor and dearest companion from the

, Enterprise System . ... " ....... . ..... . 29

initiation to the completion stages of this book is beyond

Some Alternative Economic Systems in the

imagination. I highly commend you , for your criticisms,

. encouragement, love ~nd more importantly, for your commitment

, World of Business Today .. . . , .. " .... . ' " 33
to the ideals of scholarship. I thank you immensely. Your love " Why Do We Study Business .......... .. " . . . .. , ~37
for me, my children and future is unimaginable. lowe you a lot Relevance of Business . . , ': ..... . . . . 39
of moral debt and gratitude.
Thank you once again for your extraordinary kindness
and love .
 x
xi
,
3. BUSINESS ETHICS AND SOCIA!L

2. FORMS OF BUSINESS OWNERSHIP 41

RESPONSIBILITY
72

Sole Proprietorship ....... ..... ._........ .. .

41
The Societal Perspective ., ...... . .......... . 75

Characteh'stics of Successful Sole Proprietorship

42
The Legal P~rspective ...... ....... ... . ... .. 78

Advantages of the Sole Proprietorship .......... .

43
The Organi2;ational Perspective .. " . . . . . . . . .. : .. 81

Disad vantages of the Sole Proprietorship ....... .

45
The Individual Per~pective ................ : .. 82

The Partnership System .............: .... '. . .

48
Ethical Models in Use in Organizations. . . . .. . ... . 85

J." Rights and Duties of Partners ...... " '. ........ .

50
The Moral Rights Model ....... .... ,.. .'- .... . 91

Types of Partnership .... " ....... ....... . ... .

51
The Justice Model.. .. .. . .... ,. " .. . ; '.. . .. .. . . 95

Advantages of Partnership ................... .

51
Corporate Social Responsibility . . . . . . ....... . . 98

,­
Disadvantages of Partnership ...... ............. .
52
Responsible Sales Practices . ... ..... . ... ;; ... ' 99

The Corporation .. . . . .. . . . . . . ....... . ..... .

54
How Firms Ensure Responsibility Toward Customers 99

The Corporate Charter. . . . .. ....... . ... ,.. . ..

54
Responsibility to Society ..... , ....... '. ~ .... , 105

Rights and Status of Stockholders ...... ....... .

. 56
Responsibility to the Community .. '.. : . . .. ...' : . 108

Advantages of Corporations ...... ....... . .... .

57
Social Auditing ...... ....... ~..... .. ... , ., , 108

Disadvantages of Corporation ... . .. ... . ... : . . .

59
International Ethic's and SOyial Responsibility .. : ... 109

Other Special Forms of Ownership ............. .

61

Types of Franchises .............. : ......... .

62

Advantages of a Franchise . . . . ............... .

62
112

4. ENVIRONMENTS OF BUSINESS
Disadvantages of a Franchise ...... . .... '. . . ... .
64
U Dimensions of the Business Environments ..... . 114

. The Task (Specific) Environments ........ , . . . . 114

Franchising in International Markets , .. , ........ . 65

Suppliers ...... .,.'... . ..... '" .. '.. '. : . . .... . 114

Using Technology in Franchising ..... " ..... , .. 66

Customers : .. :. : ....... .. .... ,. .. .... ~ ... . 115

The Cooperatives .,.... . .. , .... ' ....... ' ... "'. .. <'. 67
Distributors, ' .. . . .. ...... .. .. ... : .. " ... ': ..'') " . 116

The Role of the Attorney/Lawyer in the Formation

Competitors .......... . .. ;....... .....':-' .. 117

of Any Venture .... " .... .. . , ..... . 68

The General
,
Environments of Business ...... . .. d
. 118

Various Areas That Need Legal Advice , 69

The Physic~llNatural Environments ... , ... ' .... . 118

by All Attorney ..... , ... ,... . ..... .

The Political-Legal Environments .... _~ ....... . 120

Choice of An Attorney ...... 1') ' . . • •• . . • • • . • •• 71

(~
The Economic Environment ... '" ....... ...... 120

The Socio-Cultural Ehvironment' .... : . '. . . . . .. .. 122

.
The Technological Environment. . . . . . ....... . . 123

~
.~ .
 ,]
xii

. 1

5. THE MANAGEMENT FUNCTION 125

xiii

Basic Managerial Roles and Skills ...... ........ 127

Managerial Skills .... ' .......... :.... ....... 129

196

7. PINANCIAL MANAGEMENT

Orgartizationel Objectives and Their Importance 139

Characteristics of Good Goals and Objectives 141

What is Finance? . . . . .. ....... ....... . ..... . 197

Advantages of Organizational Objectives ..... .. 142

How Funds are Used ................... . .. . 197 .

Some C:;ommon Elements to be Considered in

Short-term Uses of Funds . .... . ............. . 197

Formulating Objectives ...... ....... ....... 142

Long-term Uses of Funds .................. . 198

Purposes or Missions, Objectives or Goals,

Sources of Funds , . . . .. ....... ....... . .... . 199

Strategies and Policies in Business: A Short-term Sources of Funds ............ . 200

Comparison ....... . ..... . .. . . . . Long-term Sources of Funds ............ . 202

The Managerial Functions ....... ....... . ..... .

144

148

Plann.ing ................. .. .... ......... .

Organizing . . . . . .. . .... '. . ....... ...... .

148 -- :I 8. THE ACCOUNTING FUNCTION 204

Managers in Different Areas of the Organization '"

152
What is Accounting? . . . . .. ....... . ..... . ,204

Forms of Organization Structure. " . " ....... "

15,8 Accounting Versus Book-keeping .. " . .. . ..... . 205

Directing or Leading as a Function of Management 159

The Accounting Process . : .... . . . ... . . .. . .. . 205

Controlling as a Function of Management .... " ... 163

The Accounting Journal . ............ ... . .. . .. 205

Other Things That Managers Do '" . " ....... .

166

Assets .. . ......... . ... .................. . 206

167

Equities .............. . ..... ......... . .... . 206

6. MARKETING MANAGEMENT Accounting Statements ...... .. . . .. . . ..... . 207

170

Creating Utility for the Consumer .... " ....... .

The Balance Sheet . . . . .. ....... ....... . .... . 207

What is a Market? ...... ..... . . ....... . ... .

170

171

.O";£lt,C"
LiabilIuv.:> .. . ... ....... . ..... . . . . . . .. . .;; ... 208

Classifications of Products in Marketing ... . .. '"

171
The Income Statement .... .. ...... . . ..... . 208

Market Segmentation ...... :...... ....... : ..

The Marketing Mix ...... ' ....... ....... . .. .

172
Interpreting the Financial Statements '. . . . .. . . ... . 209

Other Product Classifications ...... . ...... . .. .

173

-The Product LifeCyc1e .... " .... . .. . . ..... " 174

9. THE PRODUCTION FUNCTION 213

Product Identification .. . ... ....... ..... . . ' "

175

Production ...... ....... ....... . ... . . . 213

Marketing Channels and Physical

177
. 214

177
Resources Used for the Production Process . ..... .
Distribution Systems ...... ; " .. " .... .
Combination of Factors of Production 216

The Physical Distribution System .... ~ '. ....... ;

for Productive Means ............ .

Promotional Strategy in Marketing . ...... '..... " .

181

. ~tice and Pricing Strategy . ... " . ... . .. . ..... . 183

Factors to be Considered for an
218

191
Efficient Production ...... ....... . ... .

Selection.. of Good Operation Site ...... . ..... . 218

 ';,)
XIV

Selection of theDesign and Layout . . .... ; .. : ... 219

Production Control Systems - . ..... . . ..... ..... 220
Inventory Control ...... . ... :.. ... . ... ...... 220
Control of Work-in-Process Inventories ~. ' " .. , '" 221
Control of Finished Goods Inventories .... ".: .. .. 222 Chapter 1

Routing ..... '. ' ....... ..... . . . . . .... . ..... " . 222
INTRODUCTION

Scheduling ; .' .. " ....... ..... .. ....... '" 223

Scheduling for Special Projects .... .. ....... " 223

THE CONCEPTS OF MAN

Dispatching,, : .. ' .. . ... " ..~ : . :. , "'. . ~ ...... " .... 225

Man is a dynamic, complex and rational being.. He seeks

Follow-up. '. . '" ............. : . '" . .- . ~ .._:' . : .225

avenue.~ and opportuhities for survival in a complex world of

Quality Control .... ., :' . .. .. ', ..... .. :. " . . . . . 225

limiteg resources and competing demands; a world where

References ..... complex activities take place in an effort to ensure his ·full
a • a •••

... ...
, " ", ... ", " ... 227
economic participation and satisfaction no matter what his relative
alternatives or choices may be.
In line with this philosophy of rationality or rational
thinking and inclination toward survival man tries to do anything
possible to sustain a decent living. Underlying this philosophy of
man is the pursuit of his basic needs in life. Maslow (1954)
identified these relative needs of man as his physiological, social,
safety, esteem and self-actualization needs which include: the
need for food, drink, shelter and relief from pain; need for
, ~
freedom from threat and security from threatening events or
surroundings; need for friendship; affiliation, interaction and
love; need for self-esteem ,!nd for respect from others; and need
to fulfill one's self by maximizing the use Of abilities, skill. and
potentials respectively . The desire to accomplish the~e needs in
order to be self-actualized leads man to engage in one form of
creativity or the other. He tries to engage himself in activities
which provide him with some potential benefits; benefits which'
ty to attend to his immediate or fundamental expectations. Thi:;
l~pect of rationality and creativity is an ?tt~ibute which makes
man an economic man..
 (t
2
f:Business: Concepts and Perspectives
, .Introduction 3

Within the context of the economic man's concept Gibson,

more .relevant when ~ discussed within the context of Organizational
Ivancevich, and Donnelly (1997) stated that man is primarily
oriented toward w1)at is useful. He is interested in the practical Behaviour and individual value orientation.
affairs of the business world: in the productivity, marketing and Having advanced these concepts of man, what then is
consumption of goods and services; and in the use of economic Business? What does it imply and hOWlS it carried out in our
resources ·for his future productive ' endeavour; and in the contemporary societies with the human element in perspective?
accumulation of tangible wealth. He is : thoroughly "practical"
MEANING OF BUSINESS '
and fits well the stereotype of the America:n Businessman. "This'
A 100t of issues C:lnd concepts have been advanced on what
apparent desire to be creative in order to ' provide consumable
business is all about. . These concepts arid precepts vary according
items for the satisfaction of wants· brings about bUsiness activities
all over the globe. ' . to individual ' contentions ' about what they assume Business is all
about. To better understand the many hypotheses and
1-
There is also the social concept of man: The social mari is
propositions about the construct "Business" the following,issues
not only altruistic and value oriented, he involves himself in the
fo rmation of groups, units, entities, associations and organizations are subject to our ,critical ex.amination:
1. , Business could be regarded as the process of creating,
which interact among themselves to enable him form a coalition
procuring or providing goods 'and services to consumers or
of people working together for a common purpose of sustaining
those who need them in proper quantities and qualities at
their environments. These groups of people operate on atradition
suitable times and places at satisfactory prices.
of systems of beliefs, norms, values and culture, which seem to
be either production-oriented or people-oriented or both. 2. Business could be regarded as the sum total of those
activities that have as their main purpose, the creation,
The above concepts of man; by implication, seem to be an ' '
maintenance and extension of a' concern. which continues to
approximation of a system which views man as constantly
engaging himself in activities and associations which are both exist because it earns profits and other benefits while
providing the means of satisfying human wants.
,; meaningful and satisfying; activities and associations which not ,
3. Business also could be seen as a human activity that occurs
only view him as productive but also interactive and affectionate.
within a social system which involves the association of a
He becomes equally leadership-oriented because of the acquisition
larger number of people interacting together to provide
of some relative powers arising from socialization and intetaction
within and outside his immediate ,eIiviron'ment . . goods and services capable of sustaining their continued
existence eith~r as individuals or a group of individuals
There are other concepts of man such as the theoretical
within a wider social arid or economic environment.
man, the aesthetic man, the political man and the religious man's ,
concepts. These concepts of man a~e 4. Business can equally be defined or looked at as the system of
interaction , of twa' or more individuals who , operate
. ,

~

4 Business: Conl-epts and Perspectives
interdependently to influence e4ch other: s behaviour while
pursing a cornmon goal or purpose.
S . Business can also be viewed or defined as all profit­
directed economic or 'commertialactivities that . provide
goods and services necessary for a nation's standard of
£>
living.
Wh ichever angle one · looks at the various definitions or
propositi ons about business as advanced above one . obvious fact
is that the word "Business" is a broad ahd inClusive term that
can apply to the many activities people unc>!'rtake, on a daily
hasis, to earn,a living based on the degree or. level of benefits or
profi ts accruable to such undertakings .
Econo,tiic benefits or profits are pivotal in business and
they arc pointers to the fact that busine.fs must strive to be
customer oriented, prone to needs satisfying and provide
avenues towards consumer satisfaction. Business, therefore, is
the economic pulse of a nation as it strivr-s consistently to
increase society 's standard of living based on some derivable
Gross National Products and the per capita income of any
society or nation arising from large scale production. The above
definitions of business tend to provide answers to the question of
who the consumers are, what their values are, where and how
they carry out their activities as advanced by Drucker (1974) ,
Just as we said earlier, business activities collectively increase a
nations wealth and her standard of living through improved
Gross National Products (GNP). A Nation's Gross National
Product (GNP) is the sum total of that nation's goods and services
produced or provided during a ·given period while a country's per
capita income is assumed to be the .earnings per person in that
country when its Gross National Products are converted to cash
(earnings) and divided by the total popUlation of that country.
Some countries have high per capita income while others are left
t~
{J
introduction 5
with very low per capita income due to poor technology and
economic underdevelopment and poor ptoductivity capabilities ..
A fact to stress here is that those 'countries with high levels of
technological development attain high GNPs and high per capita
incomes because .,technology efl.hances production and brings
about new and enhanced productivity and profitability. In simple
economics , technology is a produced means of production which
is capital intensive.. All capital intensive undertakings if properly
managed bring about large scale production or ' economies of
.. scale and increased profitabiJity.
THE CONCEPT OF PROFIT
Profit in · the business context is the difference between
total revenue and total expenditure. To be profitable all
businesses must serve their customers effectively and efficiently
in some way if they are to survive on the long run. Individuals
engage themselves in many types of undertakings in order to
render essential services to society. These undertakings are as
depicted below.
TYPES OF ACTIVITES PEOPLE ENGAGE WITH
ON A DAILY 6ASIS.
The following are some basic activities people ' of all
. nations and races engage themselves with on a day to day basis:
1. Farming (2) Fishing (3) Mining .(4) ,Building (Real Estate)
(5) Construction (6) Trading (7) Tailoring (8) Driving (9)
Hoteling (Hotelier) (10) Manufacturing (11) Contraction
(12) Teaching (13) Health and medical services (14)
Legal services (15) Barbing and Hair dressing (16)
Bakery (Baking) . (i 7) Advertising agencies (18) Rentals,
etc, etc.
--------

6 Business: Concepts and Perspectives
The above activities fall under the . classifi~ti9n of
organizations or business undertakings that provide goods and
services for profit. These. organizations also provide
opportunities for individuals to become paid workers under some
regulated environments or undertake to run their owrt businesses .
as sole owners (proprietors) or partnership ventures under the
same micro and macro environments 9f business. , . A more
detailed discussion on profits is found .after the theory of the
organization in this chapter,
WHAT IS ~ ORGANIZATION? '.
According to Boone and Kurtz (1976) an organization is a
structured process in which people inter~ct to accomplish goals
and objectives. It can also be defined as a system which interacts
with its environment and develops a climate in which individuals
and groups interact to accomplish goals and objectives. It is
equally a structured process which is designed to transfonn
inputs, with human . material, technical and other resources, into
intended or unintended out puts. It can finally be
viewed as a socio-technical device which enables the
accomplishment of objectives that are too large and too complex
to be executed by a single individual.
Every organization is essential and necessary as an avenue
for human interaction, and effective and e;fficient productivity. A
full text on organization shall be done when the management
function of organizing or organization ' is discussed later in this
exposItIOn. In the interim a brief on the theory of the
organization will highlight our discussion of organizations.
•.
!..
. <•.
i. . ( '.
,;...
Introduction 7
THEORY OF THE ORGANIZATION
A useful way to begin the study of Business is to consider
the broad framework within>; which business decisions are
analyzed and taken: A business enterprise is a combination' of
people, physical and financial assets, and information involving
finance , technology, markets', and so on. People directly
involved in a busines's entity include Shareholders , management,
labour, suppliers and customers. Society in general is ~ffected by
business activities because the business community uses, scarce
resources for production, pay \axes, provides employment and
produces much of society's inaterial and sCfvices output.
Business . enterprises exist because they . provide".the means . of
producing and distributing goods and services. . .,.
The basic model of a business organization is called the
theory of the organization. . In its simplest version the
organization is thought to have profit maximization as itS"'primary
'. goal. The busine~ owner or manager is assumed to be working
to maximize the cqmpany'sshort-run profits. . 'oJ '
In today' s economy, the emphasis on profits has .been
broadened to encompass uncertainty and thetime value of money
(Hrischey, Pappas and Whigham 1995). They observed that the
primary 'goal of a firm is long-term expected 'value maximization
and this is universally considered as the primary objective of an
organization ' in ~~ economic framework of an organization's
behaviQur. This ·means that capital, labour, organizational and
other resources or assets that comprise . the organization should
produce the greatest stream of net profits over some time period.
This appears to be germane to the planning dialogue that is used .
by the managers of organizations. As a result,it is "expec;ecF
that the uncertainty · iIi . the course of . future events in most
organizations may 'alter the actual, outcome of the ,fact that they
6
~,
,.rr
"
J

c'

8 Business: Concepts and Perspectives Introduction 9 "

'0
provided income and profit that is not received immediately.
hand today is worth more than one naira (N1) to be received a
, There is therefore a :'cost of waiting" with this cost usually being
year from now ,because o~e naira today can be invested and '
closely related to the current level of interest rates. This is
with interest; grow to a larger amount by the end of the year. If ,
because the interest rates offered by financial institutions
we had N 1 naira and invested it at 10 % interest,,it would grow
represent a crude proxy of individuals' and firms' willingness to
to NL 10k in one year. 'thus N1naira is defined as the present
forgo current consumption in favour of a greater amount of
value of Nl.10k due in one year when the appropriate interest
"/
future consumption.
rate is 10%. Alternatively,the present value of N1.00 to be
v'

When organizations forgo current consumption it is known

recieved two years 'from now when the interest rate is 12 %. is
as an act of investment, while ' when indjviduals do ' it, it is

" ,'
regarded as an a9 of s.avings . ' It, is, therefore a fact ,that the
"costs of waiting" 'in this context are influenced by the rate of
inflation over the relevant period.. That is, even ·if there were no
. .,
inflation there would still be a cost of waiting, but this cost
becomes greater in the presence of a positive inflation rate. The ·
implication~ of these according to Hirschey, Pappas and Whigam
(1995) clearly mean that the process of defining value (profit) of
the firm requires careful specification. .
Borrowing frortI their :hypothesis ' (l concept of the ,economic
, model of value maximization, the mdlning of value (profit) mllst
be clarified. In this situatiOIi' in; ny concepts of value are found
in economics and business' literature which tend to reflect book
value, mark;~t valt.e; 'liquidating ' value,going,.concern valu~ and
, so on. ' However ,the value of an organization is the present
value of the firms expected future net cash. flows~ If the cash
flows are equated . to profits for simplicity, the, value ,of the
organization today or its present value is the value of expected
profits or cash flows, discounted back to the present at an
appropriate interest rate.
Dis~ounting is required because" profits ' obtaim!d in t..1.e
future are less , valuable than ' profits earned presently. To
understanq this it should' be recognized that one naira (N 1) in
~.
(N1.00/1.12 (1.12) = N 0.787. In simple equation:
Value of the firm = present value of expected future profits.
,I
It should be noted that the expected value maximization
model relates to a firm's various functional departments and
activities.
The marketing department ' of a firm has a major
responsibility for sales whic:;h involves Total Revenue (TR.), the
production department has a major responsibility for costs which
leads to Total costs of production , (TC), and the finance
department has a major responsibility for acquiring the capital '
needed to support the fir~'s investment and operating activities
and hence for the discount factor in the [trm's activities. The
value or expected v'alue of the firm ,becomes: '
TR Less TC = Profit (Expected Value).
CONSTRAINTS AND THE THEORY OF
~~
THE ORGANIZATION
Managerial decisions within organizations (operational
decisions) are often made in the light of constraints, imposed
by technology, resource scarcity, contractual obligations and
government laws and , regulations. These in business are '
regarded as the "significant others " or the external
environments that shape organizational and individual
"
behaviour. To make decisions that will maximize value,
managers of organizations must consider the

~

10 Business: Concepts and Perspectives
impact of the above environmental variables both on the short­
term and long-term basis and to determine their implications in
their ability to achieve organizational objectives :
;:;.. .
O rgani~ations often face limited availability of essential
inputs (resources) such as skilled labom, .key raw materials;
energy, specialized machinery (technology) and warehousec. space,
etc. They also often face capital constraints that place limitations
on the amount of investment funds . available for a particular
project or activ:ity . Managerial decisions can also be constrained
by contractual requirements. For example, labour contracts may'
limit flexibility in worker scheduling and job assignment, sales.
Contracts often require that a minimum level of output be
produced to meet delivery requirements. In other instances,
however, output must meet certa,n minimum quality
requirements.. Legal <festrictions that affect both production and
marketing activities can also play an important role in managerial
: decision:
Laws that define minimum wages; health and safety
standards, pollution emISSIOn ". standards, . fuel efficiency
, requirements, and fair pricing and marketing practices all limit
managerial flexibility . The rol~that constrai.nts play' in
managerial decisions In. organizations makes .. the topic of
constrained optimization a basic 'element of organization~ a~tivity .
. (Hirschey, 'pappasandWhigh~m, 1995).
' LIMITATIONS OF TIlE THEORY "'
and control. ,.By this we mean that while share holders, as
OF THE ORGANIt~TION
owners, may indeed require managers to pursue profit or value­
Although profit .and value rpaximization are taken as the
main organizationalQbjectivessOIp~ alternative issues are also
relevant in our discussion of an organization and its activities.
:' These issues suggest. that rather ., than 'attempt. to optimize, .
Introduction 11
organizations often behave in a manner 'that attempts to satisfice.
The issue of optimization seeks the' best solution for an
organization. While in trying to satisfice, organizations seek
satisfactory rather than optimal results for themselves. For
example, it has often been hypothesized that managers of
organizations attempt to maximize total sales revenue as opposed
to total profit and that this is part of a desire for high rates of
company growth that can lead t~ dominant market shares. In
• . ' ~\> :'
essence, this theory claims that managers will s,atisfi.ce some
profit in. order to incretJ.,se" sales revenue; although the extent of
.
such profit sacrifice is far from clear.
In its . crudest .form, simple sales revenue maXImIzation
finds little statistical or theoretical support, since under certain
types of demand and cost conditions iUnevitably leads to losses,
and in all sets of circumstances leads to lower profitl,evelS than
would be the case with profits or value-maximization objectives.
Business and organizational experts argue that sales
revenue maximization in business which is subject to a minimum
profit constraint is much less controversial, since this'explicitly
recognizes that managers may trade off some profits in order to
obtain a greater sales revenue. This, they said, might be in order
to gain a greater share of the existing geographic market or it
might represent an attempt to secure aJoothold in a new market.
Whatever the. reason, the fact that .managers do not always
necessarily wholeheartedly pursue profit maximization stems
directly from the increasing degree of divorce between ownership
maximizing objectives, the managers appointed may not adopt
such an objective to the same extent: Managerial rewards and
benefits stem from a variety of sources such as departmental size,
12 .introduction
organizational size, fringe benefits, secunty of tenure and
. ~ . ~
professional challeng~s, and these do not always lend themselves
to simple profit maximizing behaviour in ',orgallizations.
In this scenario, share holder's wishesc:annot be ignored
entirely , and it is the extent to which they can' be ignored ' that
determines the size. bf the ' minimum ...profit
..' " ". ' .constrairit.,-. , The
purposed scenario is therefore ' oiie ~ 6f Sllb"'maximizing or
satisfici ng ' behaviour in ' which ,sharehol~ers ,~re kept satisfied by
.
the l11inimum profit ..~
co~straii1t,
. . .
\
2nd managers
"' ,. .
arid"employees
.
. '
organizations are kept satisfied by not always having 'to perform
' This situati~n ' 'differs rrom ' ,organization to
optimally.
organization and' the d egree o f organizational, slack.
The nature ana exten:~ 'jf ,slack cleatIy ,differs from one
organization to another., although it is equally difficult. in all
circumstances to quantify. ~, The only reason that va1lie­
maximizing share holders ' are satisfied with the actual reported
. " . t). .' ':
level of profits is that they 'usually do not know that pl'ofits could
have befn higher. In this respect, the manager 's roles become
very crucial ~ince they are usually the prime sources of
informaIion upon which performance is judged. As long as
things ' are going well for an organization there will rarely be any
need for this information to be irispected too closely, and so no
need to justify expenditures and activities that can properly be
defined as slack. Even if profits should turn down, the rationale
of value maximization is sufficiently ambiguous to allow many
current practices to be justified in terms of long- run as opposed
to short-run maximizing behaviour. Loss leader marketing is a
prime example of this type of activity.
Managerial and organizational performance cannot always
be assessed adequately solely on the basis of information thaI
managers themselves supply, or on the basis of short-term as
."
Introduction ' 13
"1 l pnSl.xJ to long-term objectives. Should business and eeonomic
I 1111\ 1i Ii()[1S deteriorate severely, thenslac~ isthe' first resource to
III Nac.rificed. Operations and actIvities that are not truly essential '
111 va llie-maximization objectives tend to disappear; and the entire
111) ~; lll i /,ation becomes less slack in all respects. On the basis of
1111:, Ii would therefore appear that the p osition O} the business
Iyl \(;, is the ultimate reg'ulatcw of the extent of organlz:l tional and
.
of 11I:l llagerial slack. But this is to state that the business cycle does
IIIlI affect alUndustries' and alltlrmsin that industry. to the same
-. '. .. , . . . . . . . '. '. . . . .
( .
.,:
I xIl'nt. Consequently , slae;k J.S a pheno Il1enon that IS parqcular to
Illy organization and is eventually n~gul~ted 'by :', competiti~e ',
I Iliiditions in that company's ihdustry .' theseconditionsmay or
II I:IY not reflect the overall bdlav)'bu~ oftheeconomyas ;) whole' '
In ~;ummary , valu~: rm.l y.jrniza:jjxt Zi:~ a managerial objective .
II:r I: 2,PDeaI lhat woUld ' seen~· to be justified in many
IIIt' umstances. it is perhaps best regarded as the bottom line
lowards which other objectives are periodically forced to gravitate
11Y the effects of market forces, However, managerial and
11\ ganizational slack will still continue to exist intermittently and
would represent the difference between managerial and owner
IIhjr..:ctives. Regardless of this, deliberate sub-optimal behaviour
II II I actions inevitably require knowledge of what, the optimal
,ll'lion would have been, and so value maximization remains a
v: t1 id objective for the techniques of managerial reasoning, This
IIj hecause anyone can sub-maximize, whereas only training,
('dllcation and experience confer the ability to maximize. In this
I ('spect, if, therefore , the decision is made by workers and
III:tllagers to underachieve when it is based upon the knowledge of
whal could have been done and not upon a lack of the techniques
Illal could have been used to improve outcomes. Differ.ences in
tllr..: assumed objectives of the organization can
:) ~

14 Business: Concepts andPerspr:r('tives ." Introdu,ction .· 15

I ill IIIl illg decisions as well. . Bllymit~ pressur.e

. Jromunfriendly
exercise a considerable influence upon' the predictions that the , ~ ~)

, " lIql"lIie~ called "raiders"ha's ',beencOnsiderable, during recent

models 'apply when considering a change in the econ9mic
environment. For example, regardless of their operational
t ,II ,'" and , such ' takeovers
( , "
are ·
.~specially 'hostile to i~efficient • \ C"I

i1i [iIIi 1v,l'melU, which is usually replaced fOI:, better performance

objectives, in response to a decline in demand for their product, " ,, ' ,. ;, . " . " . ':) .. " . ': . { ," "

"[ 11 i; (lIlH;S I.' .' .

companies may well consider increasing their advertising
There seems to be a st~ong · correlation · between
expenditure. Such an action would have .two effects-it would I
np. lllizational profits ,i ~'nd ' managerial compensation in most
increase costs by the amount of the extra advertising expenditure,
iii· ,tllizalions in recent times. Ma'naghs have strong economic
and it would increase revenue by an amount equal to the effect 01 III 1 III ives to ' pursue value maximization 'thrOllgh '..'effective
I,!

i the extra advertising expenditure on the strength of demand I, ... 1... 11111 making .. It is equally important to state that' managers
! In decidIng whether, " and by how much, advertising Illil ',1 l'ol1sider all relevant costs 'and,benefits/pefore they can make
expenditure should be increased, different operational objectives i t: 1', llIll:U decisions. This also. applies to th(~: de~isionto satisfice
exercise ' a crucial effect. If organizations aim to maximize Illilll 'I' than to ma,ximize . . Jtis ' relt.~vai1t4Q~6te:..~r,e' that ,b.efore a
, 1- . , • . • • . " tf -4{.

profits, then an increase in advertising expenditure that is exactly
equal to the anticipated increase in revenue is the maximum that
is justified. On the other hand, if companies aim to maximize
sales revenue, then advertising expenditure should be increased
until there is no further increase in revenue, or until the
maximum profit constraint is ,breached. Only in very special
circumstances will these two responses be the same, and so the
., amount of advertising expenditure undertaken is clearly sensitive
to organizations' operational objectives.
Certain oligopolistic industries appear to engage in
excessive advertising expenditure. This represents a prima facie
evidence of the ' existence of revenue as opposed to profit
maximization behaviour under certain conditions and
circumstances. Furthermore, other than the prospect of
shareholder sanctions, more indirect forces may also exert
influence in the direction of value maximization. Competition in
, ,' the capital markets in which companies acquire the investment
funds necessary for current operations, growth and expansion
"
often forces managers to seek value maximization in their
\IIIIP:lI1y can. decide , on .a . satisfac.t6ry ,leyel ' Qf ;op~rf(jtma.nce,
1II 'III.IJ:l'ment °must examine . the costs ofo such a: deCision. . For.
IIllpk , it simply, may be profitable to see~ ~ o~t the ' best
II 'l llllical solution'to a problem)f the ,cos,is of finding this solution
II .lIl y exceed resulting benefits:, . What often appear to be
111 ',1ICi ng attitUdes on the part of management can iriterpreted be
v. due-maximizing behaviour once the, ¢osts of information
11 111'1illg and analysis are considered. Similai"ly, short-run
III wI II maximization strategies are often consistent with long-run
dill ' ma)}imization when the ' production,distdbution or
!" Ull lni ional advantages of la~gecompany size . are better
iiIIil! ' l ~: I l)()d . 1,\lthoughthere will always remain considerable
,1,," 111 :lh()Ut the true operational objectives of organizations under
til l lll'UIl1starices, there is no conclusive evidence to suggest that
!III' v: iI (I ~ - l11aximizatiori objective, is notan appropriate assumption
I ii 1111' majority of organizational situations. Given this interesting
1111.111(1 11, it will" be instructive to re-examine the concept of
rrrr
16 Business: concepts and Perspectives
profits and their role in the value-maximization theory
organizations.
PROFITS
The concept of profits in Qusiness has already been brielly
discussed in the proceeding sections of this chapter but needs all
elaborate explanation i~ this Mscours~.
ThaL is to say that to understand the theory of all
, '
organization and the role · of an organization in a free market
economy, one must understapd the nature of profits; , Profits arc
s}lch a key element in the free enterprise s),stem that the system
would fail to operate without profits and ,theprofif. moti.ve. Even
in planned economies where state ownership rather than private
enterprise is typical, the profit motive i s increasingly used to spu ..
efficient resource: use. Profi.ts , and profit motive , play all
impOl:tant and growing role iri the efficient allocation 01
organizational ,resources .
The general pllblic and the business community typically
define profit using an accounting concepL ,This gives rise to a
general understanding of profit as the residualbf sales revenue
minus the explicit costs of doing business . 1t is the , amount
available to provide rewards 'to the shareholders , ~ho have
supplied the c ompany 's equity c,;apital after payment for all olbel
resources the finriuses. This definition is often n~ferred to as
arcounting b~si'ness profIt.
or ' '
, Economists also have their view of profit. ' ' They defim:
profit as the excess of revenues over the costs of doing business .
However, " inputs provided by' " the owners, including
entrepreneurial effort and capital, are resources that must be paid
'fotas well, if they are to be employed. they include a normal
rate of return on equity capItal plus 'an 0pp01tunity cost for the
(
,~;
... "
Introduction 17
11\
10110rt of the owner-entrepreneur as costs of doing business, just
.I'; I he interest paid on debt and the wages paid to labour are
~ {HIS idered costs in calculating business profit. Therefore, the
I j': k -adj usted normal rate of return on capital is the minimum
{('111m necessary to attract and retain investment in an
, .
(II )',:tllization . Similarly, the opportunity cost of owner effort is
dl'lt: rmined by the value that could be received in an alternative
,Ill ivity . In economic terms , profit is business profit minus the
IlIl plicit costs oLcapital and other owner-provided inputs used by ,
1111' company in doing business. Thi;, profit. concept is frequently '
H:l'l-rred to as economic profit 'to distinguish ' it fro~ husiness
pllI li t.
The concepts of business ',profit and , economic _profit
I(cording to HrischeyIi Pappas and Whigham, _(1995) can be used
II) l;xplain Why, profits exisf arid wh~t their role ,is in a free
eIJt\:rprise system. The ' concept 0'[ economic profit' recognizes a
"'qll ired paYITlent for the us~ Q(owrier~provided inputs. There is
, j Illlrmai rate o'f return, 9rpr9fit, 'fore~ample, 'tnat is necessary
1111 illciucing ind~Y iduals' (0 invest funds 5n one-activity [<lther than
illv ('sting them ' el~e ' where or , speI1d,ingthem , for cu'r rent
( (1IlSllmption. This normal profit is' simplY a cost ,for capital., it
I .. 1111 differenffrom the cost of..other resources, such as lapour ,
1II,IIt'ria\s anderiergy. : A ' similar , cost exists for, the
1_1111 \'I'reneuriaJ;effort of a company ' s, Qwner-manager ,an'd 'for
j 11111'1' resources that owners ' bring : to' the organization', ' These
11l'ptlr( unity costs for owner~provi(fGd inp,uts . offer ~ -primary
I , plauat ion for the existence .of husiness pfd fits. A question that
I I Hilt! fea ture h§re is "what explains the differericc between the
1.IIIII()lll ist's concept of normal 'p rofits a::i a cast of equity capita!
III! I III her' owner~p~ovided ' inputs' and the "actual business profits
,' IIIlC d by compani~~? To say'the least, it would be noted"that in
---:--~-~
riP
1
18 Business: Concepts and Perspectives
real equilibrium, economic profits would be zero if all companies
operated in perfectly competitive markets. All companies wouM
report
. a
business profits r~flecting only _ norimil rate of return on
, ,
equity investment and payment 'for- other owner-supplied inputs.
. . ' . . .' "'., .,
In practice, reported profit rates vary widely. among cci~panies.
A review of the operation~l dimensions of Inany enierpris~s .shows
that business profits have ' ranged , fro~ very low in ', the airline,
banking, and~nsurance industries: to very high in the ,. office
equipment, ph~rmaceut~cal 'ahd~;6fidririks industries. Some of
this variation in business profits ;nipresents 'the influence of risk
premium~ necessary to . compedsate investors if one busine~s is
inherently riskier t han another, but many companies o~viously .
earn significant economi<; profits or experience economic losses
over any given recording period. Examining other theories used
to explain the exis~erice of economic profits generated by
organizations will provide further insight into their critical role in
a market economy and in managerial decision making. These
theories are; frictional theory of economic profits, MOlWpoly
theory of economic profits, Innovation theory of economic profits,
and compensation theory of economic.
profits. . ,
~ .~;:
FRICTIONAL THEORY OF ECONOMIC PROFITS .
One ex:p'l~mation of economic profits or los,ses is frictional
profit ' theory. " It ' states that '· markets., ' are :. sometimes '. in
disequilibrium because of unanticipated changes in demand or cQst
conditions. " 't ' . Shocks . occur in ' the , eco~oriiy, ' produc.ing
disequilibriu~ condition,s ', ,t hat lead to positive or negative
economic 'pr~fits for so~e companies. 'Using the United States
industries as example one would realize that the use of automatic
teller'. machines (ATMS) makes it possible for the customers of
, /" ,
,;
~
Introduction 19
1"lId s in the USA and building societies to obtain cash, cnter
,I. IUlsils and pay bills. At the same time, ATMS render obsolete
I () f the functions that used to be carried out at branch offices
II I, I I Y
lilt! hd p lead toa consolidation in the industry that still
1lll ll tllllpS. Similarly, a new generation of user-friendly computer
I II i ware leads to a mark~t increase in the demand for high­
pI ,wl'n.:d personal computers (peS) and a rapid growth in returns
it)i' ('Ilicient PC manufacturers.
Alternatively, a rise in the use of plastics or aluminum in
Ii' production might drive down the profits of steel
11 1.l lllIfacturers, Over time, barring impassable barriers to entry
11111 exit, resources , would flow into or out of financial
111',ll llItions, computer manufacturers and steel manufacturers thus
dl lv il\g rates of return towards normal because of frictional
I II It )I'S that prevent instantaneous adjustment to new market
Il llid itions. ;
I'll E MO~OPOLY THEORY OF ECONOMIC PROFITS
A further explanation of above-normal profits, monopoly
I J 1(I fi t theory, is an extension of frictional profit theory. This
II It 'my asserts that some companies are ' sheltered from
L IIlIlpetition by high barriers to entry.
1:1
Economies of large-scale production, high capital
il 'qllirements, patents · or import protection enable some
I llillpanies to build monopoly ,{Jositions that allow above- normal
1IIIl Iits for extended periods. Monopoly profits can even arise
1" '1'IIL1Se of luck or happenstance or from deliberate aggressively
1111 iL'ompetitive behaviour. Unlike other potential sources of
II !lIve-normal profits, monopoly profits are usually seen as
IllIwarranted, and are frequently taxed at penal rates or otherwise
I )'.lIlated.
~

20 Business: Concepts and Perspectives
THE INNOVATION THEORY OF ECONOMIC PROFITS
An additional theory of economic profits , innovation profit
theory, describes the above-normal profits that arise following
successful invention or modernization. For example, innovation
profit theory suggests that the Xerox Corporation historically
earned a high rate of return on investment because it successfully
developed , introduced and marketed Xerography , a superior
copying technology. Xerox continued to rec~ive these super
~
normal returns until other companies, such as canon, entered the
field and drove p~ofit:~i' >down to a normal level. Similarly,
McDonald ' s · earned above-normal rates of return as an early
imiovator in the fa~t-food business . Hqwever, with increased ,
competition froin ,Burger I4ing , Pizza land and several other
national and regional competitors, McDonald's like Xerox, has
seen its -above-normal returns decline. As in the case of friction~l
or d isequilibrium profits , profits that are due to innovation ar'e
susceptible to the onslaught of competition both from new and
from established competitors.
THE COMPENSATORY THEORY OF ECONOMIC PRQFITS
C'S ompensatory profits theory describes above-normal rates
of return on investment that reward companies for being
extraordinarily successful in meeting customer needs , maintaining
efficient operations , and so forth. If companies that operate at the
' industry's ave:t;;age level of efficiency receive normal rates of
return, it is reasonable to expect that companies operating at
above-average levels of efficiency will earn above-normal rates of
, _ 0 • return'. . Inefficient companies can be expected to earn
unsatisfactory, below-normal rates of return on their investments.
. Compensatory profits theory also recognizes economic profit as
an important reward to the entrepreneurial function of owners and
c'
Introduction 21
managers. Every company and product starts as an idea for
better serving some established or perceived need of existing or
potential customers. This need remains unsatisfied until an
individual takes the initiative to design, plan, and implement a
solution . The opportunity for economic profits is an important
motivation for such entrepreneurial activity.
THE ROLE OF PROFITS IN THE ECONOMY
Each of the preceding four theories describes economic
profits obtained for different reasons. In some cases, several
might apply . For example , a very efficient manufacturer might
earn an above-normal rate of return on investment in accordance
with 'compensatory theory, but during a strike by a competitor's
employees, the above-average profits may be augmented by
fr ictional profits. Similarly, Xerox's profit position might be
partly explained by all four theories: the company earned high
frictional profits while 3m,Kodak, Canon and other firms were
tooling up In response to the rapid growth in demand for office
copiers; it has earned monopoly profits because it has some patent
protection; it has certainly benefited from successful innovatiOIi;
and it is well managed and thus has earned compensatory profits.
Economic prQfits play an important role in a market
economy. Above-normal profits serve as a valuable signal that a
company's or industry's outputs be increased . Expansion by
established companies or entry by new competitors often occurs
quickly during periods of high profits. Just as above-normal
profits provide a signal for expansion and entry, below~normal
profits provide a signal for contraction and exit. Economic
profits are one of the most important factors affecting the
allocation of scarce economic resources. Above-normal profits
-J
22 Business: Concepts and Perspectives
Introduction 23
can also constitute an important reward for innovation and
3. Serve as important sources of careers to citizens of our
efficiency, just as below~normal profits can serve as a penalty for
country.
stagnation and inefficiency. Thus, profits playa critical role both
4. Enable us reach goals that would otherwise be much more
in providing an incentive for allocating scarce resources.
difficult or even impossible to reach as individuals. ..
5. Provide records of past accomplishments because they
IMPORTANCE OF ORGANIZATIONS TO SOCIETY
provide a foundation of knowledge on which we can build
An important element in the study of business
to acquire more learning and achieve greater results. ~ In
organizations is the relationship between these organizations and
this way, they help to make knowledge a continuous
society. Our knowledge of organizations clarifies the vital role of
bridge between past, present, and future generations.
organizations and points out ways of improving their
They also add to our knowledge by developing new and
contributions to the achievement of societal or social objectives.
more efficient ways of doing things.
The evidence that business organizations contribute
6; Provide their employees with sources of livelihood
significantly to social welfare is clear and convincing. The
including personal satisfaction and self-fulfillment.
economies of Nigeria, Africa, Europe, the United States and ...
Organizations flourish bett~r under a free enterprise
several other Asian Countries have sustained notable rates of
system. Nigeria, like many other nations of the world, operates a
growth over many decades. The benefits of that growth have also
free enterprise system which in most cases is referred to as
been quite widely distributed in some cases. Suppliers of capital,
capitalism. The free enterprise system simply means that
labour, and other resources all receive substantial returns for their
business organizations operate in a dynamic environment where
contributions. Consumers benefit from an increasing quantity and
success or failure is determined by how well they match and
quality of goods and services available for consumption. Taxes
counter the offerings of competitors in the market economy. In
on business operations and profits as well as on the payments
effect, competition is the watch word in a free market economy.
made to suppliers of labo1:lr, materials, capital and other inputs,
',', Competition here refers to the battle between businesses for
provide revenues needed to increase government services. All of
consumer acceptance. Each producer in the free market economy
these contributions to social welfare stem directly from the
must bring to the market what is acceptable in quantity, quality,
effectiveness of organizations in serving the econ6mic needs of
price and value. Sales and profits are the yard-sticks "by which
their customers .
consumer acceptanc~ is measured. Boone and Kurtz (1976)
Organizations are therefore important in some other ways.
observed that competition is a vital mechanism for assuring that
They tend to:
the free enterprise system continues to provide consumers with
1. Enable us to accomplish things that we could not do well
goods and services that make up and encourage their high
or could not do at all as individuals.
standard of living.
2. Help provide a continuity of knowledge.
'T'
,
24 Business: Concepts and Perspectives
Entrepreneurs play key roles in a free enterprise system.
Without them it would be difficult for organizations to be formed
and operated for any marginal form .of profitability. All
entrepreneur is a person who takes the risk of starting and
manag,ng a business, (Nickels, MchHugh and McHugh, 1997).
Entrepreneurs not, only create wealth for themselves and their
families; they also create jobs for the communities where they
operate. . What then are the entrepreneurs roles in a free
enterprise' Vstem?
ENTREPRENEURS' ROLES IN A FREE ENTERPRISE
SyjTEM
To understand the explicit roles of an entrepreneur in the
free enterPrise system, who the entrepreneur is. needs a more
elaborate explanation. ~ I« III of enhancing the productivity of labour to' encourage
For the purpose of a fair definition, an entrepreneur is the
risk-taker who sees a profitable opportunity and ~kes advantage
of it by organizing and operating a venture designed to achieve
some specific goals and objectives. In doing so profits become
the rewards for a suc~essful entrepreneur. Profit is money a
business earns above and beyond what it spends for salaries,
expenses, ~d other costs. Profits do not come easily. For
profits to 'i ccrue in business the entrepreneur must take some
economic risks designed to meet public needs. In doing so and in
few cases the costs and risks might be so great that it becomes
impossible for private individuals to perform the tasks necessary
to pilot an enterprise. As a result organizations and or
companies emerge.
The free enterprise system otherwise known as capitalism
is founded on the principle that competition between business
~.
Introduction 25
!I'I', lItil', ations will best serve the interest of the society that wants .~;"lt
\ ...;'
iI II III
Ad'~ m Smith who is the father of capitalism described it as
1111 wealth of Nations. According to Smith (1776) an economy is
1I .I!ulated by the INVISIBLE HANDS of competition. By this .
II Ii, It ( 1776) meant that competition among organizations or
IIll'lpanics would ~~sure that consumers receive the best possible "
i'IIIlhll'IS and prices since the 'less efficient 'producers wquld '
I,IIII1:1I1y be eliminated from the market place. Smith in 1776
qil! Y have advocated for Totll Quality Management which ip.
ii, '" is a management or organizational 'approach to long-term
m' 1' :;S through customer satisfaction based on the participation
Ii ,til members of an organization in improving· processes of
1'lllIitll'lion, products, service and the culture in which they w~rk
I IIll'l'ivch, Lorenzi and Skinner, 1997). In Smith's days the
1"lldlll'1 ive efficiency was the principle of division of labour
IlI t. lt involves the system of breaking down the work process
Iilill :-' llIlpler forms in which a worker undertakes the activity in
itir it he/she is best fitted by his/her skills, knowledge and
did II y. Division of labour encourages large-scale production and
Jih I "/lse in profitability.
The invisible hand concept is the basic premise of the free
ilHl,l1 (' I economy since competition is the primary regulator of
lli ll ll '~: t;conomic life. This might not necessarily be the case~
In some cases the public, through its elected
I ; I'll ("it'lllatives may have to pass laws designed to strengthen the
11111 (II competition. These laws prohibit- attempts by producers
I, I 1III1I10pOIize or dominate aparticular market. Boone ami Kurtz
I'JlIt) pointed out that without some basic rights accorded to
",.
. \:' , .",.,.
(/
.;>
 26
Business: Concepts and Perspectives
Introduction . 27
entrepreneurs they would feel very reluctant to engage themselves
in business. These basic rights are discussed below. With this as an issue in business, consumers ulcay be offered
several choices of bread, furniture, television programmes and
BASIC RIGHT&, OF THE ENTREPRENEUR UNDER THE magazines which they tan accept or reject subject to their various
FREE ENTERPRISE SYSTEM circumstances'Of forces at play. '
The freedom of choice is so habitu&l to us that we sometimes
Certain rights are enjoyed by persons involved in a free "­
enterprise system. These rights .are crucial to the ,operation of forget its importance. A free enterprise ' economy tries to
.

capitalism. They are laws about: "maximize human welfarQ!and .happiness by providing alternatives.
.

Other systems, however, do limit freedom of choice in order to

1. PRIVATE . PROPERTY: The free enterprise system
accomplish government goals, .sucQ. as production increases, etG,
guarantees that people have the right to own, accumulate,

etc.

buy, sell and ' will property. .This

' . .
right includes most forms
of property such as land, buildings, machinery and
4. COMPETITVE GROUND RULES: The free .enterprise
equipment. " The right to private property is the most
system also guarantees that the public retains the rig~t . to set
fundamental of all rights under the free enterprise system.
ground rules for a competitive activity. For example, the
Most persons or citizens believe firmly that people should
government, speaking for the public may pass laws to . prohibit ·.
have the right to any property ilii t they work for or work to
acquire and to all profits resulting from such property. cutthroat competition, "or excessively competitive . practice
designed to eventually eliminate competition. Other ground rules
2. PROFITS: The free enterprise system also guarantees that
may involve the prohibition of price discrimination, fraud in
any entrepreneur who originates and sustains a business
financial markets, and deceptive practices . in advertising,
enterprise has the right to all profits (after taxes) that might
. packaging and personal selling.>D
be earned by the business. The free enterprise system does
To achieve the abo(;e rights the entrepreneur must produce
not guarantee that the enterprise will always earn profits but
, marketable commodities, which will involve a combined use of
if it dOes, the risk-taker has a legal and ethical right to it.
means of production in the most efficient way possible. Without
3. FREEDOM OF CHOICE: There is a maximum freedom
these factors of prod.uction no gainful ' economic aqiv~ty will be
of choice in employment, purchasing decisions and •
carried out. They are discussed as below.
investment under a free enterprise system. This right means

that a person can go into (or out of) business with a

FACTORS OF PRODuCTION ~
minimum of governmental interference. Anyone can
The free ' enterprise system requires certain inputs if it is to
tchange jobs, negotiate the compensation level, join a labour
operate effectively. Economists ana managers call these i,nputs
union and quit if one so desires.
factors of production. Not all companies requir~ exactly,the same
combination of these factors or . elements of production.
~,
\
L
 o

~l
Introduction 29
28 Bu~iness : Concepts and Perspectives
lixed or variable. A variable capital diminishes with time or can
Each entrepreneur or business has his or its own peculiar mix of
"
nO longer be in use with time while a fixed capital or asset
these four factors of production, namely: Land, Labour, Capital
appreciates in value with time and forms a permanent fixture
and entrepreneurship. LAND refers to ali types of real estate or
within an industrial setting or outside of it depending on the
property such as a plot of land, or more, a factory or a, store.
nature of business being undertaken. Although some fixed assets
Land is "a basic resource or factor of production that' is required in '
depreciate, their level of depreciation is gradual or residual as a
any economic system. It isJ. fixed asset in business and without it ,
no formal or functional activity could take place because' land is result of the high value or premium attached to them.
~-I'lTREPRENEURSHIP is a system of risk taking
fundamental , to business estahlishments since organizations,
involving an entrepreneur who invests into business for profit. In
employers and employees cannot exist without land. Production,
some cases the en~repreneur manages a business effectively,
mark~ting or distr,ibutiort qf , good~ and , services, physical
efficiently and actively but in oth~r cases this duty of corporate
structures, etc cannot exist if land is not utilized. , Umd therefore
st~lnd~as' an indispensable factpt'of prod~lction by a~l parameters, ' ' management is handed over to salaried managers who do so
independent<?f the shareholders or stockholders. The
" : L"BOUR. refers to . any employee or anyone who works
,entrepreneur or the manager becomes the chief coord~nator of all
, . for an orga'nization for bene~t in the fprm of wages and salaries.
factors of production andhe puts them to the best use possible.
~ :.
Labour , in~ludes the company president" tb,e' production manager
It 'is not out of place in business to state that all the four
. and other functional managers, s~les personnel ~nd assembly line
'factors of production must receive a financial return if they are to
. ·or. chsual workers . Labour is' a variable asset in busjness. It "
be used in the free enterprise system'. These returns are in form
varies according to type ,and size of an organization, degree ' of '
of rents fOb land, wages and salaries for labour and interests on
work force ~ etc. ' ,.,
investment ' or profits from capital. When these basic principles
Without labour it becomes difficqlt to transform inputs .
are in place 'the business enterprise becomes viable, otherwise, it
into " outputs . that 'are capable "of satisfying human wants for '
will retrogress to oblivion. This state of oblivion is called
enhanced productivity and profitability.
entropy or business failure or bankruptcy , or insolvency or <
CAPITAL is defined a's .the funds necessary to finance
business activities, especially, production. It, also involves money ' liquidation, which in turn could, be subject to litigation if that
needed for expenditure on distribution of goods and services, given situation could be effectively resolved .
personnel and other , means of production such as materials and
machinery. Capital can be provided in the form of investments, TYPES OF INDUSTRIES EXISTING UNDER .

I , profits or loans. This money is then used to bl,lil~. factories, buy A FREE ENTERPRISE SYSTEM

raw materials, hire workers, etc., which form some critical or
'J
crucial inputs of a production process. In elementary economics
capital is called a produced means of production "and could be
Four basic types of industries exist in a free enterprise
system. These are perfect competition, monopolistic, competition,
Oligopoly and monopoly.
 30 Business: Concepts and Perspectives
PERFEGT COMPETITION
A perfect compe;tition is a situation where all of the
companies in an industry" are so small that some of them cannot
individually influence . the price charged in the mark~t place.
Price at this point is set by total market demand and total supply
of goods and services. Goods are tangible products such as
houses, food , and 'clothing to mention but a few, .while services in
econom~c form · are intangible products' such as education,
healthcare and insurance which can not be physically seen but can
satisfy the very basic needs of society if effectively and efficiently
discharged. Under a perfect competition, sellers prodllce
products that appear to be identical. Agricultural products are
often considered to be the closest examples of perfect competition
at work. The prevailing situation in a perfect competition where
. price determines the total quantity of goods and services produced
Jeads to the simple laws of demand and supply or the price
mechanism, which implies that price, · determines the mark~t
forces of demand and supply in a given market situation. The
diagram below explains this situation in a logical way.
" called tile equilibrium price.
S/ = supply
price ~ or competitors in the rriarket place.
D =Demand
Quantity produced
Introduction 31
.As could be seen above supply is a schedule of what
producers will offer in the market at various price levels.
Demand on the other hand is a schedule showing what consumers
will buy at various price levels also. The intersection of the
supply and demand curves is the price .level that will prevail in a
perfectly competitive economy ·if such an economy ·prevails.
This is called the equilibrium price and it is the price level at
which consumers and suppliers will buy or supply the . same
number of goods and services under some prevailing price levels.
Borrowing from elementary economics there ar~ three
basic laws of demand and supply under a perfect com~etition. ·
These are:
1. The higher the/, ;price, the. higher the quantities supplied but
/
the lower the }luantities demanded. ' .
'/... The lower. the price the higher the quantities demanded but
the lower the quantities supplied.
3. However, there will be"a price level at which the quantities
demande'd will be eq~~l to the quantities supplied. This is
Perfec~ competition mea~s that there is also a similar
product that cannot be differentiated from those of other suppliers
~.
MONOPOLISTIC COMPETITION
This exists . when a large number of sellers produce
products that are very similar but are perceived by buyers as
different. Under monopolistic competItIOn, product
differentiation (the attempt to make huyers think similar products
are different in some way) isa key to success. It is an industry
where a few or less companies produce and sell products that are

0:)
32
Business: Concepts and Perspectives
differentiated from those of their competitors. MonfJpolistic
Competition also gives a firm some power over the price it \y
ill
Charge. A good example is retailing where the price can V<l-ry for
different goOds. The relatively small size of these firms also
Illakes it easy to enter the industry.
OLIGOPOLY
This is a form of competition · in which a market .is
dominated by just a few sellers. Generally, oligopolies exist in
industries tbat produce products such .. as steel, cereal,
automobiles, aluminum and aircraft. The entry of ~ew
Competitors is restricted by the huge investments that are required
for market e(ltry. In an oligopoly, prices tend to be close t6 the
same. The reason for this is simple. Intense price competition
Would lower profits for all the competitors, 'since a price cut by
One producer would most likely be matched by the others.
Product differentiation, rather than price differences, is usually
Ii
the majo~ factor in market success in a situation of Oligopoly.
~ONOPOL)'
.A moflopoly Occurs when there is only one seller fora
Product or service. It is a market where there is only a
COmpetitor. Since one seller controls the supply of a proctuct, the
Price may rise dramatically. Nearly all the monopolies that do
eXist are regulated monopolies such as the public utilities.
Companies selling or marketing electricity, natural gas, telephone
Services are usually regulated by an agency of the state or federal
gOvernment. These agencies have power over many aspects of
regulated monopolies including pricing and the profits that are
lllade. There are no directly competitive products in a mOllopoly
,.
Introduction . 33 '
and entry into the industry is .restricted .by . the government
through its agencies.
SOME ALTERNATIVE ECONOMIC SYSTEMS IN THE
WORLD OF BUSINESS TODAY
A large part of the world lives under an economic system
other than capitalism. The number of countries with communist
and socialist systems
. .
makes it important to learn the primary
.
features . ofthesealtern~tive econoinies. ". Another important
aspect of this ' alternative system is what is called mixed
economies. Looking at them independently the:
COMMUNIST SYSTEM
. Communist system was the product 'of Karl Marx, a
nineteenth- century economist. In 1848, Marx, wrote the
communist manifesto, outlining the process of business and
political undertakings for the communist nations. He therefore
became the father of communism. Marx was a German political
philosopher at the time of his writing.
. . Communism is a system in which the state (the
Goveniment) makes ~ll economic .decisions and owns all the
major forms of production. One' problem with communism is
that the government has no way of knowing what to produce., As
a result, shortages of many items may develop, including
Shortages of food and basic clothing. Another problem with
communism is that it doesn't inspire businesspersons to work
hard because the government takes most of the earnings.
Communists adhere to the principle that people (workers)
should receive according to their needs and give according to
their abilities. A perfect communist state does not exist, since
even the Soviet Union and the People's Republic Of China have
 34
Business: Concepts and Perspectives
Introduction 35
managerial and professional classes ,in their societies. These
Socialism creates more equality than capitalism does, but
countries are' ,an ,example of how communism has evolved over
it takes away some of business person' s incentives to start wor~
the years. Managers and workers in these conimunist nations
early and leave work late. The motto of socialism is "From each
now receive incentives for exceeding production levels or quotas.
according to his ability to each according to his needs". Those
The govetrunent 'has substantial resources, which they use in
who work hard and prosper must share with those who don't
providing more 'consum,ergoods and services.
work so hard or those who don't have such well- paying job
Corruininistsalso believe that centralized management of
Marginal tax rates are very high in socialist countries.
all productive activity results in less waste than the competition of
The marginal tax rate is the r~te a worker pays on the additional

free enterprise. They admit ,that a consumer's freedom of choice

money he/she earns on a certain income level. , As a result

' has to be sacrificed in, the '.",interes.t , of, production efficiency.

professionals such as lawyers, doctors, ' engineers, business

Howeve:, ~Ri4lis!~ c Quriter " the argument , that government

, owners a nd others, who make ' a lot of money are ta~ed very

operated inaustri~s become i'neffich~nt bureaucracies because of a

heavily and highly, too. As a consequence, many of them l~ve

lack of employee incentive. Capitalists believe that competition

socialist countries ' for other countries with low'er taxes such as

promotes efficiency by providing incentives to achieve and by

eliminating ineffident producers. United States of America and United Kingdom. .
Another aspect of the socialist economy is that socialists _
believe that major industries in a nation ar~ too important for the
SOCIALISM: is an economic system based on the premise that
nation to be left in the hands of private individuals. They argue
the government
.~.
should own some businesses.... Private businesses
that government industries are more efficient and serve the public
and individuals are , taxed relatively steeply to pay for social
better if effectively run by the organs of government.
progranunes. · ' Socialists acknowledge the major benefit of
Again the capitalists' counter argument Js' that state- run
capitalism that i~based on wealth creatio~ but believe that wealth
industries becomes massiy~ bureaucracies that are insensitive to
should , be .more evenly distributed. They believe that the
consumer needs. Socialist economies usually follow some master
government should be the agency to create a more even
distribution of wealth in society. ' pians for the use af a nation's ' resources. Workers are free to
choose their employment, but the states often encourage people to
Socialism became the guiding economic ' platform for
go into areas where they are needed . Most citizens work for
• countries such as Holland, Sweden, France and much of the rest
some government enterprises based on their expertise in a
of the world. In some Countries such as Canada, businesses were
socialist economy .
expected to prosper but businesses and workers also had to pay
The experience of the world has been that neither free­
extremely high taxes. Socialist nations also rely heavily on the
market nor command economies have resulted in optimum
government to provide education, health care, retirement benefits, econorriic conditions. A free-market economic system is one in
unemployment benefits and other social services. which decisions about what to produce and in what quantities are

36 Business: Concepts and Perspectives
decided by the market; that is by buyers and sellers negotiating
prices for goods and services while a command economic system
is one in which the government largely decides what goods and
services that will be produced, who will get them and how the
economy will grow . Free market mechanisms haven't been
responsive enough t o the needs of the old, the disabled or the
elderly, nor did they protect the environment under which they
bp~rate ..; Therdore, . overtime, voters iIi free-market countries
such as U,S.A. and other elected officials adopted many social
and environmental programmes such as social security, welfare,
, " , • • J . .. K '
unemplqyment compensatIOn, and vanous .clean aIr and water
acts.
Socialism and communism; on the other hand, didn't
always create enough jobs or wealth to .keep econom'ies growing
fast enough. As a consequence, communist governments are
disappearing and socialist governments have been cutting back on
social programmes and lowering . l:flxes on businesses and
workers. The idea is to generate more business growth and thus
more revenue.
The new trend now has been for l;:3.pitalist countries to
move toward more socialism and for the socialist countries to
move .toward more capitalism. This has made it possible for all
countries
. , to have some mix of the two' systems. This trend
brought about what is called mixed economy.
MIXED ECONOMIES exist where some allocation of
resources is made by the market and sqme by the government.
Most countries don't have a name for such a system. If the
dominant way of allocating resources is by . free- market
mechanisms , then the leaders of such countries still call their
systems capitalism. However, if the dominant way of resource '
"\
J,:J;,
37
Introductjon
. allocation is by the government, then their leaders call their
. systems socialism. ' The issue to note carefully here is that mixed
economy is the term used to describe economies where there. is a
mix ~f socialism and free enterprise or market-economy ~ysteins.
Sweden, and United Kingdom are often given as -;e xamples
of nations that' still adhere to the basic philosophy of free
enterprise but als? have a high degree of goyen~ent ~wnership
of compan}es. ·· The ' United Kingdom's coal, 'steel and
communications ' industries are governmental .enterprises.
. Free enterprise , proponents often classify these mixed
•
. .
. economies as " socialist" because of the high degree of public
ownership . But these countries also have a far larger degree of
private ownership than is found in socialist nations. In fact, the
United State of America could be classified as a mixed economy
in that some public utilities are owned by governmental units.
WHY DO WE STUDY BUSINESS?
, People study business for a number of reasons. Some
people simply enter into business as a career. Others want to
learn how the business system affects them in their roles as wage­
salary earners or as consumers. Still others are just curious about
what business actually means and about how it is undertaken on a
daily basis.
Certainly, business affects all of us in some manner and
the more we know about the subject the better we will be able to
cope with some of our most common everyday problems. Some
specific reasons why we have to study business as advanced by
Boone and Kurtz (1976) are as follows:

 38 Business: Concepts and Perspectives
1. CAREER SELECTION
Most students do not spend sufficient or adequate time in
selecting their life careers. Many ~rift from one curriculum to
;'.
another and then repeat this pattern when they enter the job
market. This is· very 'true of members of the less developed
countries of the world where counseling is lacking or grossly
inadequate. The study o( business, if properly chosen, allows a
[. student to consider the various job opportunities, the worth of a
job, other available rewards arising from jobs, necessary training
opportunities available and the relative advantages and
disadvantages . of each business undertaking so chosen.
Contemporary business includes sections describing jobs that can
be found in each of the major functional areas of business and
they are always very useful to those who want to have their
careers .in them as their areas of expertise. These areas include,
management, marketing, finance, Accounting and other related
areas arising from them.
~
2. SELF- EMPLOYMENT:
Some students in most universities or colleges or polytechnics
may wish to ··work for themselves and establish their own
businesses while others prefer being engaged in an Oll- going
business concern. Business concepts and principles are the same
regardless of the size of the company a person is involved with.
Studying business can be an invaluable first step in setting up
one's own business outfit.
A self- employed person is always actively and personally
attached to his business. Knowledge of successful business
\).
practices becomes even more crucial when a person is risking his\
her own funds in his venture.
~>
Introduction 39
1. TA<2KLING THE PROBLEMS OF SOCIETY
Doing business p~ts a person on the firing line for most of
today's pressing social problems. Resource conservation,
pollution control, minority hiring. and termination,
. . affirmative
action programmes, consumerism and industrial health and safety
are problems encountered on a day to day basis by a business
person. A business career is likely to put a person in a position of
responsibility earlier than most other occupations. Many experts
believe that business careers are an excellent choice of activities
for those who want to_improve the s<?ciety in which they live.
2. MAKING BETTER CONSUMER DECISIONS /
/
Business decisions create the consumer decisions we all
have to face . For example, a certain stereo comes with three ·
options for necessary equipment. An executive decides to pass on
a recent union wage increase to the consumer by raising a call for ­
.related decision making by consumers. The study ·of business
provides an appreciation of the background for many consumer
decisions. Consumer advocates often point out that an informed
consumer is a better consumer.
Apart from the above issues raised, the study of business
provides us the opportunity to understand the nexus between
politics , law , economics, geography, history, sociology,
psychology , anthropology and the management of organizations.
These subjects provide us with a comprehensive knowledge of
how some economies of most countries are shaped and influenced
by them for better productive and. organizational efficiency . ' . 'i!
RELEVANCE OF BUSINESS
Students often argue that some fields of study simply are not
relevant to life. However, few students believe that business is
 .,:y
40 Business: Concepts and Perspectives

not relevant to soCiety in general. Regardless of opinions about .

business , executive behaviour, and the free enterprise system, the
study of business is the study of what is happening today-in our
. ,global environment. Business is probably one of the most Chapter 2

relevant and fascinating subjects a sfUdent will ever study in this

changing world of ours because no nation exists without business FORMS OF BUSINESS ·OWNERSHIP

~. . '

" organizations. -0
This is one of the most interesting topics in business.
Selecting a 'form of business ownership is the first step in the
" success , en:}ailure of an enterpri~e. According to ' Madura (1998)
a
when entrepreneurs establish ~usines~., they must decide on the
for I11 of, business ownership. The choice of a ,specific: type of '
business ' ownership can affect various busine~s characteristics, '
which in turn influence the firms value . .
~. ~

Business owners or entrepreneurs choose one of the "three ,

, possible forms of business ownership: the sole .proprietorship;
'1.
~ :. partnership and the corporation. ('}/

: I
SOLE PROPRII3TORSHIP
Longenecker, Moore and Petty (1997) defined a sole
proprietorship venture as a business owned and operated by one
person or an individual. They further stated that this individual
owner has title to all his/her business assets , subject to the claims
of creditors. He 'or she 'receives all the business profits but must
also assu~e all losses, bear all risks, and pay all debts.
Q A sole proprietorship is the simpl~st and cheapest way to
start a business operation and it is frequently the most appropriate
form for a new business . In a sole proprietorship an owner is free
from interference by partners, shareholders, directors , and
officers . It lacks some of the advantages of other legal forms. For
example, there are no limits on the owner' s personal liability; that
is, the owner of the business has unlimited liability. This means

. '
 "
42
Business: Concepts and Perspectives
i:>
that creditors can take the owner's personal assets if the business
fails.
In addition, sole proprietors are nOt employees and cannot
receive the taX-free advantage of the fringe benefits customarily
provided by corporations, such as insurance and hospitalization
plans.
.. :)
The views Of Madura (1998) and those of longenecker,
Moore and Petty (1997) are the same in terms of the definition of
a sole proprietorship form of business and its features but
Madura observe,d that typical examples of sole proprietorships
include a local restaurant, a local construction COmpany, a barber
shop, a supermarket outfit, a laundry service and a local clothing
store, According to Madura (1998) about 70 percent of all firms
in the United States of America are sole. proprietorships ; but
because those companies are relatively small, they generate less
than 1,0 percent of all business rev~nue in that country. The
earnings by a sole proprietorship .are considered as personal
income received by the proprietor and are subject to personal
ii,
income taxes imposed by the Internal R~venueService (IRS) . In
Nigeria the situation is seen as being different. The sole
proprietorship form of business is the most predominant business
in the Nigerian economy. While it generates a lot of revenue for
owners, their incomes are hardly subjected to taxation by t.o,e .
Nigerian government due to lack of accountability and internal
revenue regulations , Full-scale corruption makes it easier for
settlements, which in torn do not call for proper tax assessments
by the Inland Revenue Authorities. What operates in Nigeria is
mass tax evasion by this group of business owners.
Forms of Business Ownership 43
.1­
CHARACTERISTICS OF SUCCESSFUL
SOLE PROPRIETORSHIP
Madura (1998) observed that sole proprietors must be
willing to accept full responsibility for the firm's performance.
The pressure of this responsibility can be much greater than any
employee's responsibility. Sole proprietors must also be willing
t6 work flexible hours and are on call all times and may even
have to substitute for sick employees. Their responsibility for the
success of the business encourages them to continually monitor
business operations. They must exhibit strong leadership skills,
be well organized and communicate well with employees .
Many successful sole proprietors . had previous work
experiences in the market in which they are competing, perhaps
as an employee In a competitor's firm. For example, restaurant
managers commonly establish their own restaurants. Experience
according to Madura (1998) is critical to understanding the
competition.and behaviour of customers in a particular market.
ADV ANT AGES OF SOLE PROPRIETORSHIP
Nickels, McHugh and McHugh (1999) identified the
following as part of the advantages of a sole proprietorship
busineSs.
1. Ease of starting and ending the business. All what the sole
proprietor , needs to do is to buy or lease the needed
equipment and space and put up some announcements
saying that he/she is in business. It is equally easy to get
.out of business. All you need to do is to just stop
operation. There is no one to consult or to disagree with
about such decisions. You may have to get a permit or
·licetlse from the local or national government of your area,
but often that presents no problem.,
::"-h
~.. ,r,
.,.
~
44 Business: Concepts and Perspectives
2. Being your own boss. Working for others simply does not
have the same excitement as working for yourself. That is
the way sole proprietors feeL You may make mistakes,
but they are your mistakes and so are the many small
. ::. victories each day. A sole proprietor is in complete
control of his business. Having only one Owner with
complete control of the business eliminates the chance of
conflicts during the decision- making process. For
, example, an owner of a restaurant can decide on the menu,.
.' the prices, and the
salaries paid to employees without query.
3. Pride of ownership. People who own and manage their
own businesses are rightfully proud of their work. They
deserve all the credit for taking the risks and providing
I.
needed goods and services to the pUblic.
,. 4. Retention of profit. Other than the job of being your own
boss, there is nothing like the pleasure of knowing that you
i~
'can earn as much as possible and do not have to share that
money with anyone else, except the government in taxes,
if any.
5.. No special Taxes. All the profits of a sole proprietorship
are taxed as the personal income of the owner, and the
owner pays the normal · income tax on that money.
However, owners do have to file an estimat~d tax return
and make quarterly payments as required by the law.
6. Ease of organization. According to Madura (1998),
establishing a sole proprietorship is relatively easy. The
legal requirements are minimal. A sole proprietorship need
not establish a separate legal entity,
The owner must register the firm with the state, which can
normally be done by . mail. The owner may also need to apply
45
Forms of Business Ownership
for an occupational license to conduct a particular type of
business. The specific license requirements vary with the state
and even the city or country where the business is established.
DISADVANTAGES OF SOLE PROPRIETORSHIP
These are as follows:
1. The sole proprietor incurs all loses. Just as sole proprietors
do not have to share the profits, they are unable to share
any losses that the firm incurs.
2. Unlimited liability. A sole proprietor is subject to unlimited
liability, which means that there is no limit on the debts for
which the owner is liable. When you work for others, it is
their own problem if the business is not profitable. When
you own your own business, you and the business are
considered one. You have unlimited liability. Any debts or
damages incurred by the business are your debts and you
must pay them, even if it means selling your home, your car
or anything. This is a serious risk, and one that requires
thought and discussion with a lawyer, insurance agent, and
others.
3. Limited Financial resources to the business. A sole
proprietor may have limited funds available to invest in the
business. Funds available are limited to the funds that the
owner can gather. Since there, are serious limits to how
much money one person can raise, partnerships and
~orporatioJf..s have a greater probability of recruiting the
needed financ¥al backing to start a business and keep it
going.
A sole proprietor with limited financial resources will have
difficulty engaging in airplane manufacturing, shipbuilding,

46 Business: Concepts and Perspectives
computer manufacturing and other business that require
huge finances. They equally have limited resources to
support business expansion or to absorb temporary losses.
A poorly performing company may improve if given
sufficient time. But if it cannot obtain additional funds to
make up for its losses, it may not be able to continue in
business long enough to recover.
4. Limited skills or difficulty in management. A sole
proprietor has limited skills generally and may be unable to
control its operations, or all parts of the business. For
exaII.1ple, a sole proprietor may have difficulty running a
large medical practice because Of different types of expertise
that may be needed.
It is equally apparent . that all .businesses need some
management. Some one must keep inventory . records,
accounting records, tax records, etc. Many people who are
skilled in keeping records may not be good in selling things
or providing services. Most sole proprietors may have no
one to help them. It is often difficult to find good and
qualified people . to help run the business. A common
complaint among sole proprietors is that of "good
employees are hard to fin~" .
5. Overwhelming time commitment. It is hard to own a
business, manage it,train people, and have time for
anything else in life. This is true of any business, but a sole
proprietor has no one to share the burden with. The owner
must spend long hours working in order to be successful.
He/she may spend between 10 to 12 hours at work in order
to make ends meet. This is a tremendous time commitment
~;
Forms of Business Ownership 47
that may affect the sole proprietor' s family life- and
hampers his/ her efforts at other life activities.
6. Few fringe benefits. If you are your own boss, you lose the
fringe benefits that come from working for others. You
have no health insurance, no disability insurance, no sick
leave, no vacation pay, etc. These beneft~ may add up.to .
c' 30 percent or more of a worker'S income which he/she uses :
to solve some lifedemartding problems.
~
.,i...
~
.
7. Limited growth~ ' Ifth~ owner becomes incapacitated, the
business often conies to a
halt.. Expansion is often slow::
since a sole proprietorship relies on itsqwner ~or II1:0st of its
creativity, business cknow- how and funding.
8. Limited life span. The death of the owner terminates tl1e
business.. If the s6le proprietor dies or retires, the business
can no longer exist--unless it is sold or taken over by the
sole proprietor's heirs who are capable of running same
business effectively. Nickels, McHugh and McHugh (1999)
observed that when you talk with some local entrepreneurs
about the problems of being in busil1:ess on their own, they
are always likely to have m.any interesting stories to tell.
These stories revolve around getting loans from the local
banks, problems with the business. While these problems
form part of the disadvantages of a sole proprietorship firm
they also encourage formation of a partnership system of
business ownership.
\'
 48 Business: Concepts and Perspectives Forms of Business Ownership 49

THE PARTNERSHIP SYSTEM

partners must have to check their differences if they have to

A partnership system of business organization is one that is co­

succeed as partners. "

owned by two or more people ( Madura 1998). The co-owners

are called partners. The co-owners must register the partnership
2. How are we going to structure ownership? It would be

with the state and may need to apply for an occupational license.
great , or ideal for two people to scratch out 50-50 on a

Nickels, McHugh and McHugh (1999) defined it as a legal form

partnership business and leave it at that. But, in practice,

of business with two or more owners. However, Longenecker,

splitting the company down the middle can paralyze the business. '

Moore and Petty (1997) looked at it as a voluntary association of

If neither is willing to settle for 49 percent, ' then the partners

two or more persons to carry' on, as co-owne,rs, a business for should build some arbitration into the partnership agreement.

profit. Because it is voluntary in nature, a partnership can be set

up quickly without many of the legal procedures involved ' in 3. Why do we need each other? Bringing in ,a partner to do

creating a corporation: A partnership pools the managerial talents

business will mean sharing responsibilities and authority. If one

and capital of those joining together as business partners. These

, is taking on a partner becau'se he is afraid of doing it alone, he
partners, however, share the unlimited liability of their
should find some other way , to handle some expected anxiety. ,
partnership. Personal compatibility is an important consideration
Two partners doing business }ogether does not eliminate the
when starting or forming a business partnership. However, some
I ]! inherent problems associated wiULcrunning a venture nor does it
important questions are , likely to be asked when forming a
eliminate the psychology of individual differences which create
partnership business. These que'stions are:
some additional problems involved in living in today's world.
1. What is the partners business concept?
4. How do our life-styles differ? The fact that one partner is
This is a big , broad topic and sometimes may require help
single and the other is married and have a family can affect more
to answer by consulting some experts or professionals in business
than just the time each puts in at work. It may mean that one
management. First, the partners need to decide who will produce
partner needs to pull more money out of the business. Or it may
and who will sell what is being produced. ' They .need,to talk
affect a partner's willingness to take risks with the company. All
about growth on a long-term basis.
of the above situations need to be fully discussed and pnderstood
It is also important to discuss exactly how the business will
by both partners otherwise such diffetences may, b~ing about
be run. Do they w<;lnt 'participative management; or will
profound implications to the general well-being 'of the ,
~ employees .simply hunk~r down at machines and churn out parts?
I
I If one partner is a fist founder with a do-it-as-1-.say mentality, and partnership. The failure to clarify expectations is ,a frequent
the other believes that people ought to feel good' about their jobs, deterrent to building an effective working relationship which in
that probably represents an irreconcilable difference , that might turn affects a partnership adversely. To avoid this the rights 'and
breed problems for the business on the long run and these duties of partners in business should be properly spelt out such 0
that each partner should be aware. These are discussed below .

.,y.-:­
 Forms of j3usiness OWnership 51
50 Business: Concepts and Perspectives
with reasonable care in the exercise of managerial duties, is
RIGHTS AND DUTIES OF PARTNERS required of all partners in a · business. Since, the partnership
Partners' rights and duties should be , properly stat~d relationship is fiduciary in character, a partner cannot compete in
explicitly and in writing in articles of partnership. The articles of business and remain a partner. Nor can a partner use business
partnership is a document that states explicitly the lights and inf.ormation solely for personal gain.
duties of partners ,and should be drawn up before the firms is
operating~nd; at the very least, should cover the following TYPES OF PARTNERSHIP
items:' There are several types of partnerships. There are: (1)
1. Date of formation of the partnership.
General partnership, (2) Limited partnerships, (3) Master Limited
, 2. Names and addresses of all partners.
partnership.
3. Statement of fact of partnership. > A general partnership is a partnership in which all owners
or
4. Statement 9usiness purpose( s)'.
:.0
share in operating the business and in assuming liability for the
5. Dq.ration of the business. business' debts.
,,' 6. Name" :and location of the business.
. ~ A limited partnership is a partnership with one or more
. 7. .,"Amount invested by each partner.
general partners and one or more limited partners.
f O-Shafing ratio for profits,.and loses.
A general partner is one who manages the business,
9. Partners' rights, if any , regarding ,withdrawal of funds for receives a salary, shares the profits or losses of the business and
>:
personal use. has unlimited liability in the business while a limited partner in
10. Provision for accounting records and their accessibility to this case is one whose liability is limited or an owner who invests
partners. money in the business but does not have any management
11. Specific duties of each partner. responsibility or liability for losses beyond the investment he made
'12. Provision for dissolution and sharing of the net assets of in the partnership. A master limited partnership is a partnership
the partnership. ~
that looks much like a corporation in that it acts like a corporatiQn
<.J3. Restraint on partners' assumption of special obligatiQns,
. : ~1' . • .
and it is traded on the stock exchange markets like a corporation ,
such as endorsing a note of another. but is taxed like a partnership and thus avoids the corporate
14. Provision for protection of surviving partners, dec,edents income tax.
estate, and so forth in event of a partner's death,
f l:!nless specified othef\vise in the articles, a partner is ADV ANTAGES OF PARTNERSHIP
i "generally recognized as having certain implicit, rights. For The partnership form of ownership has three main
example, partners share profits or losses equally if they'have not advantages which are as follows:
agreed on a different ratio. In a partnership, each partner has
agency power. Agency power means the ·ability of any partner to
legally bind in good faith the other partner. Good faith, together
I;
52 Business: Concepts and Perspectives
1. Additional funding. An obvious advantage of a partnership
over sale proprietorships is•the additional funding that one
or more partners can provide. Therefore, more money
~ may be available to finance the business operations.
7. Losses are shared by partners. Any business loses that the
Rartnership incurs do not have to be absorbed by a single
person. Each owner will absorb only a portion of the loss .
3. More specialization among partners. A partnership can
allow partners to focus on their respective specializations .
and serve a wide variety of customers. For example, an
accounting firm may have one accountant who specializes
in personal taxes for individuals and another who
specializes in business taxes for firms. A medical practice
partner~hip may have doctors with various types. of
expertise practicing together for their collective welfare.
DISADVANTAGES OF PARTNERSIDP
Anytime two or more people agree on anything, there is
the· possibility of conflict and tension. Partnerships have caused
splits among families, friends, and marriages. The following are
some of the main disadvantages of partnership:
1. Unlimited liability. This means that there is no limit on
the debts for which the owner(s) are liable in the event of
business failure. Each of the general partner(s) is liable
for the debts of the firms, no matter who was responsible
for causing those debts.
You are liable for your partners' mistakes as well as your
own. Like a sale proprietor . general partners can lose their
homes, cars, and everything else they own if the business is sued
by someone or if it goes bankrupt. Many states, particularly in
,­
~
Forms of Business Ownership 53
the United States of America are encouraging partners to form
I imited liability companies to end this disadvantage. A limited
liability company is a company that has all the favourable features
of a typical general partnership but also offers limited liability for
[he partners in the event of business failure.
1. Division of profits. Sharing the risk means sharing the
profit, and that can cause conflicts. For example, two
people form a partnership; one puts in more money and
the other puts in more hours. Each may feel justified in
asking for a bigger share of the profits. Imagine the
resulting conflicts this can create .
2. Disagreements among partners. Disagreements over
money are just one example of potential conflict in a
partnership. Who has final authority over employee?
Who hires and fires employees? Who works what hours?
What if one partner wants to buy expe.nsive equipment for
the firm and the other partner disagrees? Potential
conflicts are many. Because of such problems, all terms
of partnership should be spelled/ spelt out in writing to
protect all parties and to minimize misunderstandings.
3. Difficult To Terminate. Once you have committed
yourself to a partnership , it is not easy to get out of it.
Sure, you can end a partnership by just saying "I have quit
from being a partner". However, questions about who
gets what and what happens next are often difficult to
solve when the business is closed .
Surprisingly, law firms even have faulty partnership agreements
and find that breaking \Up is hard to do. How you get rid of a
partner you don't like is best decided up front in the partnership
..

 It'.
54 Busines~:; : Concepts and Perspectives
agreement to avoid disa,2"reements, conflicts and law suits when ·
the thue arises for a break up of a partnership .
THE CORPORATION
In 1819, Chief Justice John Marshall of the United Sta:es
Supreme Court defined a corporation as "an artificial being,
invisible, intangible and existing ,only in contemplation of the
law". It is a business organization that exists as a legal entity . A
legal entity is an organization that is recognized by the law as
having a separate legal existence. It can sue and be sued, hold
and sell property , and engage in business operations that are
stipulated in the corporate charter.
The corporation is chartered under state laws . The length
of its life is independent of its owners' lives. The 'corporation,
.. and not its owners, is 'liable for debts contracted by the business.
,~ ,
The directors ana officers serve as agents to bind the corporation . .
If ,
\ ".'
THE CORPORATE CHARTER
To form a corporation, one or more persons must apply (,
the Federal Government· for permission to incorporate. Aftel
preliminary steps, induding payinent of an incorporation fee have
been completed, the written a~plication for incorporation has
been approved, it becomes the corporation's Charter. A Since the shareholders of the corporation are legally
Corporate Gharter is a document that establishes a corporation's
existence. Documents thj}tshow the existence of a corporation
are,. called articles of ,j incorporation or certificates of
i" ilkorpoiation.
I broad of directors who are responsible for establishing the general
A Corporate - Charter or c;:ertificate of Incorporation
typically provides the following information:­
1. Name of the c,0mpany.
2. FOmial statement of theocompany ' s formation . .
-...
~I
.C
Forms of Business Ownership 55
1. Purposes and power-that is type of business.
2. Location of principal office in the ' state or country of
incorporation.
3. Duration (perpetual existence, 50 years life and renewable
Charter or other).
4 . .Classes and preferences of classes of stock.
S. Number and par (or stated) value of shares of each class of
stock authorized. "
6. Voting privileges for each class of stock.
7. Names and addresses of incorporators and first year's
. directors.
8. Names and addresses of and amounts subscribed by each
subscriber to capital stock .
9. Statement of limited liability of stock holders (if required
specifically by state/ national law).
10. Statement of alterations of directors ' powers, if any, from
the general corporation law of the state or nation.
A corporation's Charter should be brief, in accord with
the law, and broad in the statenient of the firm's powers. Details
should be left to the by laws. A bylaw, in effect, is a general
guideline for managing a firm or business.
separated from the entity, they have limited liability, meaning .
they are not held personally responsible for the firm's actions .
The most that the stock holders of a corporation can loss is the
amount of money they invested. They elect the members of the
policies of the firm; One of the board's responsibilities is to elect
the president and other key officers who are given the
responsibility of running the business on a day~toaday basis. If
the board of directors becomes displeased with the performance
 56 Business: Concepts and Perspectives
of the key officers , the board has the power to replace them.
Similarly, if the stockholders become displeased with the
performance of members of the board, the stockholders can
replace the directors in the next scheduled election. In some
corporations, one or a few individuals may serve as a stock
holder, as a member of the board of directors, and as a key
officer of the firm .
RIG}lTS AND STATUS OF STOCK HOLDERS
, .
Ownership in a corporation , is evidenced by stock
certificates, each of which stipulates number of shares owned by a
stock holder. An ownership interest does not confer a legal right
to act for the firm or to share in its management. It does provide
the stockholder with the right to receive dividends in proportion
to stockholdings but only when the dividends are properly
declared by the firm. Ownership of stock typically carries a pre­
emptive right or the right to buy new shares, in proportion to the
number of shares already owned, before new stock is offered to
the public for sale.
The legal status of stockholders is fundamental , of course,
but it may be overemphasized. In many small corporations, the
owners typically serve both as directors and managing officers as
indicated above. The person who owns most or all of the stock
can control a business as effectively as if it were a sole
proprietorship. Thus, the corporate form works well for
individual and family . owned businesses, where maintaining
r
I control of the firm is important.
Major stockholders must be concerned about their working
relationships, as well as their legal relationships, with other
owners who are active in the business . . Cooperation among all
owners and managers of a new corporation is necessary for its
Forms of Business Ownership 57
success. Specifying legal technicalities is important, but it is an
inadequate basis for successful collaboration. Owners and the
members of their management team need to clarify their
expectations of each others' roles as best as they can. Failure to
have clear expectations about working relationships can result in
one or more persons feeling that others serv'ing as managers or co­
owners are not honouring their word. In reality, the problem may
result from not taking the time and effort to clarify and reconcile
everyone's expectations . Unrealistic or unfulfilled expectations
can wreak havoc within a business, in spite of the best intentions
and in spite of the best legal contracts.
ADVANTAGES OF CORPORATIONS
,Most people are not willing to risk everything to go into
business . Yet for a business to grow and prosper and create
abundance, many people would have to be willing to invest their
money in it. The way to solve this problem was to create an
ar':ificial being, an entity that existed only in the eyes of the law
and this entity is a ,corporation. Corporations have some
advantages that are discussed as follows:
1. More money for investment. To raise money a
corporation sells ownership (stock) shares to anyone who
is interested. This means that millions of people can own
part of major companies like IBM, Xerox, and Gener~ll
Motors and smaller companies as well. If a company sold
10 million shares for N50 ' each, it would have N500
million available to build plants, buy materials, hire
people, manufacture products and so on. Such a large
amount of money would be difficult to raise by any other
means/way. Corporations may also find it easier to obtain
I
_ 58 Business: Concepts and Perspectives
loans since lenders find it easier to place a value on the
company when they can review how the stock is trading.
2. Limited liability. A major advantage of corporations is
the limited liability . of owners. Corporations in Nigeria
have Ltd after their names.
The Ltd stands for limited liability and is probably the
most significant advantage of corporations. Limited
liability means that the ow~ers of the business have
responsibility for losses only up to the amount they
invested.
3. Size. Size summarizes many of the advantages of .some
.,
corporations. Because they have the ability to raise large
amounts of money to work with, corporations can build
large, modern factories with the latest equipment. They
can . also hire experts or specialists in all areas of their
operations. They can also buy other corporations in other
fields to diversify their operations and risks. This is to say
that a corporation can be involved in many businesses at
once so that if one fails, the effect of its fail\lre on the total
corporation will be lessened. In effect, a major advantage
of corporations is that they have the size', and resources to
. .
take advantage of opportunities anywhere in the world.
Corporations do not have to be large to enjoy the benefits
of incorporating. Many doctors, lawyers and individuals,
as well as . partners in a variety of businesses have
incorporated for economic benefits.
4. Perpetual life. Because corporations are separate from
those who own them, the death of one or more owners
does not . terminate the continuous existence of the
corporation.
'_.
Forms of Business Ownership 59
5. Transfer of ownership. Investors in large, publicly
traded companies can normally sell their stock in minutes
by calling their stockholders. Conversely, owners of sole
proprietorships or partnerships may have some difficulty
in selling their share cf ownership in business. In a
simplistic form, "it is easy to · change owners .of a
corporation" . All that is necessary is to sell the stock to
someone else. ,
6. Separation of ownership from management,
Corporations are able to raise money from many different
investors without getting them involved in management.
7. Ease of drawing talented ~mployees . Corporations. can
attract skilled employees by offering such benefits as stock
options (which is the Tight to purchase shares of the
corporation for a fixed price).
DISADVANTAGES OF A CORPORATION
Along with its a'dvantages, the · corporation has the
following disadvantages:
1. High Organizational Expense. The expense of
organizing ' a business normally is greater for the corporate
form of business than fbr the other forms. The higher
expense results from the necessity of creating a corporate
charter and filing it with the national government. Some
expense also may be incurred in establishing byTaws by a
lawyer. There many be some less exp~nsive ways of
incorporating a corporate , form of business but most
people do not \have the time or confidence to go through
this procedure without the help of a lawyer.
 ~

.~
60 Business: Concepts and f'3 rspectives
Forms of Business~ Ownership 61

2. A lot I[j;f. pap~r work. Th~. papers .

filed to start a
responsible for making deciSIon for the business that will
corporatio~ are just the ,beginning. Tax laws demand that
serve the interests of the owners; owners' interests may be
a corporation prove .that all its expenses and deductions
misrepresellted. Managers in "some cases may not always
.ate legitimate. A corporation therefore must process
act in the best interest of stoc.:d1olders. Managers may
many forms. A sole proprietor or a partnership may keep
attempt to · take expensive business trips that are not
rather broad accounting recortjs ; a corporatior;.,. on the
necessary. Uto mamige the business. These types of actions
other hand , must keep detailea records, the minutes of . .

may increase the expens~ s of running a business, reduce

meetings, and many more records.
busiI}ess profits, and reduce the returns to shareholders.

3. ~igh Taxes. If an individual incorporates, he/she must

. 7. Financial disclosure. When the stock of a corporation is
~; .

file both a corporate tax return and an individual tax

traded publICly, .the .investing ' public has the . right to
return. Gorporate tax return can be quite complex and
inspect the company's financial data, within certain limits.
usually ' requires ' the assistance of certified public
accountant(s) . . As a result, companies may be obligated to publicly .
. .. disclose more about their business operations and
1<,
employee sal~ries than they would like. Privately h~ld
4. Size. Size many be one advantage of corporations, but.it
finns are not forced to disclose financial information to
can be a disadvantage as well. L~g~ corpora,tions
the public .
sometimes become too inflexible and too tied down' ih.' red
tape to respond quickly to market changes ..

OTI.IE.R SPECIAL FORMS OF BUSINESS 'OWNERSHIP

5. DifficultY-of termination .. 'Once a corporation is started,
it is relatively hard to end. of
In addition to the above three types business ownership
a s discussed , there are other special forms of business ownership:
I!
These are franchises and cooperatives.
6. Possible conflict with board of directors. Some conflict '
",. . A ihnchise is an arrangement where by a business owner
. may brew if the stockholders elect ? board ' of directors .
... that . disagrees with the present management. Since the called a . franchiser allows others, "the franchisee, to use its
. .

board of directors chooses the company's officers, an
"" ~ ; ' entrepren:~ur could find himself forced out of the very
" j '. company he founded. Some agency problems as they are
may emerge in some oth~r forms. Since publicly held
corporations are normally run by managers who are
i;_
trademark, trade name or copyright, under speciJled conditions ..
Each individual franchise operates as an independent business and
is typically owned by a sole proprietor. . As it were, some people
are. more ' comfortable not starting their own ' business from
scratch. They would rather joi~ a business with a proven track

ll ..­
":'" '.
62 Business: Concepts and Perspectives
record through a franchise agreement. A franchise can be formed
as a sole proprietorship, partnership, qr corporation.
, TYPES OF FRANCHISES
Most franchises can be classified as a distributorship, a chain-
style business, or a manufacturing arrangement.
, A distributorship is a firm in whiyh a dealer is allowed to
sell a product produced by a manufacturer. An example can be
Ch~yster and Ford Motor dealers in U.S.A.
A chai,n-style business is a firm that is allowed to use the
trade name of a company and follows guidelines related to the
pricing and sales of the product. Some examples are Dunkin,
Donuts, Holiday lim, Subway and Pizza Hunt in U.S.A.
A manufacturing arrangement is a firm that is allowed to
manufacture a product using the formula provided by another
company. For example, Microsoft may allow a foreign comp~ny
to produce its software, as long as the software is sold only in that
country. Microsoft would in this case receive a portion of the
revenue generated by that firm.
ADVANTAGES OF A FRANCHISE
The typical advantages of a franchise are as follows:
1. Management and marketing assistance. A franchisee
' (a person who buys a franchise) has a much greater
chance of succeeding in business because he/she has an
valuable parts of the franchise system ..
p
established product; help with choosing a location and
5. Lower failure rate. The failure rate for franchises has
promotion; and assistance in all phases. of · operation.
o
Nickels, McHugh and McHugh (1999) stated that it is
like having your own business with full-time consultimts
available when you need them. Furthermore, you have a
whole network of peers who are facing similar problems
1
\:
~ Forms of Business Ownership 63
and can share their experiences with you. Some
franchisers are helping .their franchisees succeed by
~ helping their local marketing efforts rather than having
them depend on national advertising . .
2. Personal ownership. A franchise operation is still your
business and you enjoy much of the incentives and profit
I of any sole proprietor.
You are still your own boss, although you must follow
more rules; regulations and procedures than you would
with your own privately owned business.
3. Name Recognition. Many franchises are nationally
known because ,of advertising by the franchiser. This
provides the franchisee with name recognition, which can
significantly increase the demand for the product. For'
example, the owners of Holiday Inn, Pizza Hut, and other
franchises may not have to spend money on advertising
because the franchises are already popular with consumers
(customers).
4. Financial advice and assistance. A major problem
with small businesses is arranging financing and learning
to keep good records. Franchises get valuable assistance
and periodic advice from people with expertise in these
areas. In fact, some franchisers will even provide
financing to potential franchisees they feel will be more
been lower than that of other business ventures. More
recently, however, franchising has grown so rapidly in the
~
United States of America and European Union that many ' ,~ .
'~ weak franchises have entered the field.
I.
,.

r .. 11'

64 Business: Concepts and Perspectives

i'
Forms of Business Ownership 65

DISADVANTAGES OF A FRANCHISE
The actions of ot.~er franchisees clearly have an impact on

The common disadvantages of franchising are as follows:

your future ' growth and level of profitability. Franchisees

1. Large start-up costs. Most franchises will demand a fee

must also look out for competition from fello,w Jranchisees.

just fo~ the rights to the franchise. Fees for franchises can '
t For Example TCBY ' franchisees ' love frbzen Yogurt th,awed ,

vary considerably. Start-up costs are always very high for

as the market . became flooded with IJ.e,w TCBY stores.

franchises. '
McDonald's .franchisees in USA complain that due to

2. Shared profits. In return for services provided by the

McDonald's corps relentless growth fOrmula some of the new

franchiser, the franchisee must share profits with the

stores hive ' cannibalized business at existing locations,

franchiser. ' Annual fees paid by the franchisee may be 8

squeezing franchisees ' profits per o~tlet. '

per cent or more of the annual revenue generated b:y/ ' the
2. Restrktions on selling. ,; Unlike owners of private

franchise. This share demanded by the franchisor from

businesses who can sell ,'their companies to whomever

the franchisee, in form commi!ision based on sales, is , ", '(I

they choose on their own terms, many fr~mchi~ees face 1 "

generally referred to as a royalty.

restrictions in the reselling of their franchisees. In ' order
~ 3. Less control or management regulation. , The franchise
to control the quality of their franchisees, franchisors '
must abide by guidelines regarding product •production
often insist on approving the new owner, who must meet
and pricing, and possibly other guidelines as well.
their standards.
Consequentl y, the franchisee's performance is dependent
3. Fraudulent franchisors. Contrary to common belief,

on these guidelines. Owners are not allowed to revise

most franchisors are not large systems like McDonald's.

soine 'of the guidelines.

Many are small, rather obscure franchises that

,'Management assistance has a way of becoming

prospective franchisees may know little about. Most

managerial orders, directives and limitations .

franchisors are honest, but there has been an increase in

Franchisees may feel burdened by the company's rules

complaints to the Federal ,Trade Commission about

and r~gulations, and lose the spirit and incentive,of being

franchisors that delivered little or nothing of what they'

their own boss with their' own business. One of the

promised.

, biggest' changes in franchi,sing in recent yeats is the '

banding t~gether ' of many franchisees "to resolve their
griev.ances 'with:franchisors rather than each fighting their
I, battles aloI.1e.
4. ' Coal-tail effects. What happens ·to your franchise if fellow
'" franchisees fail? ' Quite possibly you could be forced out of
I.:
business even if your particular franchise ' was profitable ~ '
This is often referred to as a "coal-tail effect."
;: .)
FRANCHISING IN INTERNATIONAL MARKETS
The attraction of global markets has carried over into
franchising. Today, American franchisors are investing abroad
and are counting their profits in foreign currencies such as pesos
(Mexican currency), Lira (Italian money), France ( French
I.:urrency), deutsche marks (German currency), yen (Japanese
'urrency), and many other global currencies as the situation

LL .
 66 Business: Concepts and Perspectives
demands. More then 450 of the 3,000 franchisors have outlets
overseas. Canada is by far the most popular target of U; S.
franchises because of its proximity to U.S. 'and language. Many
franchisors are also finding it surprisingly easy to move into
South Africa and the Philippines. Even though franchisors find
the cost of franchising high in these markets, the costs are
counter-balanced by less competition and a rapidly expanding
consumer base.
Newer, smaller franchises are. going international as well.
Smaller franchises such as Spee Dee Oil change and Tune-up ,
Rug Doctor Pro, and Merry Maids have all ventured jnto the
international market. What makes franchising successful in
international markets is what makes it successful in the United
States. These issues about success revolve around convenience
and a predictable levet of service and quality .
Nickels, McHugh and McHugh (1999) advised that
Franchisors must be careful to adapt to their regions of operation.
In France, for example, people thought a furniture stripping place
called Dip "N' Strip was a bar that featured strippers. In general
however, U. S. Franchises are doing well all over the world and
are adapting to local customs and desires of consumers. This is
what is expected of other franchisors when they are operating
internationally.
USING TECHNOLOGY IN FRANCHISING
Franchisors are speeding on to the information super-high
, way in an effort' to meet the needs of both their customers and
I their franchisees. For example, U.S. Web Corp set up Web site
to streamline processes ' of ,effective communication for its
'employees, customers, and vendors. It built an internet to allow
• communication among its 50 franchisees, almost eliminating huge
c'
, .
Forms of Business Owners~~p 67
paper work. Using the Web site, every franchisee has immediate
access to every subject that involves the franchise operation, even
the forms to fill out. There is a chat room for franchisees to
leave messages and comments for each other. All franchisees are
kept up- to date on company news via e-mail. Many companies
have found that the Internet is a great way of disseminating
information and is revolutionizing franchisors support and
franchisees communications all over the globe.
THE COOPERATIVES
Cooperatives are other forms business organization in our society
for mutual benefits and ,gains. A cooperative is a business
organization owned and controlled by the people who use it
(producers , consumers, or workers with similar needs) , to pull
their resources for mutual gain.
Some people dislike ,the notion of having owners,
managers, workers, and buyers as separate , individuals with
separate goals in a business el!vironment. ' These people try to
form a different , kind of organization to meet their needs for ,
things such as electricity, childcare, housing, health care, food,
and financial services. Such an organization is a cooperative
society. Using the United State of America as an example, there
are about 47,000 cooperatives. Some of these cooperatives ask
members / customers to work in the organization so many hours
a month as part of their duties. Members democratically control
these businesses by electing a board of directors that hires
professional managers for their activities '
There is another kind of cooperative businesses in the
United State of America. They are set up for different reasons.
These cooperatives are formed to give members more economiC
power as a group than they would have as , individuals. The best

68 Business: Concepts and Perspectives
example of such cooperatives is a farm cooperative. The idea of a
.!,
farm cooperative at first was for farmers to join together to get
", bett~r prices for their food products. Eventually, however, the
organization expanded so that farm cooperatives now buy and sell '.
. .
fertilIzers , farm equipment, seed, and other products needed on the
farm. This has become a multibillion- dollar industry in the V nited
States. Other countries of the world, especially the E V Countries
take examples of the V.S .. sY,stem to grow and develop . . These
systems, although relatively new in developing countries, are
equally useful in the growth and development of some infant
industries, . especially when they are properly and effectively
adopted. The cooperatives now own many manufacturing facilities
as well, The 'farm cooperatives do ' not pay the same kind of taxes
that corporations do, and thus have ' an advantage in the
marketplace.
Farmland industries today in the United States of America
own manufacturing facilities: oil wells and refineries, fertilizer
plants, feed mills, and plants that produce everything from grease
and paint to steel buildings. Th~y also offer insurance, financial
and technical services and own a network of warehouses. In spite
of debt and mergers, cooperatives all over the world are still a
major force in agricultUral industries today. Mechanized
agriculture has had a tremendous positive impact on the economy of
most countries of the world. Has always encouraged the
development of most countries especially in view of its economic
benefits in food production and growth of agro - allied industries all
• <; • {. ~, \
over the globe. , -'
THE ROLE OF THE ATTORNEYILA WYER
IN THE FORMATION OF ANY VENTURE.
The attorney's/lawyer's major function in serving any
form of business enterprise is preventive in nanire. According to
B~oom and Logenceker (1975) the objectives of an attorney is to
Forms of Business Ownership 69
insure observance of all legal requirements in the establishment
and operation of the client's venture. Other functions of the
attorney include: representing the . businessman in court, before
various regulatory bodies and before other '. governmental
i agencies; serving in the negotiation ot' labour contracts with a
union and drawing up real estate or other contracts which involve
the type of business set up.
VARIOUS AREAS THAT NEED LEGAL ADVICE
BY ALL ATTO~NEY
The various areas that may need the attention or services of
an attorney are summarized as follows:
1. CHoiCE OF FORM OF Busn4JESS
ORGANIZATION
The legal differences between the proprietorship, partnership, and
the corporation are important.
These differences are to be explained by an attorney
before"'t hebusiness person or persons can decide on a choice.
2. COMPLIANCE WITH LABOUR LAWS
. In both unionized and nori~unionized enterpris~s, the various laws
pertaining to such matters as minimum wages, working hours,
unemployment compensation-, and industrial safety must be
~
understood "and) followed carefully. It is .the lawyer's duty to
.explain these lawS and to ensure that they are complied with to.the
letter. .
3. •. ACQUISITION OF REAL PROPERTY ,;
.In the 'purchase of' real estate or in leasing property, the use of an
attorney is highly desirable. In leases, for, example, an attorney
will check provisions regarding options to . renew ,ownership of
 Forms of Business Ownership 71
70 Business: Concepts and Perspectives

improvements, subletting rights and other details that may be 7. OBSERVANCE OF LOCAL ORDINANCES.
required. Prospective business owners should be interested · in local
ordinances such as building codes, sanitary requirements and
1. PURCHASE OF STOCK OF MERCHANDISE
zoning. For example, to a small manufacturer who is renting his
Purchasing the stock of merchandise from another business as in
first building, .the building code is importar\t if the building
the purchase of bulk retail store-requires compliance with the
requires alterations to make it useful for the intended business.
bulk sales law or other relevant laws of the state or court in which
Sanitary ordinances include, those pertaining to all forms of
the sale is to be made. These laws are desired and designed to
pollution control and cleanliness practices. Zoning ordinances are
protect creditors of the seller, and a clear title to the goods requires
also highly iniportant because a business builqing must be in a
compliance with the laws of the state or country also.
properly zoned area and no adverse zoning. (:hanges should be
in prospect.
2. . SECURING THE NECESSARY LICENSES

A license is a formal permission granted by a governmental body

CHOICE OF AN ATTORNEY.
to carryon a stated business or to engage in a stated occupation,
Of paramount importance in selecting an attorne:y is the quality of
which without a license would be illegal. Professionals such as
legal services that he/she can provide. Speeq and cost are of
certified public accountants, lawyers, dentists and physicians
secondary importance. An attorney must know the law, be an
require licens~s. Businesses that require licensees include banks,
accurate interpreter of legal trends and judicial opinions, and be
insurance companies, bail bond companies, liquor stores,
able to forecast outcomes of lawsuits. An attorney serves best
drugstores, collection agents and public warehouse. Personal
when courtroom battles on the part of the client can be avoided.
service businesses or practitioners such as barbers, beauticians,
Because of the range of legal issues invol,ved in conducting
plumbers and pilots, to mention but a few, also require licenses.
a business and their frequency in arising , the relationship of a
businessperson to his/her attorney should be i continuing one.
3. AVOIDANCE OF LIENS AND Once a lawyer-client relationship is set up, the client should
JUDGEMENTS AGAINST THE SELLERS . ~

utilize the attorney's services promptly whenev~r the need arises.

If the businessman is purchasing an existing enterprise, for
example, the lawyer should check the public records for possible
existence of tax Liens or obligations, mortgages or judgements of
records. These could also be undisclosed liabilities for taxes,
outstanding product warranties made by the seller, tott claims
against the seller not yet voided by the statute of limitations,
consigned inventory items,payments due and unmade under lease
or purchase contracts and the like.
 (
.:::
1-·
Ch;lpter .3
BUSINESS ETHICS AND SOCIAL
RESPONSIBILITY
Madura (1 998) observes that a firm's employees should
practice and observe business ethics, which is a set of principles
that should be followed when conducting business. According to
him, ~ach firm has also a social responsibility, which is the firm's
recognition of how its . busine~s decisions can affect society in
general. The . term social
. responsibility
, ,
is some"times used to
describe the .firm's · responsibility to its . community and to the
environment. It may also be broadly used to include the . firm's
." responsibility to its' customers, employees, and creditors. While .
. a firni . makes business ..decisions that are intended to increase its
. . value, its decisions .must not violate its ethics and social
responsibility .
Nickels, . McHugh and, McHugh (1999) ' stressed that
knowing what is right and wrong and, behaving accordingly is .
what ethical behaviour is all about. Ethical "'behaviour can
. influence a . firm's success .in business. It .is ranked the most
important personal attribute · workers in most business
organizations .in the United States of America should possess.
They, . however, see social responsibility as ~:I.business' s concern
for the welfare of society as a whole but observed that .. ethics .
concerns the moral and legal issues involved in doing business
any where i~the world.
11-.
Business Ethics and Social Responsibility 73
Hellrigel , Jackson and Slocum (1999) observed that the
ethical issues facing managers and employees have grown in
significance in. recent years. By ' some estimates, fraudulent
activities cause 30 perc~i1tof U.S business failures. No industry
seems to be immuned in this case. Business Scams have brought
down a lot of financial, non-financial and even businesses based '
on religion. 'These and numerous other high-profile .·scandals
have drawn stakeholders' attention to the effects of unethical
business practices and fueled demands for reforms. In a world of
increasing local and global competition for both employees and
customers being in step with society's expectations c<:tn be
benefiCial to everyone over a long run. Marcus (1996) identified
some reasons why ethics matter to organizations. These reasons
are (a) To enhance corporate effectiveness , (b) To preserve their
legitimacy, (c) To deter white-collar crimes and . Cd) To promote
trust and "prevent debilitating conflicts in organizations. These
will be discussed fully .later in this chapter . .'
. In the. most elementary sense, ethics is a set 'o f values and
rules that define right arid wrong conduct in a given environment. .
They . indicate when behaviour is acceptable . and when it is
unacceptable. In a broader sense, ethics includes: distinguishing
between fact and belief, defining issues in moral terms and :·
applying moral principles to a situation.
Warner (1996) offers yet another definition of business
ethics as "the application of ' ordinary human ' ethical values or
principles in the conduct of business. He stated further that
business ethics is not different from ' other ' branches of applied
ethics such as medical ethics or social ethics or sexual ethics
which submit various fields Of human behaviour to ethical and
moral analysis and evaluation. For practical purpose the terms
ethical and moral values have exactly the same meaning and
,.
 -i
~
I' I '.
74 Business: Concepts and Perspectives
differ only in their origin. Our concern ' in this text is the
similarity in meaning not origin and as such the terms will be
I·
used interchangeably to convey the objective of this chapter.
~... .
It will be over simplifying to consider business ethics as
just routinely applying general ethical or moral values or rules to
different business activities such as voting on a particular
company policy, marketing a new product, securing a contract or
making a sale. General ethics can be led to develop its thinking
by considering various business activities and recognizing that
experience of real life situations can lead us to refine or develop
our understanding and appreciation of moral values or principles.
For moral issues which arise in advertising or in negotiations can
throw light on human communication and lead us to the
realization that what ethically counts as telling the truth or telling
a lie will often vary according to circumstances or conventions.
Giving ethical attention. .to marketing can help to clarify our.:1­.­
i ~>
understanding of the different types of human needs, how these
may differ from desires, wishes, and wants, and how the
satisfaction or creation of such needs may be ev&1uated from
moral or ethical point of view.
I The issue of bribery that prevails most often in some
major corporate and non-corporate bodies not only demands that
ethical significance be attached to differences in culture and
social convention. Its analysis can also produce important
distinctions with differing ethical evaluations, including the
difference between bribing some one to do their ordinary job
(ft;lcilit.ating payments) and bribing someone to abuse their
position (corruption),and between volunteering a bribe on the .
one hand and being compelled to pay extortion on the other.
. Corporate behaviour forces us to look closely at ideas
about collective responsibility and dispersed responsibility or
J ,
75
Business Ethics and Social Responsibility
respOnsibility spread thin as well as taking into account the force
of c,or,porate pressures and influences in determining the degree
of ac'~Quhtability of individual members of an organization in
wFgugft,li business behaviour. The issues involved in doing
, .
buSi~s .in an increasingly competitive environment lead us to
the ~¢(jnsideration of human conduct as they relate the ethics of
actirtg from self interest and the common phenomenon of acting
from Mixed motives.
.' . ':: .}~usiness ethics is not the unvarying imposition of ethical
st~~d<tfds on the gamut of business situations . It is more of a
dialol ue of between the science of ethics and the conduct of
business. The values and principles which come into play are
what have been termed the ordinary' human decencies, which are
obviCiusly not limited solely to business behaviour. They are the
types of actions and ways of behaviour in which human and
social values are applied. They are also unique to business and
have. varied through the ages of humanity. The interplay of these
vaiues a~d situations as they relate to ethics is the material of our
discussion on modern business ethics.
,~
;! Hellrigel, Jackson and Slocum (1999) view the 'issue of
"
ethics from four dimensions of societal, legal, organizational and
individual perspectives.
THE SOCIETAL PERSPECTIVE
A large part of 'any view of what is ethical comes from
the 'society in which the behaviour occurs. There is a higher
level of disenchantment with the lack of ethical behaviour in the
g~obal (world) economy as a result of managerial and employee
behaviour in the workplaces.
Public opinion is the means by which societal values and
norms ~re determined. But public opinion is generated through
I
~-.====
~
76
Business,' Concepts and Perspectives
opinion pool and made manifest through the mass media. For.
exampk the issue of tobacco production and consu,.m ptionhas
taken a centre stage since 1966 in the United States of America.
This has resulted to some ethical considerations in v'iew of
societal expectations. In 1966, the public interest groups through
the . U.S . Surgeon Genec:l forced tobacco companies to put
warning labels on cigarette packaging ' in consideration to the
enormous harm smoking does to the human anatomy. In 1971,
pressure from the same interest groups forced tobacco companies
to agree to ban tobacco advertising on Television and radio.
More recently, continued pressure from groups working on behalf
of the public interest has resulted in even move severe restrictions
on the tobacco industry because dozens of studies done have
shown that smoking and chewing tobacco have negative health
consequences, including an estimated 400,000 deaths annually in
United States alone. The estimates in the other countries of the
world are in millions. It therefore becomes ethical to inform the
general public (consumers) about the consequences of the
product-tobacco and to save the companies in the business
marketing such products from some legal implications arising
from their activities.
Public interest groups concerned about human rights have
protested conditions in offshore apparel manufacturing, affecting
a wide range of companies. Conditions in a shoe manufacturing
plant in china illustrate the problem more explicitly. The
situation is that some 50,000 employees, many of them younger
than the Chinese minimum age of sixteen for working in
factories, make prOducts for Nike, Adidas, Recbok, LA Gear,
Puma, and New Balance. Many are -not even paid the Chinese
minimum wage of $1.90 per day, with no benefits. They work
under conditions that are typical in the region but are harsh by
I-I .
Business Ethics and Social Responsibility 77
global standards. Mandatory overtime hours typically amount to
eighty hours per month, or double the amount allowed by Chinese
law. Meal breaks last only ten to fifteen minutes. At other"
factories in the area, conditions are even worse. Some of those
employers attempt to reduce employee turnover by requiring
employees to pay a "deposit" equivalent to two weeks pay.
Employees also forfeit the deposit if they leave before their
contracts expire. Other employers confiscate migrant workers'
identification papers so that they can't job hop or even remain in
the city. The abc'!e scenarios are cases of unfair labour
treatments, which are very unethical and inhumane in nature.
They are subject to value judgments by society based on some
ethical principles or subject to legal interpretations based on the
law of the region under which they are exhibited. As Hellriegel,
Jackson, Slocum (1999) have observed, if a company operates in
many different countries, local standards for ethical conduct may
differ greatly from one location to the other. Developing ethical
guidelines, und~r this context, that make sense in various settings
can be a complex task because of value and cultural differences.
Some companies apply U.S" standards for ethical conduct
universally in the belief that this approach won't violate ethical
principles elsewhere. Other companies adapt to local practices,
l arguing that ethical -standards make sense only when considered
' within a particular societal context. Even in the same society, the
view of what is ethical changes over time. Changing societal
views of ethical behaviour eventually result in new legal
requirements. Before laws and government regulations are
changed, managers and their organizations may take voluntary
actions that reflect their personal and company (corporate) values
and beliefs and their assessments of the public's changing ethiCal
stance. For example, the issue of alcoholic beverages in the
,
 I;;'
78 Business: Concepts and Perspectives
United States of America. During the prohibition of it between
1919-1932, buying and drinking alcohol was illegal throughout "
the United States . Today, buying and drinking alcohol are illegal
for people of particular ages and for people living in some "dry"
localities . Although such actions ar~n't uniformly banned by
federal law and regulations, society's" concerns about the
,"
consequences of alcohol use are still felt as dangerous to health
generally.
As it is true for tobacco, federal laws' regulate corporate
advertising of alcoholic beverages. Organizational decision
makers in companies that produce and distribute alcohol, in turn,
must decide how to navigate society's shifting ethical and legal
currents. One approach is to be as aggressive as possible, while
staying within the letter of the law. Another is to carve out an
advertising strategy that is sensitive to society'S opposition to
using advertisements to encourage the nation's youth to engage in '
behaviours that are potentially.~pangerous. Both approaches can
satisfy legal codes of condu~( but either approach might be
viewed as unethical depending on an individual'S values and
perspective.
THE LEGAL PERSPECTIVE
What a society interprets as ethical or unethical frequently
ends up being expressed in laws, government regulations, and
court decisions. Laws are simply society ' s values and standards
:-
that are enforceable in the courts. The -legality of actions and
d'ecisions doesn't necessarily make them ethical, however. At
one time, for example, United States 'Organizations could lega;ry
discriminate against women and minorities in hiring and
promotion processes. As a consensus developed that such
discriminatory practices were unethical, laws such as the Civil
Business Ethics and Social Responsibility 79
Right Act of 1964 were passed to stop the practices and ensure
equal employment oppOl1Unities for all citizens . In addition, the
federal government issued regulations requiring " government
agencies and federal contractors to work at correcting the effects
of past discrimination. Affirmative action programmes were one
outcome of such regulations. During the 1970s and 1980s, large
corporations invested millions of dollars designing, implementing,
and evaluation affirmative action programmes intended to reverse
the effects of decades of employment discrimination against /
/
women and "minorities.
The equity and effectiveness of affirmative action have
been called into question in recent years. Although the principJe
of equal employment opportunity is still widely accepted, people
disagree about how best to apply it. Opponents of affirmative
action argue that such programmes are also discriminatory and
"hould be discontinued. The issue of affirmative action therefore
i, left for some states in the U.S.A to enforce according to their
\ lrious requirements and situations.
The legal concept of employment-at-will provides another
n ample of the int~;;vlay between changing societal views and
Lilanges in the law. ~Employment-at-wi11 is a traditional common­
law concept holding that employers are free to discharge
employees for any reason at any time and that employees are free
to quit their jobs for any reason at any time. Historically,
employers often dismissed employees, especially those in
managerial positions, without explanation (at will). , During the
past twenty-five years, though, courts have modified the
freewheeling notion that employees can be fired for any reason.
Besides, prohibiting discriminatory firings, employers have been
held liable for firing employees for reasons that violate an
important public policy. For example, employers cannot legally
 Business Ethics and Social Responsibility 81
80
Business: Concepts and Perspectives

fire people for refusing to lie in a legislative hearing, for blowing THE ORGANIZATIONAL PERSPECTIVE
the whistle about illegal conduct by their employers, or for filing To provide effective guidance for employees an
workers' compensation claims. organization can also guide employee actions both formally and
With respect to dealing with customers, the classic legal informally. The most fundamental informal source of guidance is
concept of caveat emptor (Iet the buyer beware) used to be the to management's behaviour, which demonstrates the ethical
defense for a variety of shady business practices. During the principles that are important to the organization. Even within the
1950s and 1960s, an increasingly aware public began to challenge . same company, however, different departments may have
the ethics of such a position. Shifting societal attitudes · and different ethical suhculture. In this way, the behaviours of middle
values concerning appropriate behaviour by businesses led to a or lower level managers can also send signals about what is
flood of United States customer legislation during the late 1960s considered ethical conduct. More formal sources of guidance
and early 1970s, which substantially diminished the concept of include policy statements, codes of ethics, speeches, publications,
caveat emptor. In the 1990s, quality improvement practices and the content of training programmes, and disciplinary actions taken
customer-oriented practices make such an approach to customer against employees who act unethically . The nature of an
relations almost
,
inconceivable.
. organization'S culture, leadership, reward systems, and practices
On some issues, both societal opinions and legal
can work for or against ethical conduct.
precedents clearly define whether a behaviour is ethical. When
An organization cannot design reward systems
behaviour is clearly unethical and illegal, taking a stand that
intentionally that will encourage unethical behaviour, but often
satisfies both the courts and the public is relatively easy for
that is just what happens. For example, some organizations might
companies. In that case individual employees also have clear
set quotas for their' employees to meet regularly. "These quotas
knowledge of what is right and what is wrong. In such
might be unreasonably increased with time such that employees
situations, societal values and standards of behaviour are clearly
might find it difficult to meet. At this point workers of the
understood and are reinfOrced by the law. But in many areas of organization might find ways of circumventing the quotas in other
business practices, judgments about right and wrong fall within a to meet expectations to set on the job. This may be regarded as
gray area of ambiguity. How should employees behave when the cheating - an unethical behaviour for workers of the organization
laws are unclear or conflicting, or when societal opinions have only designed to protect their jobs.
shifted and old laws are being questioned as unethical? Under Situations like the above are common. Studies in America
these circumstances, employees must look to their p~rsonal values show that 29 percent out of 4,000 workers studied found pressure
to be the cause of their engagements in conducts that are unethical
and beliefs and the standards, policies, and practices of their
respective organizations. so that they can meet bu siness objectives while 25 percent pointed
out that corporate executives also violate ethical standards by
finding short- cuts to reaching organizational goals and

"

<~
 82 Business: Concepts and Perspectives
,":'"
Business Ethics and Social Responsibility 83

objectives . Whereas some managers are willing to look the other

A person at the instrumental stage becomes aware that

way, other managers believe,. that business organizations can be a
powerful force . for positive change in matters involving va,lues,
morals and ethiCs in organizations.
THE INDIVIDUAL PERSPECTIVE
Despite prevalent societal, legal, and organi~a~.ional
interpretations of what is ethical, individuals have tbeir own
values and a sense of what is right or wrong. Lawrence Kohlberg
(1927-1 987). probably is the best-known scholar in the field . ~f the
psychology of ethical decision-making and beh~yiour.
Kohlberg's model of moral development is useful for exploring
questions about how members of an organization regan,! ethical
. " ~ .
dilemmas, including how they determine what is right 9t.: wrOng
in a particular situation. Kohlberg held that people deyelop
loyal employee and colleague who is always friendly and who
morally , much as they do physically, from early childhq~d to
avoids or smoothes conflict. If absence creates conflicts or work
others also have needs and begins to defer to them to get what the .,~,~ .
: :.~~; ~
individual wants. Proper behaviour is what satisfies the person's
self-interest. At times, self-interest can be satisfied by making
deals or exchanges with other people. An employee at this stage
might be willing to defer to the needs of the employer to reduce
absenteeism, but only if the employer gives something in return.
A person at the interpersonal stage considers .appropriate
behaviour as what pleases, helps, or is ..approved by friends or
family. Proper behaviour exhibits conformity to conventional
expectations, often of the majority. At this stage, being seen as a
".
"good person" with basically good motives is important. An
employee at this stage might focus on the importance of being a

adulthood. As they develop, their ethical criteria and p~tt~(rtS of

overload for other employees, some~people at this stage might be

l
!'
moral reasoning go through stages of moral developme~t : . The
willing to reduce their absences even if that meant not using all of

stages of moral development range from obedieilc¢ ' and

their allotted sick days.

punishment orientation to universa:l ethical principles. Kohlberg

A person at the law and order stage recognizes that ethical '

didn't assume that everyone progresses through all the st:ag·es.

behaviour is not determined only by reference to friends, family,
A person at ' the obedience and punishment stage 'd0t::s the
. right thing mainly to avoid punishment or to obtain approval. In
" respect for authority, and maintaining the social order for its own ,"
other words, only the immediate consequences of an action
determine whether it's good or bad. An employee stuck ar this
stage might think that the only reason not to steal money from an
employer is the certainty of getting caught and then fired or :even
arrested. Most organizations don't want employees whouse Sllch
simple reasoning to guide their behaviour when faced with ethical
dilemmas.
co-workers, or others whose opinions the individual might value , .. ~
Proper behaviour consists of doing a person's duty, showing
sake. Loyalty to the nation and its laws are paramount. The
person sees other pe..0ple as individuals and also as parts of the
larger social system that gives them their roles and obligations.
An employee at this stage\ may rigidly adhere to organizational
rufes and regulations and legitimate orders from superiors, The
employee is likely to resist or criticize the efforts of co-workers
or ~uperiors to bend or break the rules. For example, -in some
organizations employees commonly take paid sick days even
 84 Business: Concepts and Perspectives
when they are not sick. Employees may even encourage each
other to take all their sick days. They view these leave days as
something the ' company owes them. However, the company or
union contract may state that sick days are allowed only for
legitimate illnesses. In this given situation, employees at the law
and order stage might resist peer pressure to take a day off if they
are not ill. They wouid view company rules or the union contract
as overriding" the somewhat selfish interests of their peers. At
this stage of moral reasoning, rules are considered to be
necessary for the effective functioning of the entire organizations,
and they should be followed even when it requires some self-
sacrifices or resisting pressures form peers. . Ivancevich, Lorenzi and Skinner (1997) have identified
A person at the
,. social contract stage is aware that people
hold a variety of conflicting personal views that go beyond the
letter of the law. A person at this stage understands that,
although rules and laws may be agreed upon and for the most part
f I (I.
must be impersonally followed, they can be changed if necessary.
.' Some absolute values, such as life and liberty, are held regardless
of different individuals' values or even majority opinion. The
greatest good for the greatest number is the characteristic ethical
norm at the stage of social contract. People at this stage would
recognize that employees of organizations are expected to follow
the rules but would also accept the notion of breaking the rules
when those rules conflict with accepted social values. They
might accept the notion of a conipany permitting employees to be
absent for only a specified number of days. But if they believe
that the absentee rules unduly restrict employees' freedoms; they
might also feel justified in breaking the rule or might actively
work to modify the rule to make it less restrictive. For example,
they might encourage their employers to specify an allowable
'Business Ethics and Social Responsibility 85
number of days off per year and allow employees to take these
days for whatever reasons they choose.
Finally , someone at the universal principles stage views
appropriate conduct as determined by a person's conscience,
based on universal ethical principles. The universal principles are
founded in justice, the public welfare, the equality of human ~
rights, and respect for the dignity of individual human beings.
People at the most advanced stage of ethidl reasoning recognize
these universal principles and act in accordance with them rather
than rules or laws .
ETHICAL MODELS IN USE IN ORGANIZATIONS
three ethical frame works in use in organizations. These are the
deontological, utilitarian and Virtue ethics .
Based on ' their models, the deontological ethics is an
approach to ethics that sassumes that certain ethical ideals are
universal; that is, they apply in all situations regardless of the
consequences of these situations. The reasoning found in
deontological analyses suggests that there' are self-evident ideals
which can direct managers' thinking. Modern interpretations of
these ideals suggest that they may be considered universal in
character, but not necessarily absolute . The differ~nce between
absolute and universal situations is the recognition that sometimes
situations arise in which one or IIlore universal statement of right
and wrong may be inappropriate . . Early deontological thinking
would not admit the no absolute chara~ter of rules, but more
modern versions perceive, these statements as universal in
character and allow exceptions. In general, the main concept is
that these rules or duties are required , and a burden of proof lies
with any exception to them.
:.\
 86
Business: Concepts and Perspectives
. The u tilitarian ethics model is an approach to ethics 'that _
assumes that ethical, judgments .depend upon the consequences, of
an action. A familiar utilitarian measure is that an action is good
if it results in the greatest good for the greatest number of people
. \ .
in a society. There are many variations of utilitarianism as there '.
are ,:,ariati~ns . of deontological model. The pf imary " way of
assessing the greatest good' for the greatest number of people in a
society!s by performing a social cost/benefit analysis and acting
on it. .· All benefits minus all costs of a particular act are
,; considered and summarized as the net of all benefits minus all
costs. If the net result is positive, the act is morally acceptable
and bene(tcial; butif the net result is negative, then the act is not
morally beneficial and acceptable and must be avoided by society.
Utilitarianism seems to have been readily accept~d in
business, in ' part because of its tradition in economics. Adam
Smith and much of the ensui,ng economic philosophy of
capitalism provide a rich traditioiral heritage for the utilitarian
,!
model of ethics. Capitalistic systems, by oproviding the greate~J
~. ~
" .... 0 "
material good for the greatest number of persons in a society, are
considered ethical from the perspective of economic philosophy .
The utilitarian analysis of moral philosophers extend beyond
D, material good to the much broader concept of utility from which
the term is derived.
Two criticisms are relevant to the discussion of the
utilitarian concept according to Ivancevich, Lorenzi and Skinner
(1997). 'One is the problem of unjust distribution of utility.
i ci
I '·' Summarizing the c9sts and benefits as stated above can conceal
major negative . occurrences to people in small segments of a
society .by aliowing them to be offset ' by reiatively minor
increases in utility to larger segments ~f sQciety.
, , ;:'
r ',
Business Ethics and Social Responsibility 87
Another
c
problem for utilitarianism is' the concern for
individual acts. If each act is judged solely by its own
cost/benefit outcome, there is lack of consistency and of ability to
generalize. For example. marketers may argue that, fraudulent
advertising is all right if no one is worse off, and a rule against
such practices becomes less tenable. In spite of the weaknesses
of utilitarianism, it is still a major tradition in moral philosophy
and it receives substantial support by society.
However, a concluding issue about the two m'ajorethical :S:.""
models is nece,ssary. . Accordingly, deontological ethics has the
individual as its major concem and unit of analysis, while, the
utilitarian ethical model is decidedly social in character and
focuses on the welfare of society as a unit. This focus can, in
many situations, put the two traditionS at odds with each other, as
there is no totally accepted, absolute statement of what is ethical
and what is not ethical. Only important and carefully reasoned
traditions of ethical conducts prevail in most circumstances.
The third ethical model is the virtue ethics. The virtue
ethics model is an app~oach to, ethics that assumes professional
norms to be the measure of eth\cal status. It assumes ' that if an
act is appropriate within professional norms, it is considered to be
ethically good or right. Consider a professional lawyer, for
example. It is assumed that it will be unethical for a lawyer to
not defend his/her client to the best of his/her ability, even though
the case against the client is overwhelming; It is rather the
professional duty of the lawyer to defend his/her client against all
expectations. All professional activities can be, understood as
being guided by some special artificial virtues. This approach is
needed because generalized moral considerations and
psychological descriptions are usually irrelevant when applied to
professional goals or life, e.g to acts of professional marketers.
\:'~.

88 Business: Concepts and Perspectives
Professionals typically deal with ethically problematic areas.
Their virtues are probably different from general virtues.
Professional virtues are those tendencies to act in ways
that serve the goals of professions. An ideal professional may be
describ~d as one whose typical behavioural tendencies, values
and other relevant features are such that they serve professional
goals . .' This approach ' creates ' a gap between general moral
considerations and professional duties and values. Professional
virtues are ' those individual character traits that serve the
. '
professional goals as well as possible. Professional virtues may
be different from general virtues like honesty, fairness, and
impartiality , but may still be justifiable through the goals they
serve.
Hellriegel, Jackson and Slocum (1 999) have similar
classifications of these ethical issues using different names
(except for the utilitarian ethics) and explanation. They looked at
ethical models from the point of view of: utilitarian, moral rights
and justice models.
According to Hellriegel, Jackson and Slocum (1999) the
utilitarian model focuses on behaviours not on the motives for
such behaviours . A manager or employee guided by this model
considers the potential effects of alternative actions (behaviours)
from the perspective of the accepted social contract. The
alternative chosen is supposed to benefit the greatest number of
people, although such benefit may come at the expenses of the
few or those with little power. As long as potentially positive
results out weight potentially negative ones, the decision maker
considers the decision to be both good and ethical.
In most free enterprise systems of the world and in the
United States of America's economic system in particular, the
principles of capitalism have defined the social contract that
governs business decisions. Under every capitalistic system, the
~
Business Ethics and Social Responsibility 89
primary managerial obligation is to maximize shareholders'
profits and their long-term interests. Milton Friedman, the U.S
Noble prize-winner, an economist, was the best known advocate
of this approach. According to Friedman, in Hellriegel, Jackson
and Slocum (1999) using resources in ways that do not clearly
maximize shareholders' interests amounts to spending the owners'
money without their consent - and is equivalent to stealing. A
manager can judge whether a decision is right or wrong by
considering it's consequences for the company ' s economic needs
and financial well - being. If it improves the financial bottom
line it' s right, but if it detracts from the financial bottom line, it's
wrong. The utilitarian model drives companies to assess
constantly how activities--even so-called charitable contributions-­
are related to business performance.
According to the utilitarian model, all employees should
strive to' use the company's resources to increase its profits and
engage in activities designed to do so, while staying within the
rules of the game. These rules include open and free competition
without deception or fraud. The utilitarian model prescribes
ethical standards for managers and employees in the areas of (a)
organizational goals, (b) efficiency, and (c) conflicts of interest.
ORGANIZATIONAL GOALS
Providing the greatest good for the greatest number in a
competitive market system means focusing on maximizing
profits. Achieving high profits is thought to result in ~e highest
quality products and the lowest process for consumers. Profits
are seen as the reward for satisfying consumers. If profits get too
high, new competitors will enter the market, thereby increasing
the supply of high-quality goods and pushing prices down. No
firm should unilaterally go beyond what the law requires for the

90 Business: Concepts and Perspectives
sake of helping preserve the environment. Doing so would only
reduce that firm's profits and would do nothing to eliminate the
pollution caused by its competitors. They would obtain a greater
share of the market and profits because of lower cost and thus
lower prices . Every 'government is, therefore, responsible for
protecting the environment and should pass environmental laws
and regulations that apply to all companies.
EFFICIENCY
Managers and employees ' ali~e should try to attain
organizational goals as efficiently as possible. Efficiency is
.achieved by both minimizing inputs such as labour, land, and
capital and maximizing productive outputs. For example, if
technologies are available that allow a firm to produce goods or
deliver services at a lower cost, it should use them. It should do
so regardless of the consequences in terms of layoffs, retraining
costs, or moving production overseas to obtain lower wages and
be subject to fewer restrictive regulations.
CONFLICTS OF INTERESTS
Managers and employees alike should not have personal
interests that conflict with the organization's achievement of its
goals. A purchasing agent having a significant financial interest
in one of the firm's major suppliers faces a potential conflict of
interest. Again, the reason for this proscription relates to
profitability. In this case, the purchasing agent might be
public have the right not to have their lives and safety
I I motiv~ted to purchase from the supplier, even when the price or
unknowingly and ' unnecessarily endangered. In ' most
. quality is not the best available. Conflicts of interest can
countries, many laws require business to comply with
sometimes be difficult to judge. Identifying conflicts of interest
society's view of appropriate standards for quality ,of life
can be even tricker when cuitural differences are added to the
and safety. Fo'r example, this moral right in large part
mix, as op.~ American discovered when on assignment in Russia .
justifies the United States' Occupational Safety and Health
' .
"
-- ..
Business Ethics and Social Responsibility 91
The American was working :with a sen~or Russian partner, who
also happened' to own some other businesses. When the Russian
began to borrow company materials and equipmem,the American
viewed his behaviour as unethical. The Russian saw no conflict
of interest, using the equipment in two companies in which he
was an owner seemed both reasonable and efficient.
The utilitarian model , is consistent with strong values of
individualism, acceptance of uncertainty and masculinity, as
defined earlier . These values support maximiza.tion, self­
interest, rewards based on abilities and achieveU1en;~', sacrifice
and hard work, and competition .
THE MORAL RIGHTS MODEL
The Moral Rights Model holds that decisions should be
consistent with fundamental rights and privileges of employees,
for example: life, freedom, health, privacy, and property as set
forth in official documents and the constitution. Several laws
enacted in the United States of America for example requirehc l
managers and employees to consider these rights as guides fot
their decision-making and behaviour. The moral rights model is
consistent with Kohlberg's universal principles stage of moral
development. This means that respect for certain moral rights is
equivalent to defining these moral rights as universal principles
that should guide ethical decisions and behaviour.
a. Life and safety-Employees, customers, and the general

 .)
92 Business: Concepts and Perspectives
Act (OSHA) of 1970, which contains many requirements
designed to increase the safety and healthfulness of work
. environments. Among other things, OSHA and its
implementing regulations restrict the use Of asbestos, lead .
.
based paints, and various toxic chemicals in . the
! I
workplace. Business operating in other countries often
(:
filld -that laws are less restrictive there, so . they must
choose whether to meet only the standards of the host ._
country or exceed those legal requirements .. For example,
General motors, an American based company, chose to
use a higher standard than required for its operations in
. Mexico. Although it was not legally required to do so, the
company spent more than $10 million U.S. Dollars to
install small. stand- alone sewage. treatment systems in
.
towns throughout the country (Mexico). According to Lee ·
Grawford , a managing director working in Mexico, "it
w~s just something we felt was the right thing to do .
... Water i~ one of the biggest single problems in
Mexico". As an indication of how important these
projects were . to . Mexico, the Mexican government
honoured General Motors with its Aguil~ Azteca award
for humanitarian service to her citizens.
b. Truthfulness: Employees, customers, and the general
public have the right not to .0C intentional~y deceived on
.~ matters about which they should be informed. This
violatestheil individual rights for good and non-deceptive
information:. TheX should always be told the truth most
often so that their behaviours and actions in terms of their
purchasing rights should be on track.
c. Privacy: Citizens have the right to control access to
and keep employees on their toes. But some employees and
personal i!1formation about themselves and its use by
customers have expresspn "-"'ern Thalia Hondrogen, a
Business Ethics and Social Responsibility 93
government agencies, employers, and other who would
otherwise want to take undue advantage of them. This
moral right was the basis for the U.S Privacy Act of 1974.
The Act restricts the use of cert~in types of information by
the Federal Goverriment and limits those. to wHom '"' this
information can be released.
The 1988 Video Privacy Protection Act is an example of a
more specific law designed to ensure that privacy rights are
respected. This act forbias retailers from disclosing video rental
records without the customer's consent or a court order. A
customer who rents exercise videos need not worry about getting
on mailing lists for exercise equipment catalogue:;, fitness
magazines, and the like.
• With the availability of an array of new information .
technologies, enormous concern · has been expressed about
invasions of privacy at the societal, legal, organizational and
individual levels . A few of these privacy issues include drug
testing , honesty testing, confidentiality of medical and
psychological counseling records, managerial monitoring of e­
mail and work performed on computers and access to credit
records .
Video monitoring is an example . of the use of one
technology that has become widespread, despite · the negative
reaction many people have to the idea of having everything they
do recorded on tape. For example, at hundreds of Dunkin'
Donuts shops, the walls have ears that can hear conversations
between customers as they wait in line to be served , as well as
monitor conversation's among employees. Franchise owners
believe that this form of intrusion is necessary to increase security .

94 Business: Concepts and Perspectives
customer, said "It's likespying. It's not American. Many times
you say things to close friends you don't want overheard. "
People react in a similar way when they hear about software
programmes designed to keep track of people' s Internet travels.
d. Freedom of Conscience. Individuals have the right to
refrain from carrying out orders that violate their moral or
religious beliefs.
In the U.S.A a woman from the state of Oregon had a
court case that violated her moral belief. An Oregon court
ruled in favour of the woman who had been terminated
from her job because she insisted on serving as a juror . .
Her boss had ordered her not to serve, knowing that she
could get out of jury duty because of her young children.
The court at this juncture felt that her right was violated
mQrally and she got a favourable justice in court which
protected her moral right.
e. Free Speech : Employees have the right to- criticize the
ethics or legality of their .employers' actions. This type of
right holds only if the criticism are conscientious and
truthfuland~ do not violate the rights bf others within or
ou~side the"'- organization. Virtuallya~l. U.S .federal
legislation passed copceming occupational safety,
pollution, and health has contained provisions designed to
protect , employees who report violations to laws by heir
employers.
f. . Private Property: The legal and value systems <1i/-0 f the
United States, Canada, the United Kingdom, Germany,
Japan and many other Societies recognize the individual'S
right to private property. This right allows people to
acquire, use; and dispose of shelter and have life's basic
necessities. British Philosopher John Locke (1632- 1704)
Business Ethics and Social Responsibility 91
believed that human beings by . nature have rights td
political equality, and property. The exte'nsions of that
the state should not interfere with these rights and that i~
should protect those rights.
As a guide to ethical decision-making in organizations,!
the moral rights model serves as an effective counter weight
that protects the non-business sectors of society fronl
.. enthusiastic capitalists following the utilitarian model.
However, as a guide to ethical behaviour in organizations,
the .moral rights model says more about what organization~'
should avoid doing, that is, violating the moral rights of'
employees, customers, and members of soci pty--that it doe!
about what to do. The Justice model provides more guidancJ
in this regard.
THE JUSTICE MODEL
The justice model evaluates decisions and behaviour witt!
regard to how equitably they distribute benefits and costs amon#,
individuals and groups. It is consistent with KOhl-berg'~
Universal principles stage. To ensure just decisions and!
behaviour, the proponents of this model .argue that thre!
principles should be followed when designing rriamigemenJ
systems and making organizational decisions: the distributivl "
I " .
justice principle, the fairness principle, and the natural duty
principle. . I
(a) Distributive Justice principle: This principle morally
requires that individuals not be treated differently on the~
basis of arbitrarily defined characteristics. This principle
holds that:
96 Business: Concepts and Perspectives
1. Individuals who are similar _in relevant respects
should be treated similarly
2. Individuals who differ in relevant respects should
be treated differently in proportion to the '
differences between them.
T~e practices in the United States of America illustrate how the
above principles work. The United States Civil Rights Act of
1964 forbids employers from considering personal characteristics
such as race, gender, religion, or national origin in detisions to
recruit, hire, promote or fire employees. Another legal
regulation that supports the distributive Justice principle is the
U.S. Equal Pay Act of 1963 ", It made illegal the payment of
different wages to Women and Men when their jobs require equal
skill, effort, and responsibility and are performed under similar
working conditions. Prior to the passage of this act, it was
common for Women to be paid at two- thirds the rate of meh
doing the same work. The practice of unequal pay for men and
women doing equal work was a hold over from practices adopted
during the World War' ll,when many women entered the
workforce to replace men who left the factories to go into the
armed services.
b. Fairness Principle: The fairness principle morally requires
employees to support the rules of the organization when two
conditions are met. These conditions are: (a) the organization is
just or fair, and (b) employees haye voluntarily accepted benefits
provided by the organization or have taken advantage of
opportunities offered in order to further their own interests.
Employees are then expected to follow the organization's rules,
even though those rules might restrict their individual choices .
For example, if a job applicant was informed that accepting a job
97
"Business Ethics and Social Responsibility
offer would later involve being subjected to random drug testing
and continuous video monitoring, the organization would expect
the employee to accept these conditions of employment. Under
the fairness principle, both the organization and its employees .
haye obligations and both should accept their responsibilities.
Their mutual obligations can be considered fair if they satisfy the
following criteria:
They result from voluntary acts.•Employees cannot be
1.
forced to work 'for a particular organization, and employers
cannot arbitrarily be forced to hire a particular person.
They are spelled out in clearly stated rules. These ruies
2.
should specify . what both the , employee ' and lle
organization are required to do.
'~
They are owed between individuals who are cooperating
3.
for mutUal benefit. The employees and managers share a ,
common interest in the survival of the organization:
Perceptions of fairness often reflect people's reactions to.
the procedures used to resolve problems. Acceptable
processes lead to perceived Procedural JU,st!~e. FQr ,
example, a company ' s management practicps' are ' more
likely to be perceived as fair when a fonna.l process is, in
place for investigating employee;s grievances arid' taking
remedial actions, whe,n needed.
\ '
Similarly, top managers working in foreign subsidiaries
are sensitive to issues of Procedural Justice. Belieying that their
multi.p.ational employers use fair proce~ures in m~ingresoufce ,
allocations inspires them to go beyond the call of duty in their
work and leads to more cooperative and creative behaviour:
"
 '­

98 Business: Concepts and Perspectives

Business Ethics and Social Responsibility 99
.\

(c) Natural Duty principle: The natural-duty principle morally

"­ Responsible production practices. In view of this, it is the
requires that decisions and behaviour be based on universal
opinion of Scholars and practitioners that products should be
principles associated with being a responsible member of society:
produced to ensure customer safety. Proper warning labels
(a) to help others who are in need or in jeopardy, provided that
, should be attached to "products to prevent accidents that could
the help can be given without excessive personal risk or loss, (b)
result from misuse. For some products, proper information on
not to harm or injure another, (c) not to cause unnecessary
possible side effects should be provided. For example, most
suffering, and (d) to support and comply with just institutions.
drugs in the world market to day bear these warning labels about
One way to think of a natural duty is to view it as a responsibility
possible side effects. . ~
that is expected in exchange for certain rights. For example, if an
employee has a right for safety, as suggested by the moral rights
RESPONSIB"LE SALES PRACTICES
model, this right can best be assumed if members of society also
Practices involve operating based on formal and
agree that they have a duty not to harm others. Thus, the natural
established guidelines of the organization under question.
duty principle complements the moral rights model. .
Anything outside of this is not a responsible practice. However,
when employees are hired to sell a firm's products, they usually
CORPORATE SOCIAL RESPONSIBILITY
receive a commission or bonus based on sales volume.
Managers of corporate entities have many responsibilities,
Employees of some firms may attempt to maximize their product
which engage them in a wide range of activities. One way to
sales, even when they recognize that the product is not
organize these activities is according to the groups of people who
appropriate for particular customers. For example, to increase
are affected by' the decisions made by managers and the actions
commissions some insurance sales people sell more insurance
they take~ A manager's job can therefore be thought of as a series
than customers need. Furthermore, some firms falsely advise
. of attempts to address the concerns of multiple stakeholders in the
employees from using overly aggressive sales strategies or
entity he is controlling or managing.
deceptive advertising to increase sales volumes.
A social responsibility as viewed by Madura (1998) means
a "firms re~ognition of how its business decisions can affect
HOW FIRMS ENSURE RESPONSIBILITY
society. But Nickels, McHugh and McHugh (1999) view it as a
TOWARD CUSTOMERS
! business's concern for the welfare of society as a whole.
A company can ensure responsibility toward its customers
Ivancevich, Lorenzi and Skinner (1997) look at it as a firm's
by the following steps
practices with other parties such as customers, competitors, the
1. Establish code of conduct or Ethics: Companies can

government, employees, suppliers, and creditors. Before these

establish a code of business ethics that sets guidelines for

groups are adequately cared for, the firm must have a production
practice and a selling practice as well.
product quality,as well as guidelines for how employees,

~ ,
customers and owners should be treated.

{/
,,

'l.

100 .'3usiness: Concepts and Perspectives
2. Monitor Complaints: Companies shou~d make Sllre that
customers have a phone number that they can call if they
have any complaints about the quality of the product or
about how they were treated by employees. The company
can attempt to determine the source of the complaint and
~
ensure that such a complaint does not occur again. Many
companies, however, have a department that receives the
complaints and attempts to resolve them . . This step may
involve assessing different parts of the production process
.~
. to ensure that the product is produced properly. Or it may
require an assessment of particular employees who may be
c·
violating the company's code of responsibility to its
customers.
3 .. Customer Feedback: Companies can ask customers for
. feedback on the products or services they recently
purchased, even if the customers did not caIn in to
complain. This process may detect some other problems
with the product's quality or with the way customers were
treated. For example, automobile dealers such as Saturn
send a questionnaire to customers to determine how sales
people treated them. They may also be asked whether
they have any complaints ' about the aut~mobille , they
recently purchased. Once the co~pany is infornned of
probiems . with either production ~ defects or clUstomer .
treatment, it should take action to correct these problems
(Madura, 1998).
The responsibility of companies toward customers lmay be
enforced not only by the companies but also by $pecific
groups of consumers. Consumerism represemts the
collective demand by consumers that businesses satisfy
their needs. Consumer groups became popular in the
101
. Business Ethics and Social Responsibility
1960s in the U. S and have become increasingly effective
as a result of their growth. The impact of consumers is
not so much felt in Nigeria mainly becal1s e all they
purchase and consume come from the foreign markets and
producers. Since these production facilities ,lre not local
any protection against what is not produced in Nigeria '
will be unreasonable and fruitless.
In addition to the codes of responsibility by companies
and the wave of consumerism, the government attempts to
ensure responsibility to customers with variOUS laws on
product safety, advertising aJ)d industry competition.
a. Government .
Regulation of Product
.
Safety: The
government protects con~umers by regulating the
quality of some products produced by companies .
For example, ~e Food and Drug Administration
(FDA) in U.S .A is responsible for testing food
products to determine · whether they rne et specific
requirements expected of them. The ' FDA also
examines new drugs that companies Jj.ave recently
manufactured. Because the potential side effects
may not be known immediately, sorrle drugs are
continually tested by the FDA for sevetal years.
b. Governments Regulation of Adveftising: ,The
Federal government also has estal)lished laws ':>
against deceptive advertising . Yet, it may not .be
able to prevent all unethical business practi,ces.
Numerous examples of advertising could be cal!ed
deceptive. It is difficult to know if a produc~ is
"new and improved". In addition, the use of a term
such as lowest price may have different meanings
or interpretations. U
102 Business: Concepts and Perspectives
Business Ethics and Social Responsibility 103
c. Government Regulation of industry Competition:
Another way in which the government ensures that
Companies also have . a responsibility toward their
consumers are treated properly is to promote competition
employees to ensure safety, proper treatment by other employees,
in most industries. Competition between companies is t"!
and equal opportunity.
beneficial to consumers because companies that charge
Employee safety: Companies ensure that the workplace is
excessive prices or whose goods are of unacceptable
safe for employees by closely monitoring the production process .
quality will not survive in a competitive environment
Some obvious safety precautions are to check machinery and
. Because of competition, consumers can avoid a firm that
equipment, for proper working conditions, require safety glasses
is using deceptive sales tactics.

or any other equipment tl1at can prevent injury, and emphasize

Madura (1998) noted that a company has a monopoly right if it is

any special safety precautions in training seminars.

the sole provider of goods and services . In this situation, it can

Companies that treatea safe working environment prevent

set prices without concern about competition. The government

injuries and improve the morale of their employees. Many

. comes in to regulate those companies that have monopoly rights.
It regulates utility companies that have monopolies in specific
companies such as Shell, Agip, Mobil, etc now identify II
workplace safety as one of their main goals.
locations and can control the pricing policies of these companies.
He is equally of the opinion that in some industries, companies
Proper treatment by other Employees
created various agreements to set their prices and ' avoid
Companies are responsible for ensuring that employees
competing with each other. The federal government has
are treated properly by other employees. Two examples of the
attempted to prevent such activity by enforcing some antitrust
key issues regarding the treatment of employees are diversity and
laws. All of these antitrust laws have the objective of promoting
the prevention of sexual harassment:
competition. Yet, each of them focuses on particular aspects that
Diversity: The workforce has become much more diverse
can influence the degree of competition within an industry.
in recent years. More women have entered the job Il1arket, and
The trucking, railroad , airlines, and telecommunications

more minorities now have the necessary .

skills and education
.. to
industry have been deregulated thereby allowing more firms to

qualify for high-level jobs.

enter these industries. Banks and other financial institutions have

Many companies have responded to the increased diversity

been deregulated also and have since been given the flexibility of

among employees by offering diversity seminars. These seminars

, deciding on What types of deposits and interest rates to accept and
are normally intended · to inform employees about Cultura l
offer. They also have the freedom to expand within and across
diversity. Such information can help employees recognize .that
state lines. Deregulation in general results in lower prices for
certain statements or behaviour may · be offensive to other
consumers. employees.
 104 Business: Concepts and Perspectives
The following statements from a recent annual report of
General Motors in U.
. S.A reflects the efforts that have been
- ) .
made
by many companies to encourage diversity:
"Internally, we are working .tocreate an
e nvironment where diversity thrives. We are (j.
trying to remove barriers that separate people and
'iin~ new ways to engage teams to maximize
' p'~oductivity and profitability. This is being done
: through communication, teamwork, mutual
,.
support, and pulling together to achieve common
objectives. Our challenge is to seek a diverse
population in leadership roles with a wide range of c-;
'.~ back grounds, views, and experiences to ensure we
capture diverse perspectives to meet and exceed
customer expectation" . :;t
Companies such as Johnson and ' Johnson, the Coca-cola
company, IBM, Merril Lych and many other companitts in the
U.S. A .; for examples, have made major efforts to promote
diversity. Rockwell International has a diversity task team that
developed guidelines for work force diversity planning in each of
its businesses . . Xerox also has improved its workplace diversity
in recent years. About 32 percent of its employees are women,
and 26 percent of its employees are minorities.
Prevention of sexu'al Harassment. In addition to diversity · .
in the workplace , another issue is sexual harassment, which
represents unwelcome comments or actions of asexual nature.
I '
For example, OI].e employee . might make unwelcome sexual
advances toward another and use personal power within the firm
to threaten the other employee's job status. Companies attempt to
prevent sexual harassment by offering seminars on the subject.
Like the diversity s~minars, these seminars can help employees
Business Ethics and Social Responsibility 105
recognize how some statements or behaviour may be offensive to
other employees. These seminars are not only an act of
responsibility to employees but also can improve a company's
productivity by helping employees get along with one another on
the job.
In the words of Nickels, McHugh and McHugh
(1999) employees need realistic hope of a better future,
which comes only through a chance of upward
mobility . People need to see that hard work,good
will] ingenuity, and talent payoff. Companies also
have the responsibility to maintain job security or, jf
layoffs are impossible to avoid, they should give
,',) . employees warnings. Some ,companies in the U.S.A
. . . ,.
(;.
offer laid-off employees some assistance by helping
them i;get)l~\.v jobs. 'Sucir loyalty to needy employees
pays off !~ the long run.
/
RESPONSIBILITY TO SOCIETY
One of Business's major responsibilities to society is to
create wealth. Many Nigerians who work for o~ganizations in
Nigeria receive their salaries . from such organizations. The
salaries they are paid incre,ase both their purchasing power and
living standards thereby helping them build and develop a
wealthy livmg.
Businesses are also responsible for promoting social
justice. It is observed that business is perhaps the most crucial
institution of civil society. For its own well being, business
depends on its employees being active in politics, law, churches,
arts, charities and so on. Business is also responsible for helping
to make its own environment a better place by trying to
encourage clean air free of pollution. Working in cooperation
with their unions, suppliers , and customers, the companies have
 ~.1~
106 Business: Concepts and Perspectives
taken steps to set standards for incorporating prevention into
environmental pollution even if it means a short-term expense
Increase.
Some companies through their production processes cause
air pollution, which is harmful to society because it inhibits
breathing. For example the production of fuel and steel, as well
as automobile use, increase the amount of carbon dioxide in the
air. To prevent this, automobile and steel companies have been
asked to reduce air pollution by revising their production
processes so that less Carbon dioxide escapes into the air. The
federal government has also become involved by enforcing
specific guidelines for companies to limit the amount of carbon
dioxide or carbon monoxide caused by the production process.
The Federal Envirol1II1ental Protection Agency (FEPA) was
created in Nigeria to develop and enforce pollution standards.
This has resulted to less gas flaring and the establishment of
Nigeria Liquified Natural Gas company which in turn increases
Nigeria's foreign exchange earnings and at the same time limiting
air pollution in Nigeria.
Land pollution has been the case in many countries of the
world. Land has been polluted by toxic waste r~sulting from
some production process . A related form of land pollution is
sQlid waste, which does not deteriorate over time. As a result of
waste, land not only looks less attractive but also may no longer
be useful .for other purposes such as farming. This situation is so
significant in the Niger Delta regions of Nigeria where oil
exploration and production have been going on since about 1951
and to date. The effects of this situation have brought untold
hardship to this ethnic region as well as to the multinational oil
companies. Umuechem, Ogoni and Odi crises are a case in point
107
;,\ Business Ethics and Social Responsibility
and the huge production loses by oil companies are equally a
regrettable misfortune in this case.
Companies have revised their production and packaging
processes to reduce the amount of waste. They now store toxic
waste and deliver it to specified toxic waste storage sites. They .
also recycle plastic and limit their use of . ,materials that would
ultimately become solid waste.
Many compani~s have environmental protection
programmes that are .designed to reduce damage to the
.
environment. For example, Homestate Mining company in
U .;S .A recognizes that its mining operations disturb the land , and
. it 'spends monei to minimize any effect on .the environment.
Kodak recycles more then: a half-billion pounqs of material a'
year, and also supports' a World Wide life Fund environmental
education programme. 1MB typically sp'ends · mote than $30
million a yea(' for environme~tal assessments and cleaning.
Rockwell l nternational another United State company has reduced
. its hazardous waste by more than 50 percent in recent years .
To appreciate the efforts that some companies have made
. .
to protect the environment and the costs of these efforts Madura
(1998) 'stated that DuPont, aU. S. A. and International based
company s ~id: .
The company operates about 150 manufacturing
facilities , five petroleum 'refineries, 20 natural gas
processing plants and numerous product - handling and
distribution'Yacilities around the world , all of which are "
significantly affected by a broad array of laws and
regulations relating to the protection of the
environment. .lt is the company ' s policy to q()mply
fully with or exceed all legal requirements worlci' wide
... ........ .. About N 400 million was spent for capital
projects related to environmental requirements in 1994
 &>
108 Business: Concepts and ~:;erspectives
... .. ........... environmental expenses charged to
current operations totaled about 950 million in 1994,
as compared to 1 billion in 1993 and 900 million in
1992.
RESPONSIBILITY TO THE COMMUNITY
When organizations establish a base in a community, they
become part of the community and rely on it for customers and
employees. Organizations demonstrate their concern for the
community by sponsoring local events or donating to local
charities . For example, Shell Petroleum Development Company
Ltd. and other multinational oil companies in Nigeria have
.... extended numerous assistance to their operating communities by
building good roads and bridges, health centers, community
•schools and churches, markets, etc., and have awarded so many
scholarships to scholars in many academic fields to enable the
growing members of their host communities to improve their lots
in life. In the U.S.A. for example, companies like Sun Trust
Bank, IBM, and many others have donated funds to Universities'.
Nations Bank has on its own provided loans to low-income
neighbourhoods and minority communities for self-improvement as
well as community development.
SOCIAL AUDITING
It is nice to talk about having 'organizations become more
socially responsible . It is also hopeful to see some efforts made
toward creating safer products, cleaning up the environment,
designing more honest advertising and treating women and
minorities fairly . But is there a way to measure whether
organizations are making social responsiveness an integral part
of top management's decision making? The answer is yes, and
the term that represents that .measurement is "social auditing".
Business Ethics and Sociai Responsibility 109
A social audit is a systematic evaluation of an
organization's progress toward implementing programmes that
are socially relevant, responsible and responsive. One of the
major problems of conducting a social audit is establishing
procedures for measuring a company's activities and their effects
on society. Social responsibility has become one of the aspects
of corporate success that business evaluates, measures and
develops. In addition to the social audit conducted by the
companies themselves, there are four types of groups that serve
as watchdogs regarding how well companies enforce their' ethical
and social responsibility policies. These are:
1. Socially conscious investors who insist that companies
extend the company's own high standards to all their
suppliers .
2. Environmentalists who apply pressure by naming names
of companies that don't abide by the environmentalists'
standards.
3. Union officials who hunt down violations and force
companies to comply to avoid negative publicity.
4. Customers who take their business elsewhere if a
company demonstrates unethical or socially irresponsible
practices.
INTERNATIONAL ETHICS AND
SOCIAL RESPONSIBILITY
Ethical problems and issues of social responsibilities are not
unique to the United States of America or Nigeria alone. Top
business and government leaders according to Nickels, McHugh
and McHugh (1999) in Japan were caught in a major "influence
peddling" (red bribery) scheme in Japan. Similar charges have
been brought against top officials in South Korea and the People's
f\
T

Business Ethics and Social Responsibility 111

110 Business: Concepts and Perspectives
thousands of young women, laboured 10 1/2 hours a day, six
Republic of China. Because of these cases top leaders are now days a week, in excessive heat, noise and foul air for slightly
held up to higher standards all over the world. more than $10 a week. The report also found that workers with
Government leaders are not the only ones being held to skill or breathing problems caused by the factory conditions had
higher standards. Many Americans are demanding , socially not been transferred to departments free of chemicals. More than
responsible behaviour from their international suppliers by half the workers' who dealt with, dangerous chemicals did not
making sure their suppliers do not violate U.S. human rights and wear protective masks or gloves. Nike officials say they are '
environmental standards. For example, Sears will not import working to improve conditions, but their critics say they are not "
products made by Chinese prison labour. Phillips Van Heusen doing enough quickly enough.
corporation said it would cancel orders frdm suppliers that The justness of requiring international suppliers to adhere
violate its ethicaJ , environmental, and human rights code. Dow " to American ethical standards is not as clear-cut as anyone could
chemicals expects its suppliers to conform to tough American imagine. The issue here is that there is complexity in the issJi of
social responsibility in international markets. But one thing is
pollution and safety laws rather than just to their local laws.
that ht is not enough to be right when it caples to ethics, and social
McDonald's denied rumors that one of its suppliers grazes cattle
responsibility. It is . right for companies to convince their
on cleared rain forest land but wrote a ban on [lie practice customers that they are right in whatever behaviour they chose to
anyway. exhibit when it comes to international ethics and social
Ip. Nigeria the people of the Niger Delta region have responsibility.
staged several protests and demonstrations against multinational
oil companies operating in the region for violating air and land
pollution and banning further exploration or drilling except where
pollution standards are maintained.
In contrast to companies that demand-:.
that
.
their suppliers
demonstrate socially responsible behaviour are those that have
been criticized for exploiting workers in less developed
countries. Nike, the world's largest athletic shoe company, has
been accused by human rights and labour groups of treating its
workers poorly while lavishing millions ofdollars on star athletes
to endorse its products.
According to Nickels, McHugh and McHugh (1999)
Cartoonist Gary Trudeau featured an anti-Nike campaign in his
popular donnesbury syndicated series. A 1997 Ernst and Young
report on the company 's operations in Asia indicated that
rrr:-­
-'.
.Chapter 4
ENVIRONMENTS OF BUSINESS
A gamut of external factors influence an organization's
choices, directions, actions, and ultimately, the organizati on' ~,
'-'
internal conditions. The survival, . growth and success of
organizations depend on their relationships with the myriad of
uncontrollable factors that shape their operating environments .
These outside (uncontrollable factors can lead to positive
conditions (business opportunities) or to negative constraints
(threats) to organizations .
Business organizations operate within the dictates of ·the
environrtlent is like a river. Just like the way the swimmer needs
larger society and their interactions with the global society affect
to understand situations in the river, so also managers of business
.them and the society as well. This symbiotic relationship
existing between business and society is what makes business
organizations become open (social) systems. Katz and
Kahn(1966) described an open system as that which takes in
resources (inputs) from its external environments and converts
(transforms) them into goods and services that are sent back to
that environment, · where they are bought by customers. The set
of groups that make up the network of interrelationships existing
between "business " and "society" is what is referred to as the
1
"environment of business". Bourgeois (1985) has defined the
"environment of business" as a set of forces and conditions
outside the organization's boundaries that have the potential to
affect the way the organization operates . Implied in this
definition is the notion that these forces are external to the
I •
,
I
l! ~..:o- . L
I'
Environments of Business 113 ~I
organization and organizations must adapt to the dictates of these
environmental forces. Building on Bourgeois' (1985) definition
and conceptualization of the environments of business, we define
it as a set of dynamic and changing forces, conditions and factors
that operate beyond the boundaries of organizations but influence
a manager's ability to acquire and make efficient utilization of
organizational resources .
Thus, the environments of business are quite dynamic and
continuously changing, and sometimes, can be turbulent. This
singular fact has made the environmental conditions currently
facing business organizations quite different from those of past
decades. They change significantly with time.
Managers of contemporary business organizations must
have a deep understanding of the complex environments in which
their organizations function. The reason for this is simple. The
business organization is just like a swimmer, and the
organizations try to understand the constitutions and complexities
of their environments in order to appropriately manoveur them
when the need arise.
Griffin (1996) broadly classified the environments of
business into external and internal environments. The external
environment is everything outside an organization that might
affect it. Worthy of note is the notion that the boundary which
separates the organization from its external environments is not
always precise and lucid. In a sense, stock holders are part of an
organization, while in another sense, they are part of its
environments . . Tile internal environment consists of conditions
and forces within the organization. The external environments
consist of uncontrollable factors that are highly dynamic, while
'Ii
~

'""'P

114 Business: Concepts and Perspectives Environments of Business 115

j; .
organizations with the inputs (such as raw materials, component
the internal environments consist of factors "that are within the
I part§~ or iabour/ employees) that they ,require for the production
domain of managers, and are controllable in nature.
of goods and services. In return, suppliers receive some fonn of
compensation for the goods and. services they supplied.
DIMENSIONS OF THE BUSINESS ENVIRONMENTS
Managers can reasonably control their suppliers by making sure
Jones, George and Hill (1998) classified the dimensions of
that they are honest, reliable and trust worthy always.
the environments of business as the task environment and the
Managers should note that suppliers can pose threats to their
general environment. Details on how each of these dimensions of
organizations or provide opportunities for the' competitive
the business environment affect business organizations are given
advantage of their organizations in these ways:
in the ensuing paradigms.
1. Changes in the nature, numbers, or types of any
supplier result in .forces thal either pose a threat or
THE TASK (SPECIFIC) ENVIRONMENTS
provide business opportunities to which managers must
Since the impact of the general environments is often
respond if uieir organizations are t6~5ucceed.
'{,£gue, imprecise and long term, most business organizations tend . '," :' $":" .

2. Supplier-related threats 'that affect the operations of

.; to direct their efforts and attentions to their task environments .
org~nizations have to do ' with ' situations in which
The task environment has to do with the set of forces and
supplier~ ' bargaining positions with organizations are
conditions that originate with ~uppl iers, distributors, customers,
and competitors and influence organizations' ability to obtain
, so strong to the extent that they can increase the prices "
of the inputs they' supply to organizations. Porter
resour~~'s (inputs)ancL\ ' dispose of its outputs because of their
(1980) has poin~ed out that a supplier'sb~rgaining
effects on managers on a day-to-day basis. Whereas the task
position is particalarly strong if (1) tbe supplier is {he
environment is also quite complex, it gives managers useful
only SOUI'''t? of input (5) and (2) me- input is vital for
'-' information more readily than does the macro (general)
the continued existence of the organization.
environments because managers can seldom identify I
3. In addition to increasing prices, suppliers can also I
environmental variables of specific interest to their organizations
make operations difficult for an organization by ..
rather thln dealing with the more abstract dimensions of the <
restricting its access to pertinent resources (inputs). Ii
general environments. Each of these components of the task
enviroiunents is discussed below:
CUSTOI\IERS
A customer is anybody who pays money to acquire an
SUPPLIERS
organization's product Of, services. An organization's success
Suppliers are individuals or organizations that provide
depends on its response to customers. This is related to Peter
resources .for other organizations . In a more detailed perspective,
Drucker's assertion that the purpose of business is to - create
suppliers are the individuals and organizations that provide
' Of ·

I ,. ~.
Ioi.!= II
 116 Business: Concept~ and.Perspectives
customers. The manager's abiHty to identify an organization's
main customers arid produce the goods and services they desire is
a c~itical factor influencing org:i:mlzational success, growth and
,'development. '
, In addition to creating customers, organizations should
a lso maintain a mammoth of old , new and potential customers
without which they would find themselves out of market.
Customer satisfaction should be ~the ultimate goal ·of aUhusiness
organizations . Gone are those days whet:! organizations /produce. '
and sell what they feel ' customerrs would buy. Total customer
satisfaction is what ,countS 'in bustne~s these days . .
Custorners could be ;,private individuals, schools,
hospitals, ' government, ' agencieS, ' wholesalers, -retailers, and
a
manufacturers are just few of the several types of firms ~at
may be major customers ,?f other organizations. Some common
sources of information 'about cm;tomers include market research.
surveys, consumer pan~ls , repOrts from sales representatives,
'chambers of commerce and Bureau of Business/vital statistics.
DISTRIBUTORS ( that are similar to a particular organization's goods and services,
Distributors are individuals andior organizations that aid other
business firms to sell their goods and services to customers. The
decisions taken by managers kbout the distribution of their
products •to customers can ha~e very significant impacts on
organizational performance. This lies in the fact that managers
are charged with the responsibility of selecting distributors for
their organizations. Such sdection of distributors is done with
utmost care and objectivity to di'vorce the selection process f-rom
bias and the selection process IS always based on merit. The
reverse is the case in Nigerian organizations where the :;election
.'
of distributors for an organization's
I
product is based on ethnicity
;"",'
Environments foJ Business , 117
and the "man-know-man" syndrome. When this happens, the
efficient and effective distributors are pushed ' out . of th~
distribution chain and the unqualified ones taken into . the
distribution chain, and with time ' their activities become anti~
organizational success.
Porter (1985) noted ¢at the changing · nature of
distributors and distribution methOds can also bring ' opportunities
and . threats for managers and
. . .Itheir orgariizations. Thus, if
distributors are so large and powerful that they have control of
customers' access to a , particblar , organiZation's goods . and
services, they can pose a threat to organizations by demanding a
slash of the prices of their goods ;and services. The reverse is the
case when they are not so powerful: '
COMPETITORS ,
Competitors are other 0'4anizations that cOI~pete with an
organization for resources and cQ,~tomers " The most'; conspicuouS
resource that competitors vie ! for are· "customeI;s money".
Competitors are organizations that produce goods and services
I .
N
,[,
and ';erve more or less the same purpose. In other wordS,
competitors are organizations· that are vying for the ' same
custop1ers.
Information about competitors is often quite easily
obtained through competitiveirttelligence. A way of gathering
competitive intellige~ce · is $rough ben~hmarking --buying
competitor's productS' and \earning more about their technology
as well as their assembly methdds. MacMillan (1988) suggested
other sources of competitive tntelligenceas ongoing research
activities, new product deve16pments, and future advertising
I .
"
 Environmentsoj Business 119

.
."

118 Business: Concepts and Perspectives world, such as those in Africa, Central America and the Middle
East.
campaigns, . which he argued are .often closely guarded sectets of The'. topography of a country which comprises deserts,
every' organization. .!, '.~:::.: forests, lakes, mountains, plainS" and rivers exerts a lot of
. The riv~lry" . be~ween ,c.ompe~t~t~,}~.J~gt.~h#"~ffy:. '!~emost influence on business operations. Topography affects the
pervasive and threatetiingfo~~e.1ha:imanagers :· mu$tconteI)d with . . distribution of products, separates markets, and often 'create the"
A high level ·. of Xi.y~lr); of~n: culminateinpric'€ wa,($;c a~d falling need for adaptations of products Of their packaging. Topography
pbcesrend .to 'redJIce access to resource,~ and Jo~~rprofits .. For also affects the climate of ·a country, whicp' ID/,t\:lTIF affects the
example, in today'shusinessworld; competitjon ' in the ' persqnal storage~ and transportation 'of prqducts. For example, there are
computer industry is intense imdchronic as all ' niajorcorrl.petitors differeritg~ographic zones with their peculiar climatic conditions
str ive to heighten their market share by offering cUStoinetsbetter:~ in Nigeria ..,' Therefore~, firms witl1~ seasonal~pr~.u~.offinirrgs 'may
equipped machines at reduced prices.
. "., .
'. face: thFeats ;irodr unforeseen"' w,eather; ~ciiaJl:g~'S:;:a~operate in
the t<differertt geographic. regions<of" Nig~ria': " Oto1l1ghit.~ e~mditions
THE GE1\TERAL ENVIR01\~IEl'IIS OF BUSINESS , ca~< c(itch food ·processors . w ,fih .madequate sUpplies, while
The general environment 'of business is arriyriad :Cif broad ab'nomlal cliinatic conditions on, sea and"' oil land din ,p'ara1yze
dimensions, factors and forces ill its surroundings .that crea.te' its transportirtlon':~'whi@h is likely
.~ ....
'to be (cost. ' ineffective): expensive
overall context. These dimensions and forces are nptnet::es~arily . for business organizations. ..It ! is the.refore -ludd: that' certain
with other specific organization. The general en\ilr?iu~i'entsof business operations pnn~l 6ec~rriedout in ~ert~in geographi~ ·
most businesses follows thie P-PEST ' 'direction-physical, .' regions of Nigeria.
political/legal, economic, socio-cultural and technological Topographical '. and dim'atic ' conditions also affect the
environments . population distribution of a country. In mountainous countries
with' phl.ins 'and deserts, regional climatic differences are quite
TIlE PHYSICAL/NATURAL EWIRONMENTS ; drastiC. In such countries, poputation concentration tends to exist
The natural (geo·physical) environments have to do with to
in the plains and is often close scarCe water reserves. Business
the influence of geographical, I1atural or physical forces on the
operation will have . to be carried out in the plains due to
operations of a business enterprise. Asheghian and Ebrahimi
population cond~ntration. Inland waterways can be used for '
(1990) have it that the territorial size, geographic location ,
trarts'portation and also . to J connect markets.' .. Business fInns
. natural resources, climatic conditions, rivers, lakes, and forests
operatirig in the southern part of: Nigeria-especially in the riverine
make up the physical environment of a business organization. areas can take advantage ot the; inland waterways and penetrate
The geographic locarion can provide explanation to the into the hinterland with t;'eir p ro4uct offerings ,
political sinlation of a country. "For example, political instability
is characreristic of several counrries in certain regions of the

-,
:1 .
120 Business: COf}cept~ and Perspectives
THE POLITICAL'- LEGAL ENVIRONMENT
The political - legal eny-ironment of business refers ' to
.7 government regulation of busfuesses and the relationship of
bus}ness and government (Griffm, 1996). This environment
, results from political and legal developments within society and it
greatly influences managers arid their organizations. ,Political
processes shape a society1s laws - thus frequent and coerotic
.changes in political leadership ;result to changes in the legal
.,.framewo rk of a country. Regula<ory lawS constrain the operations
,,~~~ of business organizations and thus create both opportunities and
threats.
Business enterprises ruust ,carefulJy analyze new
,government-business-related , "Qoficie~ and philosophies . Hitt,
' Ireland and Hoskiss6n' ('1996),have ex'etnplarized and enumerined
the areas in which goverllinent policies can affect the operations
and profitability of organizati()~s . These are antitrust laws ,
taxation laws:; industries selectedJor deregulation, labour training
laws, and the degree of commifmentto educational institutions .
Others, according to Jones, George and Hill (1998), include
increased 'emphasis on environmental protection and the
pr~servation of endangered species, increased emphasis on safety
in the organization, legal tegulq.tions against racial, gender and
age discrimination. Successful managers of business
, ' organizations carefully monitor changes in the political and legal
enviitihm~nts in order to take advantage of business opportunities
they crea~~, and contend with: the threats they pose in an
organizatk n:'s task environment. ~
,
1
j
THE ECONOMIC ENVIRONMENT
This is the overall health 10f the economic system in which
business organizations operate. The, health of a country's
Environments' of Business 121
; '
econo:my affects ' the performance ,of individual firms and
industries. Jauch and Glueck (1988) and Asheghian and
Ebrahimi (1990) have agreed th.lt the following list are some of
the main economic factors that: business firms must take into
consideration:
1. The stage ofthe business cycle in the country must be
considered: that is, 'depression, recession, economic
recovery, or prosperity.
2. The inflationary or deflationary trends in the prices of
, 'goods and services ~ust be monitored. . In case' of
severe inf1a~ion, wage and price controls may be
imposed. ' ~
3. The monetary policies, "inter~st rates, and devaluation
or revaluation , of thJ ' currency in relation to other
c~untries must be exainined. .
4. The fiscal~ policies, tax rates for firms and individuals
must be of special corisideration.
5. Balance of payments, :surpluses, or deficits in relation
to foreign trade must be monitored.
6. The economic growth-the rate of change of a
country's GNP-must ~e predicted.
7. The unemployment l~vel, and the inflation rate. need
to be studied. 1
Recessions often . lead to unemployment which ' lead to
reduced sales if an organizatiOIl produces discretionary g00ds .
When monetary policy' is · tigh~ened ; money needed for plant
expansion becomes too costly and sometirries, not available. But
other policies lead to changes ~p interest rates. When interest
rates increase, less funds may; 'be available for investments.
When interest rates declines finits can scramble to refinance old '
!
debts, and investment is encoura~ed .
 122 Business: Concepts and fYerspect{ves
::' :.'- . ',.' ~~~. . . ." Environments oj Business 123
Tax policies can discour.a:ge investment in an ' in~ustrior
.reduce the after-tax incomes of Consumers, who thenare,-f6rced
religious inclination. For example, in Muslim SOCIetIes.
to reduce their levels of 'spending, ' Changes in the balance of
provision must be made for muslim workers to pray at work .
payments may either disco\lrage or encourage trading :parmers .., '.
. -, ' Kinship is another socio !cultural variable that need to be
from continuing to patronize themselves.
·t~· taken note of by managers of ;Organizations. In Nigeria, and
Africa in general, the kInship system is predominantly the
THE SOCIO-CULTURAL E1'\rvmONME:NT~
extended family system as oppos1ed to the western nuclear family
The socio-cultural environment of business includes the" 'J,',
system. People therefore deal "',:ith each other at work based on
custom, mores, values, and -demographiC characteristics of
the concept of 'brotherism" and not on "contractual
society in which the organization functions (Griffin, 1996).
, , . relationships ", even when a worker errs.
Socio-cultural processes .are necessary because they determine . the
The culture. traditiL~is , social vatu~s and nr .:i11,s of the
products. services, and standards of conduct that the society is '
societies ' in which businesses; function must be understood
likely' to value , and they affect: ho'w workers in a society feel
properly in order not to violate them. This is ' because violation
about their jobs and the. busln~sS:; organizations that employ them.
of the dos and don'ts of a society may mean that the organizatiop
The changes in peoples ~ttitlideS toward authority and toward
may not operate in that society any longer. , \ 150, an
work itself that have taken place ~n our contemporary society as a
understanding of the socio culthral values of a SOC1L,', . WO\lld ,

concomitant result of modernity have complicated the task of

mean an understanding of the type(s) of business that i;.J,~ 'be
managers significantly. In Nigeria. people have negative
rarried out in certain societies.
attitudes toward time, but they -exhibit positive attitudes toward
achievement. ! THE TECHNOLOGICAL ENVIRONMENT
Managers of organizations must take cognizance of the
Pervasive and diversified :in scope, technologiM! changes
belief-system of the populace wllich they deal with. The belief­
affect several parts. of modern so~ieties and organizatIons . These
is
system of the Nigerian worker mystical as opposed to scientific
effects take place primarily through new products , processes, and
thinking that is a prominent feature of western societies. This
mystical thinking has so much le,d Nigerian workers to believe in materials. Technological factors ;are the results of changes in the
, .. "predestination" to the extent th,at they believe that their destiny technology that managers us'e "to design, produce, or ,p,istribute
and success or failure in business is in the hands of some goods and serv ices. (Hitt, Irela~d and Hoskisson, 1999; Jones,
supernatural forces and their CJllcestors. Closely akin to this George and Hill , 1998) . '>.' .
belief-system J is the influence .of religion on managerial and Given the rap~d } md . accelerated rate of technological
general work behaviour , Most people (especially fanatics) would change, it is therefore imperative that business organizations
not like to behave in ways incompatible with the tenets of their carefully study different elements in the technclogical
environment. Managers must (jon~inuously strive to identify
r potential substitutes for their firms ' technology , 'identify newly_
 ...

~
,. : ,

124 Business: Concep~s and Perspectives '-'> 125

ensuing technologies, and also identify the speed with which

substitute technologies are likely to emerge and the timing of any
major changes in technology. , Chapter'S
Technological changes 'can ' render ,firmly established
,THE MANAGEMENT FUNCTI@N
products, methods of production and production equipr.nent and
machinery obsoletes overnight. : For exa~I?le , black and white
television sets have been displaced by colour television, and The ne~d for survival compels everyone of us to belong to
compac discs are currently rer,lacing video cassettes . ' Other some, form of organization. " The organization we may wish ' to
examples have to do with the manual typewriter that was belong to may be - a product-oriented
, , ' 'O r . a ,service-ori~nted
,. replaced by the electronic typewriter which was made irrelevant organization, such as $ PDC, Agip " Oil Company, Mobil Oil
Co~panY. : :NNPC; ~tN , a uni~ersity or school system, a sports
!.
by the computer. Although technological change can pose .a
threat to organizations, .it can also create a lot of , .new team such as the Super Eagles', a mu~ical group, the Army, the
:.
' OPl'ortunities for designing, making, or distribution of new and police or other business 'enterprises.
better kinds Of goods and servic~. The organizations which we may belong to will certainly
Changes in information technology must not be differ in many ,ways but will have sonie ~asic elements in '
overlooked because a manager's decision is not better than his commprt., These basic elements ,are goals, objectives or purposes.
information. A technology with :marked implications for business Ev,en '.though organizations may vary in size, -policy , structure,
organizations is the Internet, sometimes referred to as the technolpgy, etc they can nOt- be effective or efficient without
Information super-highway. The Internet is a global web of some desired goals and objectives. Another ccimmon element of
more than 25,000 computer networks . It provides a quick, an,: orgairization is ' leadership. Without a leader ' or a manager
inexpensive means of global cOIT'..lllunication and acCess to global organIzations ' are . lijcely
.(~ , ; . ~
to
'
become · dysi1.mctional
..
in their
.
information on an organization's iexternal environments ~ . operations. ", . v r ;

, Managers of business organizations must constantly adapt
to technological changes wavin~ through the industry in which
their organizations operate . ,Doing business with old and
obsolete technology would be tantamount to lack of competitive
efforts among competitors. ~ ,
..,' According to Griffin (1996) an organization is a group of
people working together in a structured "fashion to achieve set
goals . All organizations , regardless of whether they are large, or
small, 'j rofit.:'seeking or non-profit, lise some combiriation of
human, .iinanciai., physic'ai' and information resources to achieve
their goals. These resourCes are inputs which are also generally
obtained from the organization's' envirorunents . Managers or
leaders ,are, J'esponsible for combining and coordinating the

1

126 Business: Concepts and Perspectives
various resources of an organization to achieve goals and
objectives. They do so by carrying put four basic managerial
functions or activities such as planning and decision making ,
organizing, leading, and controlling.
Management is therefore' a set of activities (including
planning and decision- making, orgamzmg , leading and
controlling) directed at an organization:s . resources (human,
financial, physical and information) with the aim ' of achieving
organizational goals in an efficient and effective manner (Griffin,
1996). By efficient, we mean ,. using organizational resources
wisely and in a cost-effective way,. It also means producing high­
quality products at relatively low costs. By effective , we mean
making the right decisions and successfully implementing them .
A manager is the one particular person in an organization whose
primary responsibility is to carry aut the management process. A
manager is someone who plans and makes decisions, organizes,
directs or leads and controls human, financial , physical and'
information resources both efficiertly and effectively.
. Another definition of mai1~gement is that it is the process
of planning, organizing, directing or leading and controlling the
efforts of organizational mem'bers and the . use of other
organizational resources in or~er to achieve stated or pre­
determined goals or objectives; within the parameters set by
society. And that management . can be art or science of getting
things done through people (Flippo and Munsinger, 1975) .
The two definitions above ,reinforce the generally accepted
principle or norion that all managers in all organizations have the
same basic responsibility which is to help other members of the
organizations set and reach a series of goals and objectives
desired by the organization and, that they can achieve this by
arranging for members of the organization to perform whatever
.1 - -
The Management Function 127
tasks that may be necessary and not by performing the tasks
themselves or alone. Since a process involves a systematic way
of doing things, all managers engage themselves in certain
interrelated activities in order to achieve their desired goals and
objectives. These managerial processes of accomplishing
objectives involve: planning, organizing, directing orJeading and
controlling.
They form the four basic functions of the manager which
will be discussed later in this chapter. Before doing so, it will
serve us a useful purpose to review the basic managerial skills
and roles that make them successful managers and organization
goals and objectives and their relevance to the functional
dimensions of the manager.
BASIC MANAGERIAL ROLES AND SKILLS
Griffm (1 996) observed that all managers regardless of
their levels or areas within the organization must play some
(certain) roles and exhibit certain skills if they are to be
successful.
Managers play ten different roles and these roles fall into
three basic categories: interpersonal, informational and
decisional.
1. Interpersonal roles are the roles of figure head, leader,
and liaison, which involve dealing with other people in
ceremonial ways such as taking visitors to dinner,
attending ribbon-cutting ceremonies. It also involves
participation , in hiring, trammg, and motivating
employees and informally or formally showing
subordinates how to do things and how to perform their
functions under pressure and coordinating activities of
two prQject groups in the most effective manner .
-~-
 128 Business: Concepts and Perspectives
-'
2 Infdrmational roles are roles of a monItor, disseminator
and ~pokes person"~hlch involve the processing of
"
. \ information.:.,
.~ '. . -. . - ~'''''''
.. :.
Th¢ .' role ,: bCa mOnit6.r.....
,-::•.~.~ . .... . ~: . "
involves
' . ". .
" ' industrY ,reportS ' to stay abreast 'of developments; the
dissemin#6r, il1~dlves 'sendjIig-memos 'outlining , new
organizational initiatiyes ' while , as a spokesperson the
manager engage,s i~ maki~gspeeches to, his/her potential
clienis to disc~' ss ' growth plamCand other , releva~'t ' iss~es
that will assist ' in': the '. success , of, hisl.he~ , day,.io;day
activities. He/she also ' relays in'forriiation : to 'p~ople '
.. . .,..... .-. . . . -
outside ' his/her unit , or :' outside~ organiiation: Heishe '
:- , "
represents his/her 'organization before a ' chamber ' of
commerce or other relevant bodies thereQY pa~sing on
information or receiving: relevant information for the
benefit of his/her organization. ,;'
3 Decisional Roles: The manager's informational roles
typically lead to the decisional roles . 'T~e information
acquired by the manager as a result of performing ' the
informational roles has a major bearing on important
decisions that he or she as 'to make,
I
In playing decisional roles the manager wi)] first
play the role of an entrepreneur, the voluntary initiator of
change for the organization he/she ~ -represents. For
example, a manager at , 3m company in the U.S.A
developed the idea for the Post- it- Note pad but had to
sell it to other skeptical managers inside the company for
, implementation. A s'econd; decisional role is to respond 'to
disturbances , As a disturbahce handler he/she handles
such problems as Strikes:; Copyright infringements and ,
energy shortages; to m~ntion but a few . The third
deCisional role is that df a resource allocator. A s a
The Management Function 129
.
resource allocator, the manager decides how resources are
to 'be distributed and' with whom he/ she will workIIiost
scanning
. ., ' .
closely. For example, a manager typically allocates the
funds in the unit's operating budget among the unit's
members ,and projects . A fourth decisional role is that of
a negotiator. In this role the manager enters into
negotiations with other groups or organizations as a
representative of the company . For example, managers
may negotiate a union contract, an agreement with a
consultant, or a long-term relationship with a supplier.
" .;
Negotiations may al$o be internal to the organization.
The manager may, for instance, mediate a dispute
between two subordinates or negotiate with another
department for additional support
MANAGERIAL SKILLS
Griffin (1996) identified three important types of
managerial skills which great managers should possess in order to
manage effectively and efficiently , These skills are: technical,
interpersonal and conceptual skills. The diagnostic skills are also
important and serve as a pre - requisite to managerial success.
Technical skills: Technical skills are the skills necessary to
accomplish or understand the specific kind of work being done in
an organization.
•
Project engineers, physicians and accountants have the
technical skills necessary for their respective professions because
they were trained ip weir professions . They each develop basic
training skills by completing recognized programmes of study in
the various schools, colleges and Universities they studied at.
They also gain experience in their actual work situations
before becoming Research and Development managers, chief of
 130 Business: Concepts and .'Jerspectives
surgery or partner in a certified public accounting firm. The top
marketing executive of any large 'company started as a sales
representative or sales manager whereas the operations vice­
president of another company may have stared as a first-line
manager before rising on the job. These managers aJso spend a
lot of time training their subordinates and answering questions
. about work-related problems. ' Tohey must all know how to
perform their tasks to those they supervIse if they are to be
. effective managers , .
Interpersonal skills: This is the abiJity of a manager to
I' communicate with, understand and motivate both individuals and
groups in their organizations ~ecau~e they spend considerable
time interacting with people both inside and outside their
organizations . As a manager climbs. the organizational ladder
he/she must be able to get along with subordinates , peers, and
those at higher levels of the organization. And because of the
multiple roles he/she plays, a manager must also be able to work
with suppliers of inputs /materialS, customers, visitors, and others
outside of his/her organization. Even though some managers have
succeeded with poor interpersonal skills, a manager who has
good interpersonal skills is likely: to be more successful.
Conceptual Skills: Conceptual skills depend on the
manager 's ability to think in the abstract. Managers need the
mental ability to understand f the overall workings of the
organization and its environment; to grasp how all the parts of the
organization fit together, and how to view the organization ~n a
holistic manner. This a~lows ~em to think strategically, to see
the " big picture" and to make broad- based decisions that serve
the overall organization.
Diagnostic Skills: Successful managers also possess
diagnostic skills. These are skips that enable them to visualize_
The Management Function J3 J
~e most appropriate response ~o a situation . . For example, a
physician diagnoses a patient' s illness by analyzing symptoms
and determining their probable cause. Similarly, a manager can
diagnose and analyze a problem' in the organization by studying
its symptoms and then developing a solution. Another example
is that of a Iff~mager at a Texas 'Instruments company in U.S.A.
who noted that one particular department of his company was
suffering from high employee ~· turnover. He diagnosed the
situation and decided that the turnover was caused by one of
three things: dissatisfaction with pay, boring . work or. a
supervisor with poor interpersonal skills. After interviewing
:;everal employees he concluded .that the problem was that of
poor interpersonal skills. He ,reassigned the supervisor to a
position that required less interaction with people, and the
turnover problem soon disappeared. The ability to diagnose
enabled him to define his problem, recognIze its possible causes,
focus on the most direct problem and then solve it. Diagnostic
skills are also useful in favourable situations. A company may
find that its sales are increasing at a much higher rate than
anticipated. Possible causes might include low price, greater
demand than predicted, and high prices charged by a competitor.
The manager uses diagnostic skills to determine what is causing
the sales to increase and how to take advantage of it.
Hellriegel, Jackson and Slocum (1999) called these skills
"managerial competencies". They defined managerial
competencies as sets of knowledge, skills , behaviours and
I .
attitudes that a manager needs in order to be effective in a wide
range of managerial' jobs and various organizational settings .
They identified six specific competencies as being particularly
important. These are communication, planning and
I
administration, teamwork, strategic action, global awareness and
self-management competencies.
 'I
132 Con(;ept~'
Business: and Perspectives The Management Function 133

The tenn communicatien competency refers to tl,e effect~ve laterally With peers, downward' with subordinates, as well as
transfer and exchange of infonnation that leads to un(erstandfug , extermiIIy withclistomers, suppliers, and other stock l),olders. , It
between the ' manager and, others within and ortside the helps arnanager to take decisive and fair aqions when handling
organization. This is achieved tI:1fough infonnal comnlUnication,
problem subordinates. , " '
lonnal communication and ' negdtiations. Of the six :nanagerial , ' Phmning and administration competency involves deciding
competencies identifies in this td.t, communication corrpetency is
what ta~ks n~ed to be done, deterIilining how they can be done,
the most fundamental. Unless you can express YOfrseIf and alloc~tiIigresources to emlble' the~ ' to be done, and thep
understand others in written, ora! and nonverbal (eg. facial . ~: ' . - .. " .- . !'

mpnitoring progress to ensure that they are done effectively. The

expression arid body posture) communication, you calt use the plaI1I}.ing 'and adiTIlntstratioIl:· cDmpetency comes to mind when
other compe.tericies effectively to ~ccomplish tasks through people. . .
';, -' " ~

thinkIng about managers and ·managing specifically. Included in

Nor can ' you effectively manage the vast network of relationships
this specifications are what managers do som~tip:les ' and these are:
" that link 'you to other people inside and outside your organization.
info rmation g athering, analysis,: and problem solving; planning ,
' Infonnal communication promotes twJ- , way
and organizing projects; time management; and budgeting and
cOnlmunication by soliciting f~edback, listening, seeking out
financial maIiagem~nt. _,
a
eontrary opinions, and creating give- and- take conversation. It
"Information' g-atheririg, 'analysis and problem solving are
is also flexible and varies in approach in different situltions and
important. Customers are a rich 'source of useful information and
with oUIers from diverse backgrounds. It builJs strong
should be adequately utilized. Through infonnation gathering,
interpersonal relationships with a diverse range of pEople, and
analysis and problem solving, a manager monitors , information
shows genuine sensitivity to the diverse needs, oppions and
and uses it to identify symptoms , underlying problems, and
feeling of others and is tolerant of their fojbles and
alternative solutions; makes timely decisions and takes calculated
idiosyncrasies.
risks and anticipates the consequences, if"any.
Fonnalcommunication iilforlns people of relevlllt events , "_J ' ' ,

Planning and organizing projects means working with

and activities and keeps them up :to date; makes persua5ive, high­
employees to clarify broad ; objectives, discuss resource
'impact p~b1ic) presentations and handles questions Nell; and
allocati,ons, and agree to completion dates. " It helps a manager to
writes clearly , concisely and eff~ctively , using traditioral as well
develop plans and schedules to <,lchieve specific ' goals efficiently,;
as electronic media.
assign ' priorities to tasks; ' determine, obtain, and organize
, " Negotiation helps managers to negotiate effectively on
necessary resources,J such as ; materials people, and funds
behalf of the team over roles and resources of the org'lnization, ,
makes th~ manager feel comfortable with the pow~r of his appropriately and to delegate:I responsibility for ,,> tasks to be
managerial roles; makes him , become skilled at cFveioping' perfonned properly , , '
relationships and exercising influence upward with mperiors. Managers are accountable for budgeting and managing
, \
financial resources. Budgeting :and fmancial management helps

L.L
 134
Business: Concepts and Perspectives The Management Function 135

the manager understand budgets, cash flow. financial reports and

few create too much stress and leave the team feeling incapable
annual reports and regularly use' such information effectively.,
of successfully achieving its goals.
keep accurate budgets and complete financial records when
Managers that have good team work c0!Ilpetency
necessary; and creat~ budgetary guidelines for others and work
formulate clear objectives that inspire team members and
within the guidelines given by others in order to be very
successful. engender commitment to achieving stated objectives. they
appropriately staff their organizations and their respective in­
Because there are more problems and opportunities than
house teams, taking into account the value of diverse
the manager could possibly aneml to, time management becomes
perspectives, technical skills needed, and their development
highly important. Effective tim~ management helps a manager
goals . They also define specific responsibilities for the team as
to handle several issues and projects at one time so that he could
a whole and try to. facilitate the allocation of tasks and
not spread himself too thin; mo~itor and keep tf'\ (l schedule or
responsibilities to individual team members as they deem
negotiate changes in the schedt\le if n~eded ; work effec tively
appropriate. To ensure a balance and efficiency/effectiveness
under time pressure; and to kndw when to permit interruptions
and when to screen them out.
I
. managers create systems for monitoring · their team
performance.
Team Work Competency, means accomplishing outcomes
Without good work environment team performance would
or tasks through small groups iof pel)ple who are collectively
be inadequate. A manager with a good team work competency
responsible and whose work ~ is interdependent. M anagers in
creates an environment characterized by empowerment, in which
organizations that utilize teams : C2.n become more effective by
effective teamwork is expected, recognized, praised and
designing teams properly; 'creating a supponive team
rewarded; assists the team in identifying and acquiring the
environment; and managing tea~l d,vnamics appropriately.
resources it needs to accomplish its goals and acts as a coach,
DeSigning the team is the first step for any'team project
counselor and mentor, being patient with team members as they
and usually is the responsibility of a manager 01' team leader.
Team design involves formu)a ting goals to be achieved, learn in the organization.
defining tasks to be done. and identifying the staffing needed to - Good managers also manage their team dynamics
accomplish those tasks . . Team '!members alway s try to identify effectively by trying to understand the strengths and weaknesses
with their teams ' goals and feel committed to accomplishing of team members and use their strengths to accomplish tasks as a
such goals. M embers of a well-designed
.1
team understand its team; bring conflict and dissent into the open and use it to
tas-ks and hov.: it§ performance! will be measured; they are not enhance the quality, of decisions, while at the same time
J
confused about which tasks are: theirs and which tasks are some facilitating cooperative behaviour keeping the group moving
other team 's. A well-designed team has the right number of
toward its goals . .
members. Too many member~ lejve room for free riders; too
Strategic Action Competency means understanding the
overall mission and . values of the company and ensuring that th~

136 Business: Concepts arid Perspectives
manager's actions and those of the employees he/she manage are
aligned with the company's mission and values. Strategic A ction
Competency includes: understanding the industry ' a'nd ; its
activities; unelerstanding the organization and its policies and
objectives; and taking , strategic actions to ensure organizational
'efficiency and effectiveness .
By trying to understand th~ industry and its activities a
manager would try t o study and understand th~ history and origin
of the industry he is part of; stay' informed of ,the actions ? f
competitors and strategic partners; analy~e general trends ,in the
industry and their implicatio?s for the future; and ' quickly
recognize when changes in the industry ' create significant threats
and oppoitUni~es .
By trying to understand the organi~ation and its policies
and objectives a goo,d manager wiii try to'
~nderstand and be able
, " -" ' " ', . .
to balance the concerns of stakeholders ; uriderstand the strengths
and limitations of various business strategies; ' understand the
distinctive competencies of the ' ()rgallizatlion; '~~ ' fue ', varfous
o(ganizational structures and the advantages , ap9 di$.advantagesoL
, each;~ma be 'l-ble toftt into the unique ,c~fPorate c ul,ture of th;e
~ . . ~.
organization. '.
.- . .,
By taking strategic actions the , man;lger tries , to execute
specific plans that reflect cross·:Junctionalaild t;ross-pivisional
knowledge Of the organization; assign ' priorities, and make
decisions that are consistent with the orgairization's :missidn "arid
strategic goals; recognize the", management challenges' of
alternative strlj.te~ies and address them systematically ; consider
the long-term ' implications of actions in ordJ~r ~o sustain and
;;fu.rth~r develop the, organization ' strate,gically; , andestablish "
, tactIcal , and 'operational goals " that facilitate strategy
implementation organization.illy .
I11I
The Managerf!ent Function 131
The Global Awareness Competency means performing
managerial work for an orgiliuzation that utilizes human,
material, financial and informa'tional resources from multiple
, f. ' '
countries to serve markets that ; span multiple cultures. To be
prepared for such opportunities 'the managers , begins to develop
' global awareness competency which is ' reflected in: cultural
knowledge and understailding; an~ cultural openness and sensitivity .
Through cultural knowl~dg~ and understanding a good
corporate manager St2ys , infotmed of political, social and
economic trends and events around the world; recogni~s the
•
impact of global events on the Qrganization; travels regularly to
gain first-hand knowledge of cOlintries
I
in which the organization
'
has or is expected to have an investment interest; understands,
reads and Gpeaks more than one language fluently; and has a
basic business vocabulary in e~ch language relevant to his/her
own job.
Cultural openness and lsen.sitivity helps ,the manager
understand the nature of national, ethnic, and cultural ,differences
and is open to examining these differences , honestly and
objectlvely;become sensitive tp cultqral cues and is able to adapt
quickly in novel situations to th~~e cultural cues; recognize that
thqe is gr~at variation, within arJy~~lture and avoid stereotyping
under varying conditions; appropriately adjust his/her behaviour
when interacting with people t'Ifom various national, ethnic and
cultural backgrounds; understind how his/her own cultural
background affects his/her own lattitudesand behaviours and the
organization at large; can empathize ,and see fiomdifferent: ~
, ,J , ' ,
perspectives while still being sycure in self and be _able to ,act
with confidence under any, circumstance
I
.
, Self- Management Competency , this requires ', 'takiIag
responsibility for one's, life at ;w,O.rk and beyond. Oft~n" when
 I
139
The Management Function \

r;.t;J:' "
Business: Concepts and Perspectives
In' 'terms ' of self-awaren~ss and" development a good
138
,!
manager tries to:, '.have <idear ·personal and. career g~als and
things fail to go well with us , we, tend to blame our difficulties on
know his/her- values, feelings, ' and areaSo ·: of.stfengths·-: and
the situations in which we find ourselves or on other people. , :', . '., . -,. .'~' ,. '" ". .: :~.
weaknesses,; use str,e ngths 'to' adV;lIitage while s~eking to improve
",,', . .. ,'".. . .

Effective managers do not like tp' fall into this type of situation.
or compensate , fO'[ · WeaklleSscs;~' '.~cc:~Pt. - responsibility for
They employ the strategy of self-management to overcome' their
situations. Self-management co~npetency includes: integrity and co~tinuouS: self-dev~l~p,irtenf atW ~rltiarl1i~g:~'tid devel~p 'plans and
ethical conduct; personal drive arid resilience, balancing workllife seek opportunitiesfqr. personal J.ptig-t~rm growth; analyze and
issues; and self-awareness and development. learn fro-m w<?rk - and ' Hie"expeFi~n<;es; "and 'btcome willing to
In terms of integrity an~ ethical conduct, the manager '~ontinually unlearn as changed,s~tuati.~ns call for new skills and
persp~cti~~s . ' .~- ' ,~. . , .', . '
tends to : have clear personal staljldards that serve as a foundation
for maintaining a sense of integrity and ethical conduct, even in
Now that manageI11~nt', (ifld: mariage~i~i' skillS, ' roles and
\

competencie;s. are : fully exp~ain~d, . it .wi~,l be ' veryrel~van,t to ·

the fac e of s~rong pressure to rpe contrary; be honourable and

. discuss organizatlonal .pb:iectives~ and"goals and their: ,i.mportanc
e
steadfast, project self-assurance and do not just tell people what
for organizations, . ',­
they want to hear; willing to adlIfit mistakes; accept responsibility
fo r his/her own actions .
A manager with goodj sense of personal drive and ORGANISATIONAL OBJECiJvES AND

resilience will try to seek resp~ nsibility and be willing to take THEIR IMPORTANCE

A.ll social. ,systems (orgaruzatl0ns) and their subsystems

initiatives, become innovative a$d take risks; become ambitious

and motivated to achieve object~ves but would not want to put have objectives to accoinplish. IThese objectives form the main

existence of organizations. Fronl the management point-of-view,

his/her personal ambition ahead~ of the organizational goals and . !

objectives, would work very hard to get things done in the most these objectives are always deftped along the lines of intended

-,
effective and efficient way pos$ible; show perseverance in the and unintended outputs. But : generally, and ,to be specifiC,

face of obstacles and would bou~ce back from fa ilure even under organizations are . rational • devices
<
for the purpose of

accomplishing intended objectfves.

, ' . Intended. objectives are
a difficult situation.
Balancing work and life issues involves striking a objective that copform to the ne~ds of an organization. Based on

corporate rationality, aU the co~ponent parts of an ' organization

reasonable balance between wor\<: and other life activities so that

neither aspect, ofJ living will be: neglected ; taking good care of
and corporate actions are conc~rned with their contributions to

self, mentally and physically and using constructive outlets to riq.nned objectives .
'1

vent frustration .and reduce tension.

....
 - -- - - . -¥

The Management Function 141

140, Businf!.ss: Ccnc2pts and Perspectives
The need to accomplish plannedcbjectives is summed up
in the fundamental functions of management as we have seen in
our previous definition of management. Thus, in management , we
'Jbserve that plaIUling is concerned with ' determination of the
objectives and their · accomp<,lnying 'programmes for their
accomplishment. Organizing or. organization structures are then ­
formed to accompJish : activities necessary to fulfill corponi.te
goals and objectives, Directing ot Direction is concerned with the
stimulation of system members towards , the achievement of
. .' .
, planne<1: objectives, while cont,rol compares ' system operating
results with i~tended : objectiVes to measure tb~ degree of
achievement and to introduce necessary 'corrections if there is no
Objectives to be formulatdd should serve the interests of ,
both the company, its employees, customers, shareholders and
the general public. If on the contrary, the operations of the
organization will become dysfunctional and " organizational
conflicts will result. Therefore goals congruency must be an
optimal requirement in corporate goal formulation-whether such
goals or objeciiv,es are official go.als or operative goals .
CHARACTERSTICS OF GOOD GOALS
AND OBJECTIVES
Some basic characteristics of good goals and '11\
objectives are as follows:
1. ,They must be specific and clearly stated. No form of

·"anibig'uity is allowed in any ~tatement of gO,als ~d objectives >

conformity 'Nith organizational o~jectives.

Since corporate 'objectives ,aI14 .goa ls are p.ury?9seful ; all"
organizations float within an ' en~lronment' 'composed of' 'm any 2 Their achievement must be .measurable and verifiable.

.
other , organizations that can I be affected by the central
,

organization in varying degrees. ~ As such, there is a dependency '3 They must be realistic.
relationship that makes' these "significant others" a part of an
extended systems view;; a relationship which demand exchanges '4 They must specify the period of achievement. '
of values and actions.
. ! .. .
The degrees of :exchange, of these values will allow ' the 5, They must include intenn.ediate targets or goals that ,will
, ; ' ,

organization to pursue its plaIUled obj:!ctives with greater vigour, facilitate the attainment of major or
long-term objectives
efficiency and effectiveness. ~
A point to note therefore :; is that the objectives or goals of '6 , Objectives must meet the t~st of the time .
I: an organization are values which are deemed desirable by that
. , I ' '
, organization. These values are not eternal or absolute. They are 7 They must be based on corPorate priorities .
subject to constant and ~ften rapid changes due to the effects of
environmental dynamics. 8
Objectives as in (6) above must -be 'flexible enough to
In formulating co,rporate ;objectives the organization must accommodate some relative economic changes that may

.. have a critical view of its ~ustomers, its competitors, its occur from tl me to time ,
personnel or staff, the general public, and its shareholders .

....
 142 Business: Concepi:) and Perspectives

ADV ANT AGES OF ORGANIZATIONAL OBJECTIVES The Management Function 143

1. Objectives help organisations to establish a healthy

business relationship with its environments
through goodwill .."
2. Objective help in the formulation of better
business and administrative policies . relative to
structure, process and personnel matters.
2 Is the list of objectives too long? If so, cm some
objectives be combined?
3" Are the objectives verifiable, that is, does one
know at the end of the period whether ot not, they
have been achieved? . <

3. Objectives help the organization to properly A. Do the objectives indicate:

c;oordinate its total operations. by establishing c;lear a) Quantity (how much of a given commodity is
lines of relationship "" ~ohgine~'b~fs : : ~( its to be produced)
" .
subsystems. b) Quality (how well or specific characteristics) "
4. They create rooms for consisttmcy, clarity and c) Time (when is it produced and distributed or
unity o{purpose atid direction. - . .' sold)
5. . They serve as motivators, " in ,terms of d) Cost (how much is the price of the goods
performance effectiveness and efficiency . \! produced).
e) If qualitative in nature, are objectives
SOME COMMON ELEMENTS TO BE CONSIDERED ·'N nonetheless verifiable?
FORMULATING OBJECTIVES 5. Are the objectives challenging, yet reasonable?
1. Profitability 6. Are priorities assigned to the objectives (ranking,
2. Survival weighing)?
3. Growth 7. Does the set of objectives also include?

4. Market share a.) Improvement objectives?

5. Productivity b.) Personnel development objectives?

6. Innovation 8. Are the objectives coordinated with other managers

7. Employee welfare and organizational units? Are the objectives
8. Service to Customers consistent with the objectives of the super'lisor, the
9. Social responsibility to the entire public . department, the company (as a whole)?
..J
Also in formula,ting corporate objectives, the 9. Are the objectives communicated to all who need
following questions are e&sential: to be informed?
1. Do the objective:cover the main features of the 10. Are the short-term objective consistent with lon{
.. job? term aims?
11. Are the assumptions underlying the objectives
clearly identified?

144 Business: Concepts and Perspectives
-12. Are the objectives -expressed -clearly -and in
wdting?
-13 _ Do the objectives provide for time'ly feedback so
that any necessary corrective steps can be taken?
14. Are the resources and authority sufficient for
achieving the objectives?
15. Have ' the individuals who are expected . to
accomplish objectives been properly involved.
16. Does the. individual have control over aspect for
whicb he or she is assigned responsibility?
It is assumed that by the time a manager provides
realistic answer$ to the above critical questions, helshe
would be able to formulate appropriate, realistic, specific
and verifiable corporate goals and objectives.
PURPOSES, OR MISSIONS, OBJECTIVES OR GOALS,
STRATEGIES AND POLICES IN BUSINESS;
COMPARISON
PURPOSES/MISSION
. Every , kind of organized grouP . operation . has or a least
should have, if it is to be meaningful, a purpose ,?r mission. _
Enterprises have a basic function or task which is assigned
to them by society.
'. The purpose of businesses is the production and
distribution of economic goods and services. For example the
purposebf a state ministry of wo'rks and transport is the design of
buildings and ,operation of a , system of road and transport
services; the purpose of the corms is the , interpretation M laws
and th~~r application; '.:vhite the purpose of a university is teaching
.. and research.
r.
The Management Function 145
Sometimes distinctions are drawn between ' purposes and
lllissions but in most cases they are the same. .For example,
while a business may have a social purpose of producing and
Jistributing economic. goods· and services, it may accomplish .
distributing economic goods and services, .it may accomplish this.
by fulfilling a mission of producing certain goods or lines of
products. The mission of an oil company like Shell is a search
for oil, and to produce, refine and"market petroleum products
00
from diesel, fuel to chemicals. This mission statement at times is
in tune with a well-defined purpose. _ ,.
A clear definition.of purpose _o r mission is necessary in ·
order to formulate meaningful objectives . •. Every business Should
know what its business is and what it should be. The correct
approach should be that a business defines who its' customers are
and what their attitudes and expectations are ..
It is sometimes thought that the mission 0f a business as
well as its objective is to make a profit. Ii is true that every kind
of enterprise must have, as was pointed out earlier, a profit or ·
"surplus" in business-goal or objectives ifit is to survive and do
the tasks society has entrusted to it. But this basic objective is
accomplished by undertaking activities, going in clear directions,
achieving goals, and accomplishing a mission.
OBJECTIVES ,
Objectives or goals are the ends toward which an activity
is aimed. They represent not only the end point of planning but
the end toward which organizing, staffing, leading and
controlling are aimed'. While enterprise objective constitute the
basic plan of the firm, a department may' also have objectives.
Its goals should naturally contribute to the attainment of enterprise
objeC'~ives, but the two sets of goals may be entirely differeri~ _
 0'.
146 Business: Con cepts and Perspecti ves, .
. . . :. : " :
For exampie, tPc objectiv~. of a business might be to make
a certain profit b y produci ng a ~fven line of hnin~_. ente itainment
equipment, while ·the goal of a ;nariufaCttl,ril)g department might
be to produS~ ~he r e'1uired number of Ie'\evisionsets of a given
'. desIgn -', and 'qualityata. given cost. These Objectives are
. ' . con$istem, bin .they differ in that fpe manufacturing department
,·:alone"call1ior assure accomplishing.the company's objectives.
. . The nature of objectives and theit relationship to planning
are v~ry obvious, It is rational {o then~fo~e emphasize that .goals
or objectives are plans and that they 'inyo!vethe. same planning
process as any other type of pla~n:ing ev~n th:;ugh they are also
end points of. planning . For. example
. . ; salesgdals . cannot he
guessed at or wished for ; it must ,be det~rmined .in the light of
purpose ~nd circumstances : L;kt~~vise ~ pl an to acc olllpli.s h a
. certain sales goal s will ha,,:e within it. or as deriv.3!i;,·ez 0f it,
project or departmentalgoals. ,: .
STRA 1'EGi!'(S,if:': .:'·,i ':<·'· .
,; $trategi<:s?r.e."used
.".' . . ' .' .... . : .' •. r
. . .. .
tp ref1ect broad overall concepts of an
,., . . " . .'
enterprise : operati(m-: .;. Stf<1tegie} ~h~{)g ( often · d en(H~ a general
programme of .action .a:nd..,ail ·'-iiiip'iled deployment of tHnphasis .
..and ::tcsbu·rces~oaltaill <fO:i'11preb,ensi:~~ objeciives , .' They result "
frdrp : w.e , process ~0b.f~·.:ded{.iUlg on the obj,;cr iv ..:s 'cr the
.' o~g~ni.zatjon ? · o·ii·.cha~ges · . iI}. ' obj ectiv es, 0 0 me fe~ources
u;ese
. " u,sedt9,'obtain these: objecrives and ,on the policies mat are to
t· " go''-ern the acquisitfo.b ·; 'l ise, :anddisposition of these resources .
.. A~oth~r. ~~~y" ai IO'oking: at s~Lncgy is that it is . the .
determinatlon _o (#}&;'b~sic' 'Ihrig ~teqrt giJdl~ and' objecdves()f an :.
enterpris~ andilie:adbPtion.~i courses,.of adlonand the 'allocatioIl" ·.
of resources nec~S$;ry tbc;arry. ~ut th~~e -goals; ' .
.~ .
The' Management Function 147
The purpose of stratl~gies is to determine and
communicate , through a system of major objec:tives and policies,
4lt.
:1 picture of what kind of enterprise is envis)ioned. Strategies
show a unified direction and imply a deployment of emphasis and
resources toward meeting the specific and ov~r all needs of the
organization.
POLICIES
Policies are also plans in, that they are general statement
of understanding which guide of channel thinJking and action in
deCision-making.
Policies delimit an area within which :a decision is to be
made and assure that the decisj:on will be ctCmsistent with and
contributive to objectives . Poticies tend to ~redecide issues ,
avoid repeated analysis and give a unified strulcture to other type
of plans, thus permitting managers to delegalte authority while
maintaining control. A policy is also regarcied as a means of
.... encouraging discretion and initiative, but w'ithin limits. The
amount of freedom possible in 'drawing up ,some policies will
natu~ally depend upon the policy, which in return reflects
position and authority in the organization. However, making
policies consistent and integrated enough to facilitate the
realization of enterprise objective is difficult fOlf many reasons .
1. Policies are too seldom writt@n and their exact
interpretations are: too little knO\wn.
2. The very delegatipn of authoriM that policies are
intended : to implement lealds, through its
decentralizing . ,i influence, to • widespread
participation in pplicy making and interpretation,
with almo~t certain variations aIffiong individuals.
~,'
 ---
r

148 Business: Concepts and Perspectives 149

The Management Function
3. It is not always easy to control policy because actual
"pl'dfications of goals and means to attain them. Planning is
policy may be difficult to ascertain and intended policy
\ \J1 nposed of goals, policies, procedures, standards and
may not always be clear.
PROCEDURES ' IH.:dfic~~ionrn aqvance of what is to be done.
To implement a plan an organization must be created.
Procedures establish customary methods of handling future
\ llllllan and economic resources are divided and allocated to
activities. They are truly guides to action, rather than to thinking .
various work ~reas within the enterprise and relationships are
They also detail exact manner in which a certain activity must k
(.stablished a.rnpng the resulting subunits.
accomplished. Their essence shows the chronological sequence 01
The fo'llowing processes are well recognized in planning: ,
required actions.
1. Recognition of problems and opportunities.
2. Dev~lopment of alternatives courses of action.
THE MANAGERIAL FUNCTIONS
3. Evaluation of developed alternatives .
As mentioned above, J>.the four basic and fundamental
4. Selection and implementation of chosen alternatives,
functions of any corporate manager are as follows:
a) Planning and
5. Fo\low-up to , determine effectiveness of decision
b) Organizing
c) Directing/Leading, and re~ched. v
6. Wllere everything else fails, the manager begins from
d) Controlling.
process number one until Qhjectives are met.
Planning also requires answers to the following questions:
1. PLANNING
, 1. ' What is our business and what should it be?
This is the management function of anticipating the future
2. Who are our customers and who should they be? '
and determining the courses of action to achieve company goals
3. Where are we heading to?
and objectives. It encompasses decisions about what activities the
4. What major competitive advantages do we enjoy?
organization should perform, how big the organization should be,
' 5. In what areas of competence do we excel?
what production, marketing and financial strategies it should use
6. Shall we acquire new resources or develop them
in .,reaching ,its objectives and what resources are ,needed to
accomplish its goals and objectives. Planning involves the inten~~lly?
determination of course of action, "what should be done?" , "By
I ' '
whomT , "When and how it should be done? " . TYPES OF ~l-ANNING

There ' ~re two types of planning. One is short-range

Planning means ,that , managers think: of their actions

planning while the other is called long-range or strategic
through in advance. These ' actions are usually based on some
method or logic "i'ather than ' on a hunch. It also means ' the planning.
. "i ,
~~ .

~
 150
Business: Concepts and Perspectives The Managenlent Function 1:; 1

The short-range plan covers a peri.Qd of less. than five

through three cycles. In the first cycle, top managers meet with
years while the long-range plan br strategic plan covers a period
divj.510n manager to select tentati~/e strategies and goals. During
ranging from five years and more.
the second cycle, functional n~anagers meet with divisional
The long-range plan requires development of strategies
managers to develop goals and <fonnal action programmes for
covering products, marketing, production, finance, personnel,
their departments. In the third stage, budgets are drawn up and
research and development. It also requires environmental
approved and the resources of the organization are finally
considerations. In formal strateg'ic plaIliling approach managers:
allocated for operational purposes',.
1. Select their goals and objectives.
2. Analyze the environments of their organizations.
NOTE
3. Establish measurable goals so that their goals will
Organizational Policies are ge*eral guides to action established
be easy to work ~ith,
for the enterprise and its major' segments. -A well-formulated
4. Ask subunits to develop their own plans to help
policy is based upon an' analhis of objectives, conforms to
meet the strategi~ plans or goals of the entlre
known principles in the area, is stable and flexible,
organization.
complementary and supplementary, and reasonably
S. Compare subunits plans with the strategic pI,an to
comprehensive in scope.
see if gap exists.
A Procedure is a series of steps or functions that indicates how
6. Close the gap by developing alternatives inside
the policy should be applied in the project executed. Well­
and outside the organization.
formulated procedures are flexib1e, balanced, efficient in the uses
'7. Select the best , alternatives available to the
of resources, and subject to organized control in each of their
organization.
steps.
8. Implement the strategic plan, and
A Standard is a model or criterion with which action can be
9. Evaluate the pro$ress of the plan to see if any 1
80mpared for purposes of a~suring compliance with plans.
action is needed make
.. it work.
Standards are of two types: r
These basic steps in th~ formal plaIliling approach are
likely i) Performance results and
to be Structured differently in various types of
organizations. ii) Performan~e process.
Performance standards ' afe specifications of quantity,
Latget organizations ane likely to use a specialized
quality, time and cost while; performance process involves
planning staff to formulate strategies and goals and to coordinate
standards established fOf personnel, such as job specifications and
the other planning activities ,of tlJe organization. Smaller
organizations are unlikely to have a formal planning staff, In functions, such as job descripti~ms and procedures, and physical
largeorga!.lizations, the formal ;planning process usually moves factors such as lighting and equipment .
152 Business: Concepts and Perspectives
The Management Function 153 "

ORGANIZING Employment of people with both interest and

3.

Is the means' by which management blends human and requisite qualifications for performing assigned

material resources through the design of a formal structure of jObs, and

tasks and authority. It involves classifying and dividing work Coordination of the activities of each worker based
4.
into manageable units. This could be called departmentalization. on performance standards.
Departmentalization is a structure or framework whkh relateS all 'Employees MUST Pull Together If the Company
personnel, work assignments and physical resources to each Is To operate Smoothly:.
other and to the enterprise objectives and is usually called
NOTE
organization structure. Departmentalization is the subdivision of work activities
"
The strength of an organization dependS Oil ,fis ability to into units within the organization. As organizations grow larger ,
utilize its available resources to attain a goaL, ' The more and larger managers begin to assign some activities to their
integrated and coordinated the. work of an orgahization is the subordinates in order to have time to devote to their managerial
more effective it-will be.
functions.

Delegation is the act of assigning part of the manager)

STEPS IN ORGANIZING activities to subordinates to perform.

The organizing function, as it were, includes the Responsibility is the obligation of a subordinate to

following steps: perform assigned duties.

1. Detetmining specific work activ'ities 'ileceSsary to Authority along with responsibility is authority which is

accomplish organizational objectives, the power to act and make decisions in carrying out assigrunents

2. Grouping work activities into a logical' pattern or

on the job,

structure, and Accountability js_the act of holding a manager liable for

3. Assigning the activities to specific positions and carrying out activities for which he or she has the necessary

peoples. authority and responsibility to carry out.

ORGANIZATIONAL STRUCTURE Span of control is the optimum number of subordinates a

While organizations are simply structured processes in manager can effectively manage. It is influenced by:

which people interact to accomplish objectives, organization 1. Type of work required by the organization .
structure focuses upon: 2. Training of workers on the job to perform
1. The activities necessary to reach goals. " necessary activities ,
2. Management and analysis of the sequence of the 3, Ability of the manager to lead and manage people
jobs that are to be performed, effectively,
4, Effectiveness of organizational communication.
154 Business: Concepts and Perspectives
5 . Geographical location of the company
6. Importance of work done, and
7. Goal congruency' as it relates to both the
organization and it~ members.
Decentralisation shows how much authority the manager
is willing to disperse throughout!the organization. It means that
managers follow the practices of d!spersing great amounts of
authority to subordinates. In allows both middle and supervisory
management more leeway in terms of decision-making. It also.
encourages industrial harmony. '
Centralization means decreasing the role of subordinates
in decision making. Managers. who disperse only the slightest
amount of authority operate on a centralized or autocratic
management philosophy , They believe that they can control and
coordinate the company 's activitIes more effectively by retaining
most of the authority they posses. This encourages employee
I
alienation. '
Unity Of Command rrteans that each employee must
receive his or her instructions about a particular operation from
only ONE person. If an employee was responsible to more than
one superior, conflict in job instructions and conclusion of
authority would result. It also states that a subordinate should be
accountable to only one superior: at a time,
Unity Of Direction means that those operations within
the organization that have the same objectives should be directed
by only one JDanager using one plan. For example, the personnel
department in a company should not have two directors each with
a different hiring policy rather ~ere s,hould be only one director
using one hiring policy in a personnel department.
Organization Hierarchy is the line of authority in an
organization often represented today by the neat boxes and lines
The Management Function 155
of the organization chart. It is presented in order of rank from
top managementto the lowest level of the enterprises in respect of
employee positions on the job.
Esprit De Corps means promoting team spirit which will
give an organization a sense of unity. This can be achieved by
the use of verbal communications instead of formal lines within
communications along the organization structure whenever
possible.
Job is the homogeneous cluster of work tasks, the
completion of which serves some enduring purpose for the
organization.
Job Analysis is the systematic study of jobs that attempt to
discover the major task dimensions of a job and what the job calls
for in terms of employee behaviours and qualifications.
Job Content means factors that define the specific work
activities or tasks.
Job Enlargement is a job design strategy that . involves
expanding the job range of the individual's job horizontally,
giving then more things to do within the frame work of their
positions in the organization.
Job Enrichment is a job design strategy that is based on
the motivation-hygiene theory that seeks to improve perfonnance
and satisfaction by providing more challenges, responsibility,
authority and recognition onjobs.
Job Evaluation is a method that attempts to determine the
relative worth of each job or position to the organization in order
to establish a basis for relative wage rates within the organization.
It is a major method for establishing reward policy.
Job Functions--the general requirements of, and methods
involved in performing a job.
156 Business: Concep.ts and Perspfctives The Management Function 157
Job Rotation a job design strategy that involves moving
the worker from task to tasks over a period of time to reduce
assistants or other key company executives. This is referred to
boredom on the job.
as the Top Management of an organization.
Job Satisfaction is an attitude held by a person that
Top level Managers devote their time to developing long­
reflects an evaluation of a particular component in the work
range' plans for the company. ,They make such broa~ ~ecisions
place.
as whether to , manufacture new ;products, purchase smaller
Job Specialization means dividing the work or tasks of
companies or begin international operations. Also a considerable
a job into specialized, standardized, simple tasks and placing
amount of their time is directed to " activities .' outside the
them into specific units. The job occupant would focus on the
organization, ~nv()lving government~nd community affairs.
specific set of tasks associated with the job.
Another level of management in' ail organization.i s ,the
Job Stress is an individual's internally felt frustration
Middle Management. Middle Man~gement is. the second J~vel of
and anxiety with certain jobs or organizationally related
the management pyramid and.it includes such executives as plant
situations.
managers and department heads o~ .other re~~ied peisomiel.
Job Description is a document which describes the
Middle managemet;lt 'is ' more ,involved : in, spe~ific
<

objectives of a job, the work to be performed, the

operations within the various units or ,' subdivisions.of an
responsibilities involved, skills needed, the relationship of the
organization. "It is responsible f.or developing specific plans and
job to other jobs and its working conditions.
procedures to implement' the broader pr~ns of top management.
Job Specification is a document which describes the
Middle management , might be involved in such activities '
special qualifications required of a worker who fills a particular
as determining the number of sales-persons for a particular store
job.
chain (marketing unit), selecting equipment for a new facility
(production unit) and developing techniques for evaluating the
LEVELS OF MANAGEMENT
performances of employees (personnel unit) etc.
There are various levels of managers who together form
The third level of management is the supervisory
a management pyramid. This pyramid is the hierarchy or levels
management. It includes supervisors who are directly
of management in an organization.
responsible for the details of assigning workers to specific jobs,
The management of a company may be divided into three
evaluating daily or even hourly performance. Supervisors are
categories, such as Top Management, Middle Management and
always in direct and continuing c.ontact with production personnel
Supervisory Management. Although all three categories contain
and are responsible for putting into action the plans developed
managers, each level of the management pyramid stresses
by middle and top management.
different activities and functions.
The highest level of the management pyramid is
comprised of the General Manager and his other (associates)
 ,.;i
158 Business:, Concepts and Perspectives
The Management Function 159

Administrative Managers: Administrative or general, managers

MANAGERS IN DIFFERENT AREAS
are not associated with any particular management specialty.'
OF THE ORGANIZATION ,
Administrative managers tend to be generalists; they have some
Regardless of their levefS, managers may work in various ',
basic familiarity with all functional areas of management rather
areas within anorganization. In any given organiza~ion, areas of
than specialized training in anyone area.
management may include mark~ing , finance , operations, human
Other Kinds Of Managers: Many organizations have specialized
resource, administ:J:'ative and other areas. These are as follows :
management positions in addit~on to those already described.
Mar keting Managers: Work in areas related to the marketing
Public relations managers, for example, ,deal with the public and
function. This involves getting consumers and clients to buy the
media for organizations like Philip Morris companies, Inc., and '
organization's products or services. Marketing management
the Dow Chemical co. to ~rotect and enhance the image of the
includes such functions as new product development, promotion, '
and distribution of goods and services. Given the importance of organization.
Research and Development (R&D) ' managers coordinate
marketing for virtually all organizations developing good
~
the activities of sc;:ientists and engineers working on scientific
manager1;i in this area can be critical.
projects in the organization for good product/service image and
Financial Managers: Financial managers deal primarily with an
organizational efficiency and effectiveness.
organization's financial resources. They are responsible for
Internal consultants are used in organizations such as
activities such as accounting , cash management, and investments.
Shell, Agip, etc. , to provide specialized expert advice to
In some. businesses, such as banking and insurance, financial
operating managers.
managers are found in especially large members because of their
Many areas of international management are coordinated
relative significance.
by specialized managers in organizations like all the multinational
Operations Managers: Operation managers are concerned with
creating and managing the systems that create an organization's
oil companies operating in Nigeria whose headquarters are in
their home countries. The number, nature, and importance of
,
products and services. Typical responsibilities of operations
these specialized managers vary tremendously from one
managers include production control, inventory control, quality
organization to another. As contemporary organizations continue
control, plant layout, and site selection.
to grow in complexity and size, the number and importance of
Human Resource Managers: Human Resource Mangers are
such managers are also likely to increase in such organizations.
responsible for hiring and ,: developing employees. They are
typically involved in human resource planning, recruiting and
FORMS OF ORGANIZATION STRUCTURE
selecting ,employees, training and development, designing
There are four (4) main types of organization structure.
compensation and benefit, systems, formulating performance
These are: '
appraisal systems, and discharging low-performing and problem
L. The line organization structure
employees.
 160 .'Brisiness: Concepts and Perspectives
2. The functiopal organization structure .'
THE FUNCTIONAL ORGANIZATION STRUCTURE
3~ The line and staff structure, and
This is a structure in which a functional relationship exists
4. The committee structure.
No particular one of these structures is the best structure.
)
It is the responsibility · of management to .choose the type of
structure to adopt. However, any structurechoseil should be made
to improve upon the operational efficiency of the organization.
THE LINE OR GANIZATION STRUCTURE
This is a structure where authority and responsibility flow
from the top executives to the .lowest subordinate on the job.
It is the most common type of structure gener@ly in us.e
the world over. IIi this structure, authority and responsibility are '
greatest at the top and diminish at each successive lower level of
the org~nization : It is made up of men and women with various
\ :"
. . . . ' .
areas of speCIalIzatIOn. " .:,-,
o .
ADVANTAGES OF LINE ORGANIZATION STRUCTURE
1. It is a very simple structure to be formed, studied and
understood.
2. It is very useful for small organizations.
3. It clearly identifies the various duties andresponsihilities
of employees of the organization.
4. It allows for easy discipline of employees on the job
based on better supervision.
DISADVANTAGES
1. It tends to be rigid and inflexible in nature
2. There tends to be a lack of specializ<ition at the
supervisory level of the structure.
3. It is too autocratic and military-like.
<k
('Y
The Management Function 161
between functioo.al managers and line officers/ managers. For
example, the personnel manager in the personnel department has
a functional responsibility for all activities concerning personnel
in the organization even though each worker has his own line
manager in his own department to report to.
ADVANTAGES
1. In a functional organization structure, experts are allowed
to make use of their expertise .in the discharge of their
duties for better business operation.
2. It allows for the use of several supervisors instead of one.
This, in effect, makes for better and proper business
coordination.
DISADVANTAGES
1. There is overlapping of authority and lack ot fixed line of
responsibility which may lead workers into confusion.
2. There mGlY be too many bosses and too many experts and
this can lead to organizational conflicts anQ poor
leadership outcomes.
THE LINE ANP STAFF ORGANIZATION STRUCTURE
This is ~ combination of line and functional types of
organization structures whereby a line employee engages experts
who are to advise the line officers on the .performance of their
duties and responsibilities. In this case, the line officers are the
executives while the staff officers are the advisory officers.
 162
Business: Concepts and Perspectives
ADVANTAGES
1. This structure makes for operational efficiency due to
proper division of labour and the use of expert hands.
2. It eliminates the problem of authority and responsibility
residing on many supervisors in the organization.
DISADVANTAGES
i 1.
Line officers may at times ignore the advise of staff
I,
officers or the staff officer may start issuing orders which
I' concern those of the line officers.
2. The idea of having both the line and staff officers in one
j'
organization tends to cause confusion except that their
various duties and responsibilities are clearly defined in
advance.
THE COMMITTEE TYPE STRUCTURE
In the committee system, the management team is
assisted by a number of standing advisory committees. It is most
common in local government authorities and other public
enterprises. Committees may equally be formed to operate in
addition to the existence of line and staff structures.
ADVANTAGES
1. The committee system is a good source of getting
opinions from individuals within a formal structure.
2. People tend to react more favourably to a group decision
than to the dictatorial authority of one man.
3. It makes good use of specialists.
4. It calls for the participative system of management or
governance.
The Management Function 163
DISADVANTAGES
1. It takes time to arrive at a decision in a committee
structure.
2. When such decisions are reached, they are usually very
weak.
DIRECTING OR LEADING AS A FUNCTION
OF MANAGEMENT
The managerial function of directing or leading is
concerned with stimulating the organizational members to
undertake actions along the lines of the plans drawn by the
corporate executives. It means that managers direct and
influence their subordinates., Managers do not act alone, rather
they get others to perform essential tasks and they also establish
proper atmosphere or climates that enhance subordinate
performance.
Directing or leading deals with the dissemination of
orders and the acceptance and execution of these orders. This
acceptance and execution usually necessitates managerial
attention to training and motivation of individuals and groups
that make up the organization.
LEADERSHIP Is the focus of activity through which the goals
and objectives of the organization could be achieved. The three
basic leadership styles are:­
1. Autocratic leadership style
2. Free - rein leadership style, and
3. Democratic leadership style.
 ", j

The Management Function 165

164 Business: Concepts and Perspectives

3. OBJECTIVITY IN INTERPERSONAL RELATIONS

AUTOCRATIC leaders make decisions on their own without
Questions to ask here are as follows:
consulting others.
. a) . .Am I objective in dealing with my
subordinates 'or do I react too emotionally? .
DEMOCRATIC leaders involve their subordinates in making
, b) Do ,I maintain a detached view in reacting
decisions.
to subordinates' behaviour?
c) Can I be empathetic and objective at the
FREE REIN leaders believe in minimal supervision and leave
same time?
most decisions to be t:nade by their subordinates . .
. Motivation: is therefore a process of increasing employee
The best leadership style will vary , depending on three
performance, through positive reward systems. Employers could
elements
employ extrinsic rewards (rewards that a person receives from
a) The leader
sources other than the job itself. They include compensation,
b) The followers , and
superVISIon, promotions.. vacations, friendships and other
c) The situation.
.. outcomes apart from the job) 'or intrinsic rewards (rewards that
. are associated with the job opportunity to perform meaningful
A good leader should possess:
" work, complete cycles of work, see finished products, experience
1. EMPATHY: This is a situation where a leader places
variety, carry out highly visible cycles of activity ' and receive
employees in his shoes.
To achieve this he often asks the following questions: .
feedback on work task).

a) How does the worker view this new rule?

EXTRINSIC JOB CONDITIONS can be identified as:­
b) Will the worker be able to see its value if I
a) Job security
explain it this way?
b) Salary
c) Whom does the worker trust, and whom does he
c) Working conditions
fear?
d) Status
2. SELF-AWARENESS: proper knowledge of oneself in
e) Company policy
terms of ability , aptitude, strengths and weaknesses.
1) Quality of technical supervision
Questions to consider here are.s follows:
g) Quality of interpersonal relations among
a) What are my strengths? My weaknesses?
peers, supervisors, and subordinates
b) What do people thi'nk of me?
h) Fringe benefits .
c) Do they consider me fair and objective in
assessing situations?
d) Am I too gruff in dealing with otbers?
 The Management Function 167
166 Business: Concepts and Perspectives
3. The Ivlanager takes corrective actions to bring any
INTRINSIC JOB CONDITIONS are as follows:
deviations that might occur into line or
a) Achievement
perspective..
b) Recognition
c) Work Itself
OTHER THINGS THAT MANAGERS DO
d) Responsibility
Managers assume a wide range of roles in order to move
e) Advancement and
their organizations towards accomplishing stated corporate
o Personal growth and development. objectives. These roles can be seen as follows:
1. The manager assumes responsibilities. He is
CONTROLLING AS A FUNCTION OF MANAGEMENT
always in charge of specific tasks which must be
Controlling. means that managers attempt to assure that .the
successfully accomplished through the efforts of
organiz~tion is moving toward its stated or predetermined
his subordinates. Because of the fact that the
objectives.·· Its objective is to assure proper performance in
success or failure of subordinates is seen as the
accordance with corporate plans. It requires the monitoring of
success or failure of managers themselves,.
operative perform~ce and the effectiveness of resource utilization.
management is therefore seen as collective
If some sections of the organization are on the wrong
responsibility which must be carefully executed.
track, managers, through the control process try to find out the
2. The manager must balance competing goals. Most
prevailing problems and also get things right. Since it
at times, a manager is faced with a number of
(controlling) involves proper utilization of organizational
organizational goals, problems and needs; all of
resources managers u~e all available resources of the organization
which compete for the manager's precious time
in an effort to achieve desired objectives . These resources are its
and resources. Because these resources are limited
finances (money), its equipment (machines) its people (man) and
each must strike a balance between his various
its information (materials).
goals and needs. The manager must also decide
The control process closes the system loop by providing
who is to perform a particular task by assigning
information feedback to the manager so that he may explain,
each task to the person most able to perform it and
replan, reorganize and redirect the enterprise activities.
to perform it satisfactorily.
3. The manager is a conceptual thinker. Every
STEPS OF EFFECTIVE CONTROL SYSTEM
manager should be an analytical thinker. He/she
1. The manager sets performance standards.
must be able to think a specific and concrete
2. The manager then collects information from within
., problem through and come up with feasible
and outside the organizati<;m to discover any
solutions to such a problem.
deviations from set standards.
 The Management Function 169
168 Business: Concepts and Perspectives
time. There is almost no limit to the number and
4. The manager should be able to work with and types of problems . that ,jlay occur: financial
through other people. This will involve the use of difficulties, problems with employees, or
accurate information needed to perform tasks. To differences of opinion concerning organization
achieve "this there has to be proper channels of policy, to name just a few , form the network of
communication within the organizations. Such
these problems.
channels mUst be upward, downward and lateral in
nature.
Managers are the' people who are, expected to come up
5. The manager is a mediator. Disputes within a unit or
with solutions to difficult problems , and to follow through on
. organization can affect morale and productivity and
their decisions even when doing so may be unpopular with some
may even cause come competent employees to leave
persons in and around the organization.
the organization. Managers try . to mediate ~ver One of the m~st unpleasant measures whi~h a manager has .
disputes.to 'avoid their effects on the organization.
to take is to terminate an employee and/or other managers.
'- 6. The manager is a politician because he uses the art
Warnings, reprimands, transfers, suspensions, etc, are better
of persuasion and compromise in order to promote
ways of handling employee misconducts.
organizational goals. ;"
Every effective manager plays politics by
developing networks of mutual obligations with
other managers and employees in the company. He
also tries to build or join alliances or coalitions in
order to win support for critical proposals,
decisions or activities.
7. The manager is a diplomat. The manager is an
official representative . of his work unit at
organizational meetings. When dealing with
clients, customers, contractors, . government
officials and personnel of other organizations, the
manager is usually considered a representative of
the entire organization as well as a particular unit.
8. The manager is a decision maker. Managers are
faced always with the problems of making difficult
decisions. No organization runs smoothly all the

·Chapter 6
. MARKETING MANAGEMENT
Marketing and production are the other basic functions of
the business firm. All organizations must . produ~e and market a
product (or service) for use by its customers.
Marketing can therefore be defined as the performance of
business activities that direct the flow of goods and services from
producers to consumers or users . These activities are very vital
to contemporary businesses.
CREATING UTILITY FOR THE CONSUMER.
A business must create utility, the want satisfying power of
a product or service for its consumers. There are four aims of
utility. These are: Form utility, Time utility, place utility and
ownership utility.
FORM UTILITY: Is created when the business firms
converts raw material into finished products through the
production processes.
TIME UTILITY: Time utility refers to having the
products available when the consumer wants to buy them. This
requires ~ffective marketing research to determine what items the
consumer will desire at some future date.
, These are th6~e produc~ and services purchased by the
PLACE UTILITY: Is created by having the products
available to the consumers a convenient location when the
persons want to buy them.
Marketing Manag{,ffJl'III 171
'.OWNERSHIP UTILITY; Is also created by arranging
for the transfer of title from sel~er to tIlt: buyer. All the above
utilities combine to form what we call the "marketing concept" .
,;
'­
THE MARKETING CONCEPT: The marketing concept
says that a company should adopt a company wide conSllllU'1
orientation with the goal of achieving long-run profits. '1'11/ ,' ,
implies that all areas of the business should try to sa I l S] Y
consumer wants and needs not 'only by quantity of goods ami
:;ervices produced but also by their quality. The marketing
concept advocates that all aqtivities and functions of the
organization ought to be directed toward the identification and
satisfaction of consumer wants in the forms of product, price,
place and promotion.
WHAT IS A MARKET?
A market consists of people, whether they are consumers,
company purchasing agents or purchasing specialists for
government (local, state or federal). A market requires not only
people but also purchasing power; and the authority to buy.
CLASSIFICATIONS OF PRODUCTS IN MARKETING
In marketing, products may be classified as consumer or
industria) goods.
CONSUMER GOODS
ultimate consumers for his or her. own use.
172 Business: Concepts and Perspectives
Marketing Management 173

surveys, consumer panels, direct observation or buying behaviour

INDUSTRIAL GOODS: of customers, personal interview and the like.
On the other hand, industrial goods are goods and services Marketing research studies can provide ' data used ill
purchased to be used either directly or indirectly, in the analyzing the buying habits of consumers, thus;
production of other goods for sale. 1. Who buys?
2. When does one buy?
MARKETING SEGMENTATION 3. Where does one buy?
This is process of taking the total market and dividing it 4. What does one buy?
into groups with similar characteristics. In doing so, population 5. How does one buy?
and income, colour of product, styling or product design, etc,
will be consider~d. TH E MARKETING MIX
Once marketing research has identified the company's
SELECTING MARKET TARGETS THROUGH market targets a suitable plan has to be made to reach these
MARKETING RESEARCH selected market segments. Marketing decision-making can be
The key to effective marketing lies in locating unsatisfied classified into four strategies of:
consumers. These customers may not be purchasing goods 1. Product strategy .
because they are not currently available or they may be buying 2. Distribution strategy
products that give them only limited satisfaction. In ' this case, 3. Promotional strategy
they are likely to switch quickly to new products with complete 4. Pricing strategy .
satisfaction. These unsatisfied segments should be the targets of The combination of the above four strategic elements form the
consumer oriented companies. They should therefore be marketing mix.
targeted. By definition a MARETING MIX is, therefore, the
A market target is the group ' of consumers toward which •
blending of product, channels, promotion and price to satisfy
the firm decides to direct its marketing effort in order to give chosen consumer segments. This is the total package in
maximum satisfaction product-wise. The selection of market
marketing that determines the degree of marketing success.
targets requires considerable marketing research in order to
identify those groups that are most likely to buy the goods
produced. Marketing Research therefore is the systematic PRODUCT PLANNING OR STRATEGY
gathering, recording and analyzing of data about problems Includes decisions about package, design, branding, trade­
relating to the marketing of goods and services. Marketing marks, warranties, guarantees product life cycles and new
resea,rchers uses a variety of approaches to identify market product development for effective marketing.
targets. These approaches include the analysis of published data,
 f

174 Business: Concepts and Perspectives Marketing Management 175

who try to purchase T. V. sets may visit many storeS;' examine

DISTRIBUTION CHANNELS OR STRATEGIES
perhaps dozen of television sets and spend sometime in ' making
Distribution channels or strategies are the paths a good or
decisions on what type, size 'and colours of aT. V. set to
service follows from producer to ,-consumer. They determine how
purchase.
effectively goods and services could be marketed.

PROMOTIONAL STRATEG-i-y SPECIALTY GOODS

These goods have no reasonable substitutes in the mind of
Involves personal selling, advertising, and sales promotion
the buyer. The buyer is well aware of what he/she wants and is
tools. These elements must be skillfully blended to produce
willing to make a special effort to obtain it. Example, cars,
effective communication between the company and consumers or
wears, camera etc are specialty goods.
the market place.

INDUSTRIAL GOODS.
PRICING STRATEGY
Are classified further based on capital and expense items.
The pricing Strategy which is one of he most difficult
parts of marketing decision-making processes, deals with the
CAPITAL ITEMS
methods of selling profitable and justified prices for goods and
Are those industrial prod(lcts that are relatively long-lived
services. In pricing strategy, governmental regulations and public
and usually involve large sums o~ money to purchase.
opinion must be considered in making pricing decisions. The
marketing mix, in summary , .is the mechanism that allows
EXPENSE ITEMS
business to match consumers needs with product offerings.
Are usually less costly ~ndustrial products than capital
items and are . consumed within. a year of their purchase eg
OTHER PRODUCT CLASSIFICATIONS
Electric bulbs , pencils , pens, engine oil, etc .
CONVENIENCE GOODS
These are those products; the consumer seeks to purchase
THE PRODUCT LIFE CYCliE
frequently, immediately and , with a minimum of effort.
Products pass through a ~eries of stages from their initial
Newspapers, bread and cigare~es fall under this category of
appearance to death. This proc~ss is , in marketing , called the
convenience go~ds.
"product life cycle"., These stages are:
i. The introductory.stage'
SHOPPING GOODS .t ~ .? ~
ii. The growth stage .L " ,

These goods are purchased only after the consumer has

iii. The maturity stage anq
made comparisons of competing goods on such bases as price, ,­
" ! '

quality, style and colour in conipeting stores. Examples , people iv. The decline stage.

~

176 Business: Concepts and Perspectives
INTRODUCTORY STAGE
This is the initiation stage of the product. In this stage the
company tries to secure demand for its new market entry. And
since the product is not fully known to the consumer, promotional
campaigns highlights its feature. Losses are also common during
the introductory stage of the product life cycle due to heavy
promotion expenses and extensive research and development
expenses especially when sales are low.
THE GROWTH STAGE
At this stage, sales volume rises rapidly as new customers
make initial purchases and repurchases. Word-of mouth an'
mass advertising do persuade hesitant firm buyers to make trial
purchases and the firm begins to realize profits from its
investments on production and sales.
THE MATURITY STAGE
At this stage, sales continue to grow but they eventually
reach a plateau stage as the backlog of potential customers is
exhausted . The company at this stage is also faced with high
level of competition which may lead to price reduction and
decline in the level of profitability. Price reduction in this case is
a device to attract more customers under a very competitive
market situation.
THE DECLINE STAGE
In the final stage of the product's life cycle new
innovations or shifting consumer preferences 'result in an absolute
decline in total industry sales. Industrial sales or profit decline
and in some cases actually become negative as sales fall and
companies begin to cut prices in a bid for the dwindling market.
Marketing Management 177
Producers/manufacturers then gradually begin to leave the
industry in search of more profitable products.
PRODUCT IDENTIFICATION
Consumers do identify their products before purch,:!sing,
they do this by brand names.
Brands are important in developing a product's image.
Once customers are aware of a particular brand, its appearances
become advertising for the company. Successful branding is also
a means of escaping some price competition.
Brand names should be easy to pronounce, recognize and
remember. To do so they should not contain words in general
use such as television, automo"bile, etc .
Branding and brand manes are the primary ways that
'businesses can identify their products in the market place.
Marketers must spend considerable time and effort in selecting
brand names that will enhance the image of their product
offerings to consumers.
MARKETING CHANNELS AND PHYSICAL
DISTRIBUTION SYSTEMS
All organizations perform a distribution function. The
distribution function is vital to the economic well-being of society
because it provides the products and services desired by the
consumers at the right time and in the right place.
The marketer contributes to a product's values by getting
the items to the right place when consumer wants to buy it and
. then provides the mechanism for transferring the ownership.
Companies who fail to perform the distribution functioll
effectively usually become business failures.
 Marketing Management 179
178 Business: Concepts and Perspectives
.'.(~<

v. They also extend financial asistance to

Distribution also provides considerable employment manufacturers.
opportunities to society. Most people who are involved in They provide sales promotion finctions to
Vl.
distribution processes are called "sales or service people; manufacturers.
meaning that their sale is to provide a service to some other They also provide market information to 10th retailers
vii.
sections of the economy. Man;:: of these sales people are highly and manufacturers.
paid and hey approach professional status in most companies They service some producers for both the
Vlll.
where they serve. manufacturers and retailers.

CHANNELS OF DISTRIBUTION SIX PRIMARY CHANNELS OF DISTRIBUTIOr OF BOTH

. .
As has already been noted, marketing channels are the CONSUMER AND INDUSTRIAL GOODS
paths goods and the title to goods follow from the producer to the
These are;
consumer. The distribution channels in marketing involve the
1. From manufacture to consumer: This is the drect channei
use of middlemen. The two prime categories of middlemen are from producer to consumer and is used for at services but
the wholesalers and retailers. only about 5 % of products are distributed this Nay .
2. From manufacturer to retailer to consumes. In this
WHOLESALERS situation, some manufacturers distribute !hir products
These are companies or people that sell to retailers and directly to retailers. The clothing industrr has many
other wholesalers or to industrial users but only occasionally and producers who sell directly to retailers throu;h their own
in small amounts to ultimate users. sales forces. Some other manufacturers set lp their own
retail outlets in order to maintain better contnl over their
RETAILERS
channels and sales .
Are those companies or individuals that sell to persons for 3. From manufacturer to wholesaler to retailer::> consumer:
their own use, rather than for resale. This is the traditional channel of distribution::>f consumer
goods. It is used by thousands of small ranufacturers
FUNCTIONS OF THE WHOLESALERS o who cannot afford to maintain an extensiv' field sales
I ' The wholesalers perform the following functions. force to reach ~e retailing sector. These ccnpanies rely
i. They maintain the sales force of a company. on wholesalers for this functions. In saml cases these
ii. They provide storage facilities for produced goods. manufacturers maintain technical advisers to assist
111. They ensure the delivery of goods to those who need retailers and to secllre marketing informatiol1but they are
them. not directly involved in the selling effort.
iv. They provide or extend credit facilities to the buyers ._
 180 Business Concepts and Perspectives
are common in the distribution of agricultural and
petroleum products. An extra wholesaling level is
required to divide, sort and distribute bulky items.
5. From manufacturer to consumer directly. These direct
channels are he most commonly used approach to
distributing industrial products except accessory
equipment and operating supplies.
6. From manufacturer to wholesaler to consumer: In this
channel, wholesalers of industrial goods are often called
industrial distributors. This direct channel is used for
small accessory equipment and operating supplies hat are
produced in relatively large lots but are sole in smaller
quantiti es .
MARKET COVERAGE
Three categories of market coverage exists. These are
intensive distribution, he exclusive distribution the selective
distribution.
1. The Intensive Distribution: Strategy is where the market
tries to place a product in nearly every available outlet.
This occurs during a period of market saturation. And
this saturation period requires hat wholesalers be used to
achieve a maximum distribution effort.
2. Exclusive Distribution: Is the exact opposite of intensive
distribution. In this case the manufacturer gives a retailer
or wholesaler the exclusive rights to sell its products in a
specific geographical area. An exclusive distribution
contract allows the retailer to carry an adequate inventory
and provide good service facilities that might not be
possible if competitive dealers exist in the area.
The Financial Management IX I
3. Selective Distribution: Is a degree of market coverag~
some where between intensive distribution and exclusive
distribution. In this situation, a limited number of
retailers are selected to distribute the firm 's product lines .
By using a selective market coverage, the manufacturer
hopes to develop a close working relationship with a limed
number of dealers.
THE PHYSICAL DISTRIBUTION SYSTEM.
The distribution system includes the function of physical
distribution. This is the actual movement of goods from the
producer to the user of the goods.
Since this is a very important aspect of doing main
objective of the physical costs. But the effort is 0 maximize the
lev el of customer service.
The physical distribution system involves that various
modes of transportation which includes:
a. Road transportation.
b. Air transportation
" c. Rail transportation
d . Water transportation
e. The pipelines system
THE ROAD TRANSPORTATION
This can be classified into three categories as;
a. Common carriers
b. Contract carries and
c. Private carriers
 182 Business: Concepts and Perspectives
'.r carriers usually have certain monopoly or semi-monopoly right
to 'serve an area.
., . Contract carriers transport goods for hire by individual
con,tract or agreement, Contract carriers do not offer to perform
services for the General public but usually offer services that
meet the special needs of customers.
By law they are limited to the number of customers they
service. Contract . carriers are most frequently engaged in
business as owner/operator motor carriers. Usually they solicit
large shipments from one shipper to one recipient, Private
carriers carry their own property in their own vehicles.
Examples of private carriers would be PABOD Breweries Ltd,
i'
. "PABOD Food supplies Ltd, Leventis Stores, etc.
All the three categories (common carriers contraG:t
". carriers and private carriers) make up the Highway carriers or
the road transportation system.
The principle /advantage of the highway system is its
flexibility of transportation. That is to say that wherever there is
a road, ahighway carrier can operate. Examples; taxis, pickup
. .' vans, trailers, large buses, etc . .
I
AIR TRANSPORTATION
Speed is the principal . fa¢tor in the . growth of air
transportation. Air transport is usually limited to valuable and / or
perishable pn:xlucts because of the mode's relatively high cost. Air
transportation.is more expensive in terms of .long .distance coverage
than in short distance coverage. Contract carriage can be done with
ai~ transportation through the charter system. ."
r.
. "' ~
Marketing Management 183
"
RAIL TRANSPORTATION
This mode of transportation offers services to dealers 'of
bulky commodities. About 40% of all domestic intercity freights
is carried by the rail. Most rail roads operate as common
carriers and none are contract carriers.
WATER TRANSPORTATION
Water transportation is one of the least costly of all modes
of physical distribution system. It can be classified as:
i. International or offshore system
ii. Intercoastal system.
Ill. Coastal system and _,
iv. Inland waterway system.
THE PIPELINES SYSTEM
This is also an intercity system of transportation which .
generally involves the conveyance of petroleum products ranging
from crude oil to highly refined products and natural gas. Pipe
line can transport many liquids and gases much cheaper and
faster than other modes of transportation.
MATERIALS HANDLING
This is the process of moving g~ods within the customer' s
warehouse, terminal , factory or store.
"'
PROMOTIONAL STRATEGY IN MARKETING
Promotional strategy is the function of informing, persuading and
influencing a customer decision about goods and services which
he/she needs. It is used to expand market areas, hold the current
market position of a product, and to present a corporate
viewpoint on public issue. . Put differently the promotional
strategy objectives are as follows:
1. To provide market/product information
 184 Business Concepts and Perspectives The Financial Management I S.')

2. To increase sales. A stable sales pattern allows a company to do better

3. To maintain the current market position of products, and financing, purchasing, and market planning and to reduce some
4. To stabilize sales. management and production costs.
Providing information about product availability , prices
or related data has always been of primary importance to THE THREE ELEMENTS OF A
marketing and promotional strategy. Marketers realize that PROMOTIOANL STRATEGY
nearly all promotional massages must carry some informational Promotional strategy consists of three elements such as.

content in what they may be refer"red 0 . as promotion's Advertising

educational role. Industrial sales person also keep buyers aware Personal selling, and

of he least technological advancement in a p"a rticular field through Sales promotion.

,
1I
~

the marketing information system. "

The ultimate promotional goal for most companies ADVERTISING
is increases sales. Advertising, personal selling, and other Is a non-personal sales presentation usually directed 0 a
responsible for moving products from the many facture to the large number of potential customers. It uses various media such
consumer in our economy . An effective promotional strategy as;
therefore is required if a company hopes to increase its sales . 1. Newspapers.
Promotional strategy has been used to position a product ii. Magazines.

in certain markets. "positioning" is he strategy of concentration lll. Television

on specific market segments rather than on trying to achieve a iv. Radio

broader appeal. This requires he market to identify the market
segments of would-be likely users of the products. Promotion
strategy is then thought into play to differentiate the item, so that
it appeals to these market segments.
Sales stabilization is another promotional strategy goal.
Sales contests offering prizes (such scholarships) to sales
personnel who meet certain goals are usually held during slack
sales period of the year.
Sales promotion materials, such as calendars, pens, and he
lice, are of ten distributed to stimulate sales during off-peak
periods.
v. Direct mail and
vi . Outdoor advertising to relay promotional massages to
today's widespreadtnarkets.
TYPES OF ADVERTISING
1. Product advertising involves the non-personal
selling of a good or service.
2. Institutional advertising concerns the promotion of
a concept, idea, philosophy or good will of an
industry, company, organization or governmental
entity.
 186 Business: Concepts and Perspectives
3. Informative advertising is intended to build
introductory phases of the product life cycle.
4. Persuasive advertising attempts to improve the
competitive status of a product, institutions or
concept. It is used in the growth and maturity
stage of the product life cycle.
5. Reminder-oriented advertising is used in th~, late
maturity and decline stages of the product life
cycle~ ,It attempts fo keep a product's name in
front of the consumer" or to remind people of a
concept' s or institution's importance in our society.
PERSONAL SELLING
Is a promotional presentation made on a person -to- person basis
• with a potential buyer.
SALES TASKS
A sales person's tasks or work can vary significantly from
one company or situation to another. Three basic sales Uisks can
be identified. These are:
a. Order-receiving '
b. Creative selling and
c. Missionary sales.
ORDER~RECEIVIN G
, Involves. the simple processing of an order. Here
customer needs are identified, then pointed out to the customer,
and the order is processed.
Marketing Management 187 ,
CREATIVE SELLING " '
.' '. • :. .~: • .~". • 'G
lS a-_ perst1asivetypeofprorriotion~1 presentation used when the
benefits 'bf using a p~od~ct are not readily- apparent, and/or the
purchase:: of 'a product is' basedona careful' ~nalysis of alter­
natives ~ \ New-product selling is a situation where the salesperson
must be-veri creative if initial orders are to be secured .
MISSIONARY SALES'TASK
Is an . indirect fOf m of selling where the 'representative
markets : thegooq~will of a company and/or provides technical or
operational :,a ss'tstance - to ·the customer. For example, many
technically-b.ased organisations such as IB~ and XEROX ,
provi<te' systems specialists who
~. . .­ consult with their customers.
These people are problem-so~vers ~nd sQm~titi1es, work on
situations not directly ihvolvingtheir emplOyers' products.
THE SALES PROC~SS: ' ,
Seven steps can b,e identified' in the sales -process. These are:
(1), Prospecting and qualifying
"
(2) Approach
(3) , Presen~tion
(4),' Demonstration
,.(5) , , Hapdling objections
'(6) . Closing and "
(7) Follow up
PROSPECTING A~D QUALIFYING
Prospecting is the task of identifying potential customers.
Thesecustdfuers may come from , many sources; these are
Ilrevious customers, friends ,' business associates, neighbours,
other sales personnel, noIl-sales ~ employees in the firm and the
like . Prospects as they (potential customers) are called must be
 188 Business: Concepts and Perspectives
qualified with respect to their financial ability and their authority
to buy.
-_ ArPROACH
Sales-persons should carefully prepare their approaches to
potential customers. All available information about the prospect
should be collected and analyzed. Sales representatives should
always remember that the initial impression given to prospective
buyers often indicates their future attitudes.
PRESENTATION
The presentation stage is when the sales person transmits a
promotional message. The usual method is to describe the
products' major features , highlight its advantages, and to
conclude by citing examples of customer satisfaction.
DEMONSTRATION
Allow the prospect to become involved in the presentation. They
supplement, support and reinforce . the message that the sales
representative has been communicating to the prospective buyer.
HANDLING OBJECTIONS
Many sales people fear objections from the prospect because they
view them asa rebuke to their sales presentations. Actually,
sales persons should welcome objections because they allow them
to present additional sales points and answer any questions that
the consumer has about the product.
CLOSING
Is the critical point in selling. This is when the seller actually asks
the prospect for an order. Several effective closing techniques
have been identified. Sometimes, the salesperson simply asks the
. prospect directly. At other times,alternative purchases are
proposed. And in some cases, the . salesperson does
Mwketing Management 189
something that implies the sale has already been completed, .such
as walking toward a cash register, This f~rces the prospect to say
"no" if he or she does not wartt to complete the sale.
FOLLOW-UP .
Post-sales activities are very important in determining whether a
new customer will become a repeat customer. After the prospect
has agreed to buy, the sales person should complete the order­
processing quickly and efficiently, and assure the customer about
the purchase decision. Later, flle representative should check
with the customer to · see that the product is performing
satisfactorily.
Sales managers are required to perform some managerial
functions which are perform as follows:
i. Analyzing manpower needs and recruiting
ii. Selection of employees for sales positions
iii. Training and development of the sales force.
iv. Organizing the sales force.
v. Providing proper leadership and supervision.
vi. Evaluation of the sales force and making relevant
recommendations for improvement, on promotions,
salaries and wages, adjusunent, and dismissals .
All sales management tasks are performed subject to the
eiwironmental influences .that exist in competitive . business
surroundings.
SALES PROMOTION
Can be defined as those forms of promotion other than
advertising and personal selling that increases sales through non­
recurrent selling efforts. Sales promotion techniques are used to
enhance and supplement !he company's . sales or advertising
efforts. o
 ,

190 Business: Concepts and Perspectives ",

Marketing Management 191

TYPES OF SALES PROMOTION Ii;

o toconsl.uue new products. They are usually designed by
"\
POINT OF PURCHASE ADVERTISING: , InCludes
displays and demonstration which promote an ite,Ill, or ,]pro~ct at
time and places near'the place of actual ,purcha~e decisi(Ouslich as,'J
in a retail store.
SPECIALTY ADVERTISING: In~ludes slicJh item as
pens, calendars and ash trays that are valued at lessthan1 N30 and
are imprinted with the donor's company.
TRADE SHOWS: Are often used to promoteplroducts to
various resellers in the distribution ch.annel. Retalilers and
wholesalers attend various trade conv~n~ions apd sho'ws " wher~
manufacturers exhibit their different lines of pJ;"oducts.., Tr:ade shows
are very important in the toy', furniture and f<!$hionindustr'i es .
SAMPLES: Are free gifts of PfO<;tucts used in am attempt
t£> get public acceptance of the products th~t will result: in future :
sales. Samples are particularly useful in the promotiom of new
specIalists in this fidd. ' " '
p(UCE AND P1UCING STRATEGY: Price is a product's
exchange value. the . value of any item (consumer product,
indllSt~ial product or service) is its exchange value in the market
place'and this is also called the price of the product.
Sirice ' consumers are faced with allocation problems in
¢ onnection with~eir li~i~ed .resources, the p~ice system helps
them makeallocatlon de~lSlons. " ". .
to
. Price alSO help people tedirect their overall economic system.
:ices andtbe volum~ of goods sold also determine the revenue
received by the companY-and they influence profits generally.
PRICI~G OBJECTIVES.
There are three basic categories of pricing objectives.
t hese are:

products. . L Profitability objectives. -'

COUPONS: Are advertising inse~. 9$ package iiQ,clusions , 2. Volume objective.

that are redeemable for price dtscotints wi!hretail~rs. T~hey offer ,
,,a small price disco:unJ and can be helpfu.~ 'i n getting a colO-sumer to
try a new or different product.
PREMIUMS: ,Are ' small gifts .~at ,areprovide~ when a ,
consumer buys a product. They ' ,can 'also b~ hte1pfut in
introducing a new product or g~tting <;onsUJ;ners to try a I different ,'
brand.
TRADING STAMPS: Are similar to premium1S ,in that
they are redeemable for additional merchandise. Tradin1g stamps
a
have been used to build loyalty to certain retailer or suIPplier. '
3. Social and ethical considerations, status-quo
objectives and image ·goals.
PROFITABILIty ,OBJECTIVES:
Are expressed in terms of a return on ' either sales or
investment bearing In mind that profit maximization is the basis
of such economic theory and that profit is ,equal to total revenue
less total expenditure and that total revenue itself is equal to price
multiplied by total quantity sold.
i.e profit = Revenue - expenses apd

PROMOTIONAL CONTESTS: Offering (cash ' or Total Revenue = Price x Quantity sold.

merchandise as prizes are also cons~dered sale~ plromotion

techniques. Promotional contests a~e useful in getting C01nsumers ,

I: '
I
~

L..-.. - --

192 Business: Concepts and Perspectives
VOLUME OBJECTIVES: Are sales maximization concept
which says that management sets a minimum level of profitability
" that is a~ceptable and then tries to maximize sales as it is viewed
as being more important to the company's long-term competitive
position than are short-term profits.
A second volume objective is market share or the
percentage of a market controlled by a certain company's
produ'ct. Market Share objectives have become popular for
several reasons:
1. They are easily measured and can be used · by
management in evaluating company performance.
2. Managers believe that higher sales lead ' to higher
profits because of economies of scale.
3. Many managers possess a psychological drive to grow.
Organization growth is seen as personal growth by
some people.
SOCIAL AND ETHICAL CONSIDERATION: Plays an
I
important role in some pricing. situations, for example, the prices
of some products and services are based the person's ability to
pay a certain price.
Medical insurance premiums, Union dues and retirement
fund contributions are often related to the income of the payers.
It seems reasonable to believe that ~ocial and ethical
considerations will . be even more important in future pricing
strategies of most organizations.
Companies also possess Status Quo pricing objectives.
There are inclined to follow the leader. When one company sets
a price, everyone in the vicinity .goes along with thaL price.
These companies seek stable price that will allow them to put
their competitive efforts into other areas, such as product design
or promotion.
Marketing Management 193
IMAGE GOALS: In pricing strategy is done such that the price
structures of companies are set to reflect the quantity and quality
of the products produced.
PRICES AND INFLATION: Inflation can be defined either in
terms of rising prices or the decreased purchasing power of a
nation'S currency. It has great influence on today's prices.
There are two' traditional types of inflation. These are
emand-pull inflation and cost-push inflation.
EMAND-PULL INFLATION: Occurs when there is too much
?ney relative to the products available. Once maximum
'oduction is reached, (increased consumer demand) supply bids
'ices higher.
COST-PUSH INFLATION: Results from rising costs of l<lbour,
raw materials, interest rates and the like that are passed on to the
...
consumers.
Another tenn which is important to note here is /1
Stagflation. This tenn is used to describe the dual economic j
problems of high unemployment and a rapidly risin~p.!ice ~~
Inflation has forced people to make a number of changes
in their daily lives.
a. Eat less
b. Drink less
c. Travel less
d. Seek for the less superior products that can satisfy
their needs.
e. Called for drastic adjustments on the part of · the
consumers.
 194
Business: Concepts and Perspectives
Marketing Management 195

PRICE DETERMINATION
THE jJi'{EAK-EVEN CHART
Price deter~ination is an eConoinic:Jfi,~Q;Y'. -that:: -assum~s .a Sales Total Revenue (TR)
profit maximization, objective: . Thi~' ..9QJ1gept .says . that ~'the Profit __ Tota] cost (TC)
market price will be set where· the amount of a:piodudde~ired. at
a given price is equang· the :a-~builtthatsuppl.1~fsWifi~pt~vfde at . ~ . ,

that price. It also ' means tIiatthe'amounf demanded 'arid -th.e

amount supplied are in balance or eqgiiibri~ni'. 1--------= 7./ Fixed cost (FC)

Demand Volume
Supply

I
BREAKEVEN ANALYSIS: Is a ,method of determining
the minimum sales volume that is necessary at a certain price
P V -. Equilibrium point level. It involves a consideration of various costs and total
r~venue. Total Cost (TC)(\ is composed of total variable cost
(TVC) and total fixed cost (TFC). .
-- I..'
FIXED COSTS: Are those that renia~'1l stable regardless
of the sales level achieved.
Q V ARIABLE COSTS: Are those that change with the
The schedule of amounts that will be demanded at different price level of production.
levels is called the demand curve while the schedule of the TOTAL REVENUE: Is determined by price and volume
amounts that will be offered in the market at a certain price is sold. Therefore, the Breakeven point is the level of sales that
called the supply curve. will cover all of the company's costs (both fixed and variable).
MARK -UP PRICE: Is the amount that is added to cost to NEW PRODUCT PRICING: New product pricing can
determine the market price. take one of two alternatives: ~ ',

Mark -up percentage = Amount Added to Cost
Price.
The company's Mark-up should be related to its stock turnover
or the number of times that the average and higher stocks are
sold annually. Mark -:up figures should be lower for products
with stock turnover figures. above the industry figures above the
industry average and higher for items with low turnover figures.
Stock Turnover = Sales (or cost of Goods Sold)
Average Inventory
1. The skimming price policy: Which is to,price the new
product relatively high compared to substitute goods and
~en giadually lower it with time.
2. The penetration price policy: Which means that the new
product is priced low relative to substitute items in order
to ensure wide market acceptance for the new product.
3. Pricing Lining: Which occurs when a seller decides to
offer merchandise at a limited number of prices, rather
than pricing each item indiVIdually.

. ;' -.,..)
,J
i , ~ .
Chapter 7
FINANCIAL MANAG'EMENT
On most occasions this course has stressed the two
primary functions which ' must be performed by an enterprise
before customers could be satisfied . These primary functions are
production ' and marketing the wants satisfying products and
services. Along with these functions is an equally critical
function which is the provision of adequate funds for industrial
take-off and .industrial stability.
Unless adequate funds are made available for the
purchases of raw materials, machinery, production, marketing
and personnel, management may find itself in bankruptcy and
relative difficulties.
The two main functions of the financial manager are
deciding on what sources and uses of funds to embark upon .
Financial managers are therefore responsible for both raising and
spending corporate money.
They must have funds available to make purchases and
pay bills as they become due. They must evaluate alternative
sources of funds in deciding upon the least expensive sources.
Their responsibilities also attend to continually monitoring the
level of the company's cash, inventories, and unpaid bills in
order to ensure that excessive funds are not tied up in those
items.
, Financial managers try also to ensure that corporate
finance are being used efficiently.
'.
Marketing Management 197
WHAT IS FINANCE?
Finance from the business point of view can be defined as
the function of effectively obtaining and using corporate funds
because deciding upon the best source of funds and how they should
be used are the key ingredients of the company's financial plan.
HOW FUNDS ARE USED. '"
Funds are used based on two issues. One is the short­
term use while the other is the long-term expenditure.
Short-Term Uses Of Funds
The short-term uses are often referred to as current
assets. (Assets here mean items of value and short-term indicates
that the assets are expected to be converted into cash within a
period of one year) . .
Short-term funds include the following:
1. Cash immediately available (cash at hand) .
2. Marketable securities.
3. Accounts receivables , and
4. Inventories . c,
These short-term funds are very essential for the day-to­
day operations of the business enterprise since they provide he
company with the ability to pay bills, extend credit and promptly
deliver merchandise to its customers.
Cash represents funds readily available for operational uses.
Majority of the company's cash is held as a deposit in the
company' s current account for use in paying bills and salaries and/ ,
or wages. The financial manager' tries to minimize the amount of
cash he desires for business operations as much as possible.
MARKETABLE SECURITIES
Are considered as "near money" since they are
marketable and can be easily converted into cash. The three
moSt common types of marketable securities are treasury bills ,
commercial paper and certificates of deposit.
 198
Marketing Management 199
Business: Concepts arid Perspectives
, , not expected to be converted into cash within onl ) year time
' . ' " . . :" . (. . , " , " " " . ':
, , Treasury Bills: Are short-term borrowing, which covets ' period.
a cOmpan)I'S financial needs for some days or weeks Fixed assets are required by the manufacturer to be used

Certificates of Deposit: , 'Are short-term notes issued by , in producjng selle able products. Fixed assets include:

commercia} banks . The size of the 'note ~nd the matlItity .date~fue , Land, Plant and Equipment:

minimuni. maturities of 30 days , are' quite commoil. " " For L~nd: Land owned by the company is considered to be a

certificate of deposit int~rest rate'is typically hIgher than treasury fixed asset which has an unlimited life span. As a result, the

bills but below that of cOIl}inercial paper. ' , " ' company receives no ' tax benefits for income tax purposes on any

Commercial Papers: Consists of short-terrtlpromissory , land it owns.

notes issued ,by major corporations ,with vety ~igh , credi~ Pl~nt: Refer's. to building owned by a company. Since
standing. ' , buildings ' are likely to deteriorat~ . overtime"their oWners are / /

Accounts Re,ceivable: , Credit sales to the company's ,

allow,ed to 'deduct a certain percentage of the pur~ha$e: price from
'

customers. Generally , companies make credit sales to their ,' income e::ach year. 'Tl1ese deductions, 3:re _commonly called

customers in order' toaitract new customers and/or retain old depreciati~n and they re~ult 'i~ io~ering'-'the' c~mpany!s tax

customers. For many companies accounts receivable may make pay~etlts~ " " '

up form 15 to 20 percent of all assets. Accounts receivable, Ecfuipment: Refers to all items used in production. Since

involve investments by the company and a great deal of attention 'equipment is also expected to dep~eciate with use , companies are

is normally devoted to the efficient management of credit sales. permittect ,to , deduct depreciation on the income, of the firm there

Since accounts receivable represent sales for which payment has

, by reduCi(igtheamount oftaxes they -pay~ . Sincee~ch fixed asset
yet to be received, it represents a use of funds.
, is likely ' to represent major purchases, the financial manager
Inventories: Are major use of cash. Most companies hold . usuallypl~Ys a major role in 'tlie decision' process ass0cia(ed with
inventories in order to satisfy customer demands q~ickly. these pure:hases. , ' " ", ' ' " .' ~ " , "
Inventories therefore represent major fmancial investments. That is , Co',mpaiues , ' typically , delegat~ , fi.~ed assets, pl,1:rc.hasing
to say that cash is continuously invested in raw materials, work in authority on the basis ~f certain naira limits. Thesearr~ngemeI).ts
progress (goods in various stages of production) and in finished usually , m~ke major purchases 'the responsibiI~ty of the board of
goods inventory. The amount of money invested in inventory may directors, ' while lesser Pl1rchases are delegatcl to lower levels 6.f '
vary during the year and is based on the level of demand and managers :in the organization.
supply.
SOURCE_S OF FUNDS
LONG-TERM USES OF FUNDS Th,e choice of the best sources of needed funds 'is a::vital
Long -term uses of funds are referred to as Fixed Assets. finapcial tJlan for a company. The .fm~ncial IUanag~r lias . three '
The key long-term uses of funds are for items of value which are basic SOurv::es ,o f,funds. These are': , - '
 200 Business: Concepts and Perspectives
a. Debt capital or borrowing.
b. Equity capital or stock issues or additional investment by
the owners. of the company and
c. Ploughed -back earnings. Unless the financial manager
is able to generate adequate funds through plough-back
. earnings, the manager will be forced to choose between
funds provided by borrowing (debt capital) or obtaining
them through purchase of stock (equity capital).
SHORT-TERM SOURCES OF FUNDS
Short-term sources of funds are those that must be repaid
within a one- year period. There are four major sources of
short-term funds for a company. These are: .:';­
1. Trade credit.
2 . . Unsecured bank loans
3. Commercial paper
4. Secured short-term loans.
Trade credit typically does not involve a formal contract.
When the purchaser accepts shipped merchandise, the
purchaser in effect agrees to pay the supplier for the goods.
The credit terms are stated in the supplier's invoice or bill,
which accompanies the shipment.
Unsecured bank loans are loans which companies obtain
from commercial banks without pledging any of their assets.
The commercial bank makes such short-term loans based upon
previous experience in dealing with the firm (company) and the
company's credit reputation. Short-term funds are in three basic
forms:
1. Promissor'y notes
2. Lines of credit
3. Revolving s;redit agreements.
Financial Management 201
A promissory note is a traditional bank loan where by the
borrower signs a note stating the terms of the loan including its
length and the interest rate charged, such a loan is for a specific
purpose, such as a temporary increase in inventories for the
Christmas sales season. For major business organizations, with
high credit standing, the interest rate will be at or near the prime
rate.
The prime Interest Rate is the lowest rate . of interest
charged by commercial banks for 'short-term loans to major
corporations or companies with extremely high credit standing.
The prime interest rate will shift based upon availability of funds
and demand for short-term funds. Changes in the Federal
Reserve discount rate usually produce similar changes in the
prime rate.
A line of Credit: Is an agreement between a commercial
bank and a business firm that states the amount of unsecured
short-term credit the bank will make available to the borrower
provided the bank has enough funds available for lending. A line
of credit agreement is not a guaranteed loan. It represents a one­
year agreement indicating that if the bank has · enough available
funds it will allow .the firm to borrow the maximum amount of
money stated in the agreement. The presence of a line of credit
speeds the borrowing process for both the bank and the ·
borrowing company since the bank does not have to examine the
credit-worthiness of the company each time it borrows money.
A Revolving Credit Agreement is simply a guaranteed line
of credit. The commercial bank guarantees the borrower that the
amount of tne credit agreement will be available to the borrower.
Since availability of funds is guaranteed, a commitment fee is
usually charged. The fee applies to the unused balance of the
 202 Business: Concepts and Perspectives
:.,,;.
revolving credit agreement. A coml11-ercial paper is a source of •.'
funds for major corporations attempting to raise f!10ney, , to business firms. These loans are most often made to purchase
A commerci?l paper isa shorHerm piomissory-"not~ c,
issued by maj~r' firrn.s with high credit }t~n~tngs., '" .si#S~ ' _~ ' "
commercial ' 'paper is unsecured and " is , backed ::qnly ' by : ~ th~
reputation ' of ' the issuing firm, . only \:'ery - iarg~-" firms with
unquestioned financial stability are ~ble Jo "issl!e it., Even with
large companies, risk is still present. '·,
Secured short-term loans are the oilly 's ouice,of funds for
smaller companies. Secured loans ~equire the borrower' to pledge
such collateral as account. receivable or inventory: ' An agreeinent
is made between lender and bart-ower, which lists the amount of
the loan, the interest, rate and due date, and the collateral pledged
, by the borrower. A copy ofthis agreement is filed in a pliblic
office in the state office. By filing the agreement future lenders
are provided with information as to what assets of the borrower
are free to be used as 'collateral. Factoring outright sale" of
accounts receivable could be sold at a discount to raise funds for
operation by som,e firms. ' :
" ~'
.LONG-TERM SOuRCES 'OF FUNDS '
WhUes,hort-term sources of cas~ prove satisfactbry in,financing
c~rrent purGh~ses
"t-'
needs for ' cash or inventory, major ,of )and": ,
plant and' equipment require funds for a mu'ch l~nge~ pe~i~d at'
time.
business firm has several possible long-tenn firiailc'i<il sources, '
. .
available. These are: .
,1. Long-term loans
2. Bonds
3. ,Equity financing
earnings for future expansion.
c
Financial Management 203
Long-term loans are made by various financial institutions
machinery and equipment.
The cost of long-term financing is generally higher than
short-term loans due to greater uncertainty about the future.
The bond represents a" method of long-term borrowing by
corporations or government agencies.
The corporate bond is issued according to the terms of a
legal contract called the bond indenture, which contains the
provisions of the loan: its amount, interest rate and maturity data
for the bond.
, Corporate bonds have essential characteristics as long-term
loims. Issuing bonds to raise money is generally reserved only for
those large companies with a regional or national reputation.
Equity funds are ,obtained from the sale of stocks in the
company or by reinvesting company earnings,
Sales of stock provide cash in flows for a firm and a share
in ownership by stock purchasers. The sources of equity funds for
a company include sales of stocks and retained earnings. Stock
sales are possible only for corporations.
, The sale of stock, both preferred and common, represents
the true source of equity funds to the business firm. Stocks may
be defined as shares of owner.ship in the corporation. The
stockholders are considered the real owners of the firm , since they
are not guaranteed any dividend payment.
Retained earnings are funds that result from reinvestment
of earnings in the firm. A company may have funds available
after paying all claims, including taxes. One choice is to
distribute the earnings to stockholders in the form of cash
dividends. At least a portion of company earnings are kept to
finance future growth. Rapidly growing firms retain most of their


204
Chapter 8
ACCOUNTING FUNCTION
WHAT IS ACCOUNTING?
Accountants are responsible for developing accounting
Accounting is the language of business. It can be
formally be defined as the process of measuring and
communicating financial information to enable interested parties
inside the firm and outside groups to make informed decisions.
~ .;
Accountants are responsible for gathering, recording, reporting
and interpreting financial information which describes the status
and operations of a firm and which aids in decision making.
Inside the firm, accounting information aids management
in planning and controlling daily operations, as well as in long­
range planning. Owners of the film rely on accounting data to
decide how well the firm is being operated. Union officials use
accounting data in contract negotiations.
Outside the firms potential investors use accounting
information to help them decide whether to invest in the
company . Bankers and other creditors must make decisions on
whether or not to lend money to a firm, and accounting
information gives them an insight into the company's financial
soundness.
Accounting records are also used for determining credit
ratings. Such government agencies as the Internal revenue
service use accounting information to evaluate the company's tax
payments for the year.
: I
A ccounting Function: What is Accounting? 205
ACCOUNTING VERSUS BOOK-KEEPING
Book-keeping is the chief clerical phase of accounting.
Book-keepers are primary responsible for the systematic
recording of a company's financial transactions. They provide the
data that the accountant uses .
systems for classifying transactions , developing accounting
method which involves summarizin~ transactions and interpreting
financial statements.
Accountants are decision makers, while book-keepers are
trained primarily for the largely mechanized tasks of record-
keeping .
THE ACCOUNTING PROCESS
The basic data used in accounting are financial
transactions between the firm and its employees, suppliers,
owners, bankers and various governmental bodies. Weekly
payroll cheques result in cash outflows for the compensation of
employees. A payment to a supplier results in the receipt of
needed raw materials for the production process. Prompt
payment of bills preserves the finn's credit rating and its ability
to obtain future loans.
THE ACCOUNTING JOURNAL
Each financial transaction is recorded in chronological
order in a book called a journal. The journal can take the form
of computer print outs in a company with computerized
accounting systems.
 Accounting Function 207
206 Business: Concepts and Perspectives
claims of the creditors are shown as accounts payable or ' notes
Examples of a general journal entry in 1979. payable. Wages and salaries owed to employees also represent
July 1 Land 10,000 liabilities known as wages payable.
"
Building 30,000
The owner's equity represents the proprietor's, the
To record purchase of land and
building for cash 40,000 ' partner's, or stockholders' claims against the assets of the firm,
July 10 Furniture 20,000 or the excess of all assets over all liabilities.
Accounts payable Assets = Liabilities + Owner's equity
ABC furniture Ltd 20,000 Assets = Liabilities + Stockholder's ~quity
To record purchase of furniture on
Assets = Liabilities ' + Partner's equity.
Account 20,000
July 20 Accounts payable-
ABC furniture Ltd AGCOUNTING STATEMENTS
Cash 15,000 The relationship expressed by the accounting equation as
To record payment on account 15,000 above is used to develop t.Qe three ,primary qccounting statements.
July 25 Accounts Receivable -'
1. The balance sheet (
Adam sales Revenue 25,000
To record sales of merchandise on account 25,000 2. The income statement
July 28 Cash 5,000 3. The statement of changes in financial position.
(,
Accounts Receivable - Adam
To record collection on account 5,000 THE BALANCE SHEET
A balance sheet shows the financial position of a company
ASSETS as of a particular date. It ' shows the status of the company's
The 'assets of a business are everything of value found in assets and equities at any moment in time. "
the business . Cash accounts receivable and notes receivable ,,' Balance sheets should be prepared at regular intervals to
(amounts owed to the business through credit sales), land, provide information to management concerning 'the financial
building, supplies and marketable securities are all examples of posit.ion of a company. Most companies prepare balance sheN at "
assets. least once a year, and often for each month or quarter. The
'balan~e sheet consists of current assets and stockholder's equity.
EQUITIES = LIABILITIES AND OWNER'S EQUITY Current assets consist of cash and other assets that can be
Equities are claims against the assets of a business. The readily used in the operation of the business within one year.
two major classifications of individuals who have equities in a Current assets are usually listed in order of their , expected'
firm are the creditors (liability holders) and the owners. liquidity, or the speed a~ whiFh they could be converted. to casp.. .,
The Liabilities of a business are ,' everything , owed to Other issues in{rolv~d in thi'current assets sections of a -I3alance
creditors. They are the claims of the firm's creditors. When the
firm makes credit purchases for inventory, land or machinery, the
208 Business Concepts and Perspectives
sheet are marketable securities, accounts receivable, and
inventories. Prepaid expenses, the final current asset are services
such as insurance, that have already been paid for but have not
yet been used up.
Net property, plant and equipment are assets to be used
over a long period of time in the operation the business . These
fi xed assets include such items as land, factories and machinery.
Long-term receivable are debts of the firm's customers that are
not due to be repaid within the next twelve months .
LIABILITIES: Like assets, are also divided into current
and long-term claims. The term current liabilities is used to
id entify those claims which will be repaid within a one-year
period . Accounts payable and notes payable are the liability
counterparts of accounts recei vable and notes receivable .
Accounts payable represents credit purchases by the firm which
must be repaid within a one-year period.
Notes payable are loans represented by a written
document such as an IOU for a longer period of time than one
yea r. The portion of notes payable due in the current year is
li sted as a current liability. Notes payable due after one year are
included on the balance sheet as a long-term liability.
THE INCOME STATEMENT: Reflects the operations
of the company over a period of time. The purpose of the
income statement (also called a statement of earnings) is to show
the profitability or unprofitability of a firm during a period of
time sllch as a year, a quarter or a month, and to provide basic
data to help the investor analyze the possible reasons for such
results. The income statement is even sometimes called a profit
and loss statement.
Accollnting Punction: What is Accounting? 209
the income statement is the deduction of costs and expenses,
including taxes, from income in order to determine the profit of
the firm for that time period . The equation for the income
statement is:
Income - expenses = Net profit (or loss)
Income for sales shows the total sales to customers during
the accounting period. Sales represent the major source of
income for the company . Other income (or expenses) represents
net profit (or loss) from such transactions as the sale of
machinery , rent reviewed from property and interest earned on
investments during the period .
In order to determine the profit earned for the year, the
expenses involved in producing the goods that were sold must be
deducted from income .
Next, the selling and administrative expenses of the period
must be deducted from income . These expenses include
advertising, sales commissions, officers ' salaries and rent.
Deductions of these expenses from income leaves income before
taxes. Once taxes are deducted, the net profit (or loss) for the
period is determined.
INTERPRETING THE FINANICAL STATEMENTS
Once the financial statements have been produced from
the financial data colleted for the period , the accountant must
interpret the statements. The fact that a firm earned a profit for
the past year is of interest, but of equal interest is the profit it
should have earned. A number of technique ~ have been
developed for interpreting financial information in order to aid
management in planning and evaluating the operations of the
company from day to day and month to month . One common
technique of interpreting income statement is the use of
 Accounting FiinctiiJn 211
210 Business: Concepts and Perspectives

Acid Test Ratio ,Quick Assets

:=;::
percentage of sales. When the cost and expense items are shown
Current liabilities
in percentage form, they can quickly compare with the income
i.e Nl12. 823, 000 '= 1.1 to 1
statements of previous periods or with other companies in the
N101, 178, 000
industry. In this way, unusually high or low 'expenses will be
Cash = N7,855,OO
apparent to management, and corrective actions may be taken
Marketable securities = N128,000
should this become necessary.
Accounts and notes receivable N 104,840, 000
A second technique in use is through ratio analysis. By .
comparing the company r~tios to industry standards, problem
If',TVENTORY TURNOVER: The inventory turnover rate
areas can be pinpointed. Among the most commonly used ratios
indicates the number of times the merchandise moves through the
are:

business. It is calculated by dividing the cost of goods sold by

' 1 The current Ratio

, 1
the average .amount of inventory. .
The Acid Test Ratio

Inventory turnover = Cost of goods sold

Inventory Turnover

Average inventory ,
Earnings Per Share

The turnover rate can be compared with industry standards and

Total Debt to Net Worth Ratio

used as a measure of efficiency.

The Ratio of Net Income to sales.

EARNINGS PER SHARE: One of the most commonly used

THE CURRENT RATIO: The current ratio compares current
ratios in business is earnings per share. This ratio indicates the
assets to current liabilities. It is designed to measure the ability
amount of profits earned by a company for e'ach share of common
of the company to pay i~s current debts as they mature.
stock outstanding.
Current Ratio = Current Assets

@urrent Liabilities

Earnings per share = Net Earnings - Provision for ,preferred Dividends

I.e. N 319,522.00 == 3.210.1 Average number of common shares outstanding.
N101, 178.00
DEBT TO NET WORTH RATIO: The debt to net worth ratio
THE ~ ACID TEST RATIO: The acid ratio or quick ratio,
is designed to measure the,extent to which the operations of the
measures the ability of the firm to meet its current debt on short
company are financed by borrowed funds. It indicates the
notice. The ratio does not include inventory or prepaid expenses.
amount of funds contributed by creditors as compared with the
t; Only cash, marketable securities and accounts receivable; all
total funds provided.
highly liquid assets, are included.
212 Business: Concepts and Perspectives 'J 1:1
7)'

Debt to net worth ratio Total liabilities

=
Stockholder's Equity
N276, 257, 000 = 6.0
N457,798,000

RATIO OF NET INCOMES TO SALES Chapter 9

The n~tioof net income to sales measures company

profitability by comparing net income and sales. i.e
THE PRODUCTION FUNCTION

,"Net Income
Sales. Society allows businesses to operate only so long as the
husinesses make a contribution to its members. By producing and
ivn ~ marketing desired goods and services, businesse& satisfy this
societal commitment. They create, according to Boone and Kurtz
(1976), what economists call utility, which is the want-satisfying
power of a product or service. ; There are four basic kinds of
utility as we have noted in our discussion in marketing. These
are time, place, ownership and fOrm utility.
Time, place, and ownership utility are created by
marketing. They a~e created when products are available to the
consumer at a c.onvenient 10catiOIi when he wants to buy them and
facilities are available, where title to the products may be
transferred to him at the time of purchase.
Form utilIty is , the creation of utility through the _
conversion of raw materials and other inputs into finished '
products and services. The ~reation of form utility is the
responsibility of the production !function ' of an organization and
this is the main subject of this chapter. What then is production?
Production: This is the process of using people and machinery
to convert materials into finished products and services. And
production management,. also called operations management,
represents the management of a process in which resources are
used to produce products and services.

214 Business: ConceptS and Perspectives
RESOURCES USED FOR THE PRODUCTION PROCESS
Whether an organization produces products or services, it
-.needs a production process also called a conve,rsion process or a
series of tasks in which resources are used to produce a product
or service. A process identiJies the mixture of resources
allocated for production, the assignment of tasks, 'and the
sequence of tasks (Madura, 1999). Accordi~g to Madura, many
possible production processes can achieve the production of a
. . '
~;pecific . product. Thus, effective production management can
develop ~ efficient and high -:-quality 'production process for~
producing . specific , products .and . services. Specifically,
production management can achieve efficiency by determining the
proper amoUllt of materials to use; the proper mix of resources to
use , the proper assignments of 14sks, and the proper sequence of
ta~ks. The profits and value of each company are influenced by
. it~production management. , and inevitable asset to manufacturers or producers. The building
The main resources ti}at organizations use for the
production process are human resources (employees), materials,
and other resources such as building, machinery, and equipment.
HUMAN RESOURCES , having to sell the ,building. M~chlnery and equipment are also
Companies must identify rbe type of employees needed for
production. These employees must either be skilled or unskilled
labour. Skilled labour is necessary for some forms of production,
while unskilled labour can be qsed for other forms as well. A
point to note here is iliat some :forms bf production are labour­
intensive while others are not. Labour-intensive production
processes require more labour (employees) than materials. The
operating expenses involved in "hiring human resources in this
case are dependent on both the nllmber of emplo,yees and on their
skill levels. Because of the ~mployee skill level required, a
The Production Function 2 15
computer . development company incurs much larger salary
expenses than a supermarket store.
MArERIALS
The materials used in the production process are normally
transformed by a company's human resources into a final product.
For example, tire manufactures rely on rubber, automobile
manufactures rely on steel, and :book publishers rely on 'paper.
Service organizations such as travel agencies and investment
advisors do not rely as much on materials because they do not
engage in manufacturing (Madura, 1999).
OTHER RESOURCES
Building is needed for most forms of production.
producers or manufactures use factori~~~:n~ ofii~es during every
period of production. A building therefore becomes a permanent
or site may be owned or rented by the company. Since the
purchase of a building can be eX-pensive, some companies simply
rent their operational areas (building site). Renting as it were also
allows the company to move at the end of the rent period without
needed for many manufacturing : companies. These, too, can be
bought or rented depending on the manufacturers capital base at a
given point in time and or the intensity of the production period.
COMBINATION OF FACTORS OF PRODUCTION
FOR PRODUCTIVE MEANS
Managers of organizations try to utilize the resources
available to them in a manner that achieves the production of
 216·
Business: Concepts and Perspectives
The Production Function 217

goods and services at a low cost. This is called cost minimization

or operational efficiency. They combine their various resources
with the use of work stations or assembly lines. A work station is
an are~ in which one or more employees are assigned a spt(cific
task. A work station may require not only employees but also
equipment and machinery.
An assembly line consists of a sequence of work stations,
in which each work station is designeq- to cover .speCific phases; of .
the production process. The production of a single product may
require several work stations, with each s~tion using'employees' i
. .
machinery, and materials : Since the cost of all these resources .
along with the building can be sub~tantial , efficient management
of the production process can reduce expenses which can be
converted into higher profits.
Employees ilse bUildings, machinery and equipment to
convert materials into a product or service. For example,
printing companies train employees to use their machines for
typesetting, printing and binding, which produces bOoks. The
travel agency trains employees to use their offices and computers
for hotel and airline reservations.
Many different combinations of employees can be
allocated among various tasks. At one exn:eme, one employee
may Cover all tasks of the production process. However, most
production processes are more efficient if different employees a,re .
assigned different tasks. · In .this way, employees can iltilize their
unique types of expertise. Actording to Madura (1999)
companies frequently attempt to improve their production process
so that they tan reduce their operating expenses and . increase
FACTORS TO BE CONSIDERED FOR AN
EFFICIENT PRODUCTION PROCESS
The following are highly indispensable factors that are
essential in the achievement of a unique and successful production
process: (l) selection of a production site, (2).selection of a
design and layout and (3).production control systems
identification. ...
SELECTION OF GOOD OPERATION SITE
A critical d-ecision in production management is the
selection of a good site for the production process . Location or
site can significantly affect the cost of production and the firm's
ability to compete against other' firms . Site selection can also
affect revenue because it may influence the demand for the
product produced if the product is to be sold at the site.
Some essential factors also affect the site decision. These
factors are as follows:
1. The cost of workplace space.
2. Cost of labour
3. Tax incentives given or allowed to organizations
due to location
4. Sources of demand for goods and services.
5. Access to adequate and sufficient transportation
facilities due to some physical feature
consideration-topology / geography.
6. Sources of suppl~ of labour, either skilled or
unskilled: J

profits. 7. Sources of power :.

8. Local regulations. and
9. Community living;:conditions,
 )218
Business: Concepts and Perspectives
. - '.
SELECTION OF THE DESIGN AND LAYOm
Once a site for a manufacturing plant or office is chosen,
the design and layout must be determined. The design represents
the size and structure of the plant or office While the layout '
represents the arrangement of the machinery and equipment
within the factory or office space provided.
The design and layout "decisions according to Madura
(1999) directly affect operating expenses bec~tlse they detennine
the costs of rent, machinery, and equipment; They may even
affect the finn's interest e1penses because they influence the
I
I
amount of money that firms borrow to purchase property or
machinery. Firms can improve their profits by using innovative
ideas for their plant design and layout. Companies may assign
~n1ployee teams the responsibility of identifying mefu6ds to make
their plant design .and layout more efficient.' Employees may be
highly motivated to offer .cost -cutting solutions When they realize
that the alternative solution involve layoffs.
. The fOllowing factors are found to have very significant
influence on design and layout of a production system:
1. Site' Characteristics -high -land; low land situations, size,
etc.
2. PrOduction process anticipated -- ' A product layout,
level that minimizes costs . It requires the management of
specialized components etc.
A product layout . POSItIOns the tasks to be
perfcrmed in the sequence that they areassig.Q,ed. A
fixed-position layout is one in which employees go to the
positioI}! of the product, rath~r than waiting for the product
to come to them While a flexible manufacturing is
production process that can be easily adjusted to .
accommodate future revisions in layout situations.
3. Product line desired
.'
!l
The Production Function 219
4, Desired production capacity-volume of goods and services
desired. . (J" , , :
~ t~"
PRODUCTION CONTROL SYSTEMS
Production 'cQJltro1 involves purchasing materials,
inventory control, routing, scheduling, and quality control
1. Purchasing materials: involves selecting a supplier
of material properly and the issue of prompmess
and reliability are essential.
2. Obtaining volume discounts from suppliers to
enable reinvestment of funds for expansion and
improved performance.
3. Delegating production to suppliers by the use of
outsourcing, which involves the act of purchasing
parts from a supplier rather than producing the
parts. This act ;or strategy of delegating some
production tasks : to suppliers is referred to as
deintegration.
INVENTORY CONTROL
Inventory control is the process of managing inventory at a
materials, inventories, work-in - I process inventories and finished
goods inventories.
a ontrol of materials Inventories. When firms carry
excessive inventories of materials, they may need to borrow more
funds to finance these inventori~s. This increases their so-called
carrying costs or their c6sts of maintaining inventories. While
they attempt to reduce their carrying costs by frequently ordering
small amounts of materials, t;bis strategy increases the cost
involved in placing orders. Any . adjustment in the materials
 220
Business: Concepts and Perspectives The Production Function 22 1

purchasing strategy will nonnally reduce carrying costs at the a

Michelin (Nig) Limited, tire producing company in Port
expense of increasing order costs or vice versa. Harcourt, Nigeria,had at one time attempted to reduce the time
A popular method for reducing carrying costs is the "Just­ from when raw materials are purchased until the completion and
in-time" (lIT) system originated by Japanese companies . This sale of the final product. This reduced the length of time during
system attempts to reduce materials inventories to a bare minimum which funds must be borrowed t,o finance purchases, because the
by frequently ordering small amounts of materials. It can reduce
· company receives cash from the sale of its products as soon as
costs of maintaining inventories. However, there is a cost of
managerial time required for frequent ordering and a cost of possible. Tire sales are by cash,
frequent deliveries. The "Just-in-time" system could result in a
shortage if applied improperly. · CO~kOL QF FINISHED GOODS INVENTORIES
The "Materials requirements planning" (MRP) system is a " As demand for a company's products changes' over times,
process for ensuring that the materials are available when needed, managers need to monitor the . anticipated supply-demand
It normally requi'res the use of comput¢r's. TheMRP system helps ' differehtial. If an excess supply of a prod.uct is anticipated,
managers detennine the amOunt of specific ma,terials that should companies could avoid excessive inventories by redirecting their
be purchased at any given time. The first step ofMRP is to work · resources toward the production '9 f other products. Alternatively,
backward from the finished product toward the beginning and companies that experience an excess supply of products could
detennine how long in advance materials are needed before
continue their normal produdtion schedule . and implement
products are completely produced. As a company forecasts the
marketing strategies that would ihcrease. demand for products and
demand for its product in the future , it can determine the time at
which the materials need to arrive to achieve a production level services.
that will accommodate the forecasted demand, If excess demand is anticipated, companies become
concerned about possible shortag~s and must develop a strategy to
CONTROL OF WORK -IN - PROCESS INVENTORIES boost production volume, They may schedule over time for work
Companies must also manage their work-in-process
or may hire new workers to achIeve higher levels of production.
inventories, which represent inventories of partially completed
But when the forecasted demand is underestimated, the firm may
products. They attempt to avoid shortages of all three types of
not produce a sufficient volume to accommodate all customers.
inventories. The direct consequence of a shortage in raw
Many companies have, in recent times , improved their
materials inventory or work - in-process inventory is an
efficiency by using computer networks . Changes in inventory
interruption in , production, while the direct consequence of a
levels are updated as soon as a customer order is received .
shortage in completed goods is foregone sales. A shortage of
.completed products inventory is commonly caused by a shortage ·ROUTING: Routing, in production management, represents the
ofraw material inventory or work-in-process inventory. sequence or route of tasks necessary to complete the production of
a product. Raw materials are yommonly sent to various work
 222 Business: Concepts and Perspectives
The Production Function 223

stations so that they can be used as specified in the 'production

managers must search for ways to make up the time on other
process. A specific part of the production process is completed at
tasks.
each work station. For example, the production of a bicycle may
One method of scheduling tasks of a special project is to
require: (1) using material to produce a bike frame at one work
use in GANTT CHART, ,named after it creator, Henry Gantt,
station, (2) assembling wheels at a second work station, and (3) , ,

packaging the frames and wheels that have been assembled at a
third work station.
The routing process is periodically evaluated to determine
whetller it can be improved to allow a faster or less expensive
prodllction process.
SCH~DULING: Scheduling is the ac(of setting time periods for
each task in the production process. A production schedule is a
which illustrates the expected timing for "each task ' within the
production process. To show how a Gantt Chart can be applied,
consider an example in which a chemical company must produce
five hundred gallon containers of chemical Z for a manufacturer.
The production process involves creating large amounts of
chemicals X and 'Y, w1;ich are then mix,ed in a tank to produce
chemical Z. Next, chemical Z must be poured in gallon
containers and then packaged in crases to be delivered. While the
, I

two tasks can be completed at the same time, each remaining task
plan for the timing and volume of production tasks (Madura
cannot begin until the previous task is completed .
1999)·
Another method of sched~ling tasks of a special project is
For example, the production schedule' for a bicycle may
the PROGRAMME EVALUATION AND REVIEW
set a time of two hours for each frame to be assembled and one 1
TECHNIQUE (PERT), which sthedules tasks in a It)lanner that
hour for each wheel to be assembled . Scheduling is useful
'will minimize delays in the production process.
because it sets the expected amo:unt of production that should be
The PERT involves the following steps:
achieved at each work station over a given day or week.
1. The various tasks involved in the production
Therefore; each employee recognizes what is expected.
process are identi~ed.
Furthermore, the scheduling allows managers to forecast how
2. The tasks are arranged in the order in which they
much will be produced by the end of the day, week, or month.
must take place; this sequence may be represented
on a chart with arrows illustrating the path or
SC!mDULING FOR SPECIAL PROJECTS
sequence of the pr'pduction process, and
Scheduling is especially important for special long-term
3. The time needed for each activity is estimated.
projects that mus} be completed by a specific deadline. If many
The PERT was first developed for militaTy uses in
related tasks must be completed in a specific sequence,
scheduling can indicate when each task should be completed. In producing guided missiles for the Polaris nuclear submariue, but
this way managers can detect whether the project is likely to be was quickly modified for use by industry. In actual practice a
PERT Network may consist of thousands of events and cover
completed on time. If any tasks are not completed on time,
months of time. Complex corpputer programmes are used in
 224
Business: Concepts and Perspectives The Production Function 225

developing the network and in finding the critical path among the
maze of events and activities. I Juality level to determine whether the quality ' needs to be
improved. Quality control involves the measuring of products
DISPATCIDNG against established quality standards. , Such checks are necessary
10 spot defective products that areoccasibnally produced ~nd 'to ·
Dispatching is that phase of production control that issues
instructions to each department on what work is to be done and see that they are not shipped to the company's customers.
the time allowed for its completion. The dispatcher authorizes the Measuring devices for monitoring quality levels of a firm's out
put, according to Boone and Kurtz (1976); involve visual
performance of certain jobs, provides instructions for their
performance, and lists priorities for each job. inspection, electronic sensors, and X-rays. This particular aspect
of production control may occasionally result in changing
FOLLOW-up production practices. A high rate of rejected products can lead to
required changes in equipment, raw materials used in the
Boone and Kurtz (1976) observed. that since even the best
products, or additional training for workers whq are employed in
plans sometimes go awry, some means of follow up must be
the production process.
,available ' to keep management aWare of problems as they arise.
Follow up is that phase of production control that spots problems
in the production process and informs management of needed
adjustments: These problems c;ome in many forms: a machine
malfunction, delays in shipment' of vital materials~ or employee
<,.bsenteeism may result in production delays. ' These delays must
be reported to production control department so that adjustments

in production schedules can be made. A delay in the delivery of a

particular component may require new assignments by the

dispatcher to work areas affected by this delay.

QUALITY CONTROL
Quality control is a process of determining whether the
quality , of a product , meets the desired quality level, and
identifying improvements (if any) that need to be made in the
production process. Quality can be measured by asseSSing the
various characteristics that enhance customer satisfaction. The
actual quality of a product cart; be compared with the desired
226 Business: Concepts and Perspectives
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 ~~.

- , LJ
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Box 1630 OWERRI, · Nigeria
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ISBN: 978-3020-37-2