Int roduc t i on t o B usi ne ss

Lesson 01
INTRODUCTION

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CONCEPT OF BUSINESS
Literally, the word “business” means the state of being busy. Generally, the term business includes
all human activities concerned with earning money. In other words, business is an activity in
which various persons regularly produce or exchange goods and services for mutual gain or profit.
The goods and services produced or purchased for personal use are not included in “business”.

DEFINITION

1. According to L. H. Haney
“
Business may be defined as human activities directed toward providing or acquiring
wealth through buying and selling of goods.”

2. James Stephenson says that:

“
Every human activity which is engaged in for the sake of earning profit may be called
business.”

3. In the words of B. W. Wheeler

“An institution organized and
operated to provide goods and services to
the society, under the incentive of private
gain” is business.

Structural Diagram

CHARACTERISTICS

Following are the essential characteristics of a good business:

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1. Capital
Capital is the lifeblood of every business. It is the most essential and important element of
business. In case of deficiency, loans can be taken from various financial institutions.

2. Creation of Utility Utility is an economic term referring to that characteristic of a certain

commodity, which can satisfy any human need. Business creates utility, which gives benefit to
the entire society as well as the businessmen.

3. Dealing in Goods and Services

Every business deals with sale, purchase, production and exchange of goods and services for
some consideration.

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4. Employment
Business is a good source of employment for its owners as well as for other people, for
example, employees, agents, transporters etc.

5. Islamic Process
Business is an Islamic way of earning living. Income from business is known as profit, which is
Rizq-e-Halal. The Holy Prophet Muhammad himself did prosperous business.

6. Motive The motive of business is to earn profit. Otherwise it will not be termed as
business.

7. Organization
Every business needs an organization for its successful working. A proper organization is
helpful in the smooth running of business and achieving the objectives.

8. Productions or Purchase of Goods

A businessman deals in production or purchase of goods. These goods are supplied to the
people. So, it is necessary that more goods should be produced so that demand of people may
be fulfilled.

9. Regular Transaction
Business has a nature of regular dealings and series of transactions. So, in business, only
those transactions included which have regularity and continuity.

10. Risks and Uncertainty

Business involves a large volume of risk and uncertainty. The risk element in business keeps a
person vigilant and he tries to ward off his risk by executing his policies properly.

11. Sale or Transfer for value Another characteristic of business is the

sale or transfer of goods for value.

12. Social Welfare

Business does not only satisfy the producer, but also the consumer when products are offered for
sale at low prices in markets.

NATURE OF BUSINESS

The following points state the nature of business in brief:

1. Economic Activity

Business is an economic activity as it is concerned with creation of wealth through the

satisfaction of human wants.

2. Human Activity

Business is an economic activity and every economic activity is done by human beings. Thus,
business is one of the most important human activities.

3. Social Process

Business is run by owners and employees with the help of professionals and customers. Thus,
business is a social process.

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4. System

Business is a systematic arrangement of various elements, which leads to the attainment of

particular objective, according to a well-established plan.
Components and Scope of business

BUSINESS

The word “Business” includes all human activities concerned with earning money. In other words,
business is an activity in which various persons regularly produce or exchange goods and
services for mutual gain or profit.

COMPONENTS OF BUSINESS
Business bears the following components:
� Industry
� Commerce

Industry Commerce

INDUSTRY

Industry is connected with the production and preparation of goods and services. It is a place
where raw material is converted into finished or semi-finished goods, which have the ability to
satisfy human needs or can be used in another industry as a base material. In other words,
industry means that part of business activity, which is concerned with the extraction, production
and fabrication of products.
KINDS OF INDSTRY

1. Primary Industry
2. Secondary Industry

Primary Industry
Secondary Industry
(a) Extractive (a) Construction
(b) Genetic (b) Manufacturing
(c) Services

1. PRIMARY INDUSTRY
Primary industry is engaged in the production or extraction of raw materials, which are used in the
secondary industry. Primary industry can be divided into two parts:

a) Extractive Industry
b) Genetic Industry

(a) Extractive Industry

Extractive industries are those industries, which extract, raise or produce raw material from
below or above or above the surface of the earth. For example, fishery, extraction of oil, gas
and coal etc.

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(b) Genetic Industry

Genetic industries are those, which are engaged in reproducing and multiplying certain species of
animals and plants. For example, poultry farm, fishing farm, diary farm, plant nurseries etc.

2. SECONDARY INDUSTRY
These industries use raw materials and make useful goods. Raw material of these industries
is obtained from primary industry. Secondary industry can be divided into three parts:

a) Constructive Industry
b) Manufacturing Industry
c) Services Industry
(a) Constructive Industry
All kinds of constructions are included in this industry. For example, buildings, canals, roads,
bridges etc.

(b) Manufacturing Industry

In this industry, material is converted into some finished goods or semi-finished goods. For
example, textile mills, sugar mills etc.

(c) Services Industry

These industries include those industries, which are engaged in providing services of profes-
sionals such as lawyers, doctors, teacher etc.

COMMERCE
Commerce is the second component of business. The term “commerce” includes all activities,
functions and institutions, which are involved in transferring goods, produced in various
industries, from their place of production to ultimate consumers.
In the words of Evelyn Thomas:
“
Commercial occupations deal with the buying and selling of goods, the exchange of
commodities and distribution of the finished goods.”

In simple words, “trade and aids to trade” is called commerce.

SCOPE OF COMMERCE

The scope of commerce can be explained as:

1. Trade
2. Aids to Trade
Commerce

1. TRADE
Trade is the whole procedure of transferring or distributing the goods produced by different
persons or industries to their ultimate consumers. In other words, the system or channel, which
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helps the exchange of goods, is called trade.

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TYPES OF TRADE

There are two types of trade:

Home trade
Foreign Trade

Home Trade Foreign Trade

(i) Wholesale Trade (ii) Import Trade
(ii) Retail Trade (ii) Export Trade
(a) Home Trade
The purchase and sale of goods inside the country is called home trade. It is also known as
‘
domestic’, ‘local’ or ‘internal trade’. Home trade has two types:
(i) Wholesale Trade
(ii) Retail Trade

(i) Wholesale Trade

It involves selling of goods in large quantities to shopkeepers, in order to resale them to the
consumers. A wholesaler is like a bridge between the producers and retailers.

(ii)Retail Trade
Retailing means selling the goods in small quantities to the ultimate consumers. Retailer is a
middleman, who purchase goods from manufacturers or wholesalers and provide these goods to
the consumers near their houses.

(b) Foreign Trade

Trade or exchange of goods and services between two or more independent countries for their
mutual advantages is called foreign trade. It is also called international trade. Foreign trade has
two types:

(i) Import Trade

(ii) Export Trade
(i) Import Trade When goods or services are purchased from other country it is
called import trade.
(ii) Export Trade When goods or services are sold to any other country it is
called export trade.
2. AIDS TO TRADE
Trade means buying and selling of goods, whereas, aids to trade means all those things which
are helpful in trade.
(a) Banking
(b) Transportation
(c) Insurance
(d) Warehousing
(e) Agents
(f) Finance
(g) Advertising
(h) Communication

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(a) Banking
In daily business routine, commercial banks and other financial institutions help the seller and
the buyer in receiving and the buyer in receiving and making payments.

(b) Transportation
The goods which are manufactured in mills and factories, reach the consumers by different
means of transportation like air, roads, rails, seas etc.

(c) Insurance
The transfer of goods from one place to another is not free from risk of loss. There is a risk of
loss due to accident, fire, theft etc. The insurance companies help out the traders with this
problem through insurance policy.

(d) Warehousing
The manufacturers today, produce goods in large quantity. Therefore, a need for warehouses
arises in order to store the manufactured goods.

(e) Agents
They are the persons who act as the agents of either buyer or seller. They perform these
activities for commission.

(f) Finance
A large amount is needed to set up an industry. Financial institutions provide long-term
finance to the producers. The producers alone are unable to manufacture goods without
financial help.

(g) Advertising
The consumer may sometimes, not know about the availability of goods in the market. The
producer must sell his goods in order to remain in business. Advertisement is an easy way to
inform the large number of customers about the goods. This can be done through TV, news-
papers, radio etc.

(h) Communication
The producers, wholesalers, retailers, transporters, banks, warehouse-keepers, advertisers and
consumers live at different place. This post office, telephone and other similar media is very
useful for promotion of trade and industry.
What are the qualities of a good businessman?

QUALITIES OF A GOOD BUSINESSMAN

The modern business is very complex. Due to scientific and technological development,
changes are taking place very fast in every business field. Following are the basic personal
skills or qualities which a good businessman must possess:

1. Ability to Plan
A businessman, if he wants to shine in business, must have the ability to plan and organize it.
2. Activator
He had to activate his workers. If he activates his workers then this is good for business.
3. Bold or Courage
Courage is a great asset of a businessman. A good businessman should be a courageous
and bold person. May be his some angry decisions gave him loss in future, so he has to be
courageous and be bold.

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4. Cooperation
A good businessman should have to cooperate with his workers. With the help of cooperation
with his workers he can run his business well.

5. Courtesy
Courtesy is to business what oil is to machinery. It costs nothing but wins a reputation. So
businessman has to win the heart of everyone with his polite manners.

6. Decision Making
A good businessman should be a good and quick decision maker. Quick decision of a
businessman is an important asset of businessman. And businessman has to know that his
quick decision will give him benefit or not.

7. Discipline
A good businessman should have to care about the discipline of the business. If he doesn’t care
about the discipline then nobody (who concern to his business) obeys the discipline and
business can’t go well.

8. Evaluator
A businessman has to check himself that how he is working. This thing can make the business
good in progress.

9. Foresight
A good businessman must have the quality of foresight. He must keep in touch with the business
world. He should move about and see what is going on for he has to estimate new wants and
new inventions for creating fresh demands.

10. Honesty
A businessman should be honest in dealing with others. Honesty of a businessman helps him in
his business.

11. Hardworking
A businessman must be hard working. Without have working no business can be successful. If
the owner is not hard working then other workers of the business can’t be hardworking.

12. Initiation
The business world is moving at a very fast speed. A businessman should have the ability to
take initiative by producing new things and new methods of marketing the products and services.

13. Knowledge
A good businessman should have knowledge of his business. It should be supplemented by the
knowledge of trade, finance, marketing, income tax, etc.
14. Leadership
Leaders are not made, they are born; but the businessman has to get some qualities of a leader.
With the help of leadership a businessman can control his business and workers.
15. Negotiator
If a businessman is a good negotiator, then he can run his business well, because without good
communication he can’t impress his consumer.

16. Personality
A businessman should have a graceful personality because it can impress his customers. If his
personality is not good or not graceful then his business can’t go well.

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17. Quick Decisions

A businessman has decision-making power. He decides on all matters in the best interest of the
business. A businessman must have technical knowledge, judgment power and intelligence to
take sound and quick decisions.

18. Responsibility
A successful businessman should have to realize his responsibilities. If he doesn’t do his duty
then his business can’t go well.

19. Reviewer
A good businessman has to review his mistakes, which he committed in the past, and try his
best never to do it again in his life.

20. Sound Financial Management

Sound financial management is an important factor for successful business. Without it no
business can go well. So a business must possess good financial position.

21. Self-Confidence
A good businessman should have self-confidence. Without self-confidence he can’t make quick
decisions and business suffers a lot.

22. Tact
A good businessman should be a tactful person. He has to handle persons or his customers very
tactfully. It helps to earn profit in future.

23. Technical Skills

A good businessman must have the knowledge about technical skills. He should have complete
command of specialized knowledge in his field, which he has to perform.

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Lesson 02
ORGANIZATIONAL BOUNDARIES AND ENVIRONMENTS

All businesses, regardless of their size, location, or mission, operate within a larger external
environment.

External environment—Everything outside an organization’s boundaries that might affect it.

a. Organizational Boundaries—That which separates the organization from its
environment. Today boundaries are becoming increasingly complicated and hard to
pin down.
b. Multiple Environments include economic conditions, technology, political-legal
considerations, social issues, the global environment, issues of ethical and social
responsibility, the business environment itself, and numerous other emerging challenges
and opportunities.

1. THE ECONOMIC ENVIRONMENT

Economic environment—Conditions of the economic system in which an organization
operates
a. Economic Growth
i. Aggregate Output and Standard of Living
1. Business cycle—Pattern of short-term ups and downs (expansions
and contractions) in an economy
2. Aggregate output—Total quantity of goods and services produced
by an economic system during a given period
3. Standard of living—Total quantity and quality of goods and services
that a country’s citizens can purchase with the currency used in their
economic system
4.
Gross domestic product (GDP)—Total value of all goods and services
produced within a given period by a national economy through domestic
factors of production
Gross national product (GNP)—Total value of all goods and services
produced by a national economy within a given period regardless of
where the factors of production are located

1. Real Growth Rate—the growth rate of GDP adjusted for inflation

and changes in the value of the country’s currency
2. GDP per Capita—GDP per person and reflects the standard of
living.
3. Real GDP—GDP calculated to account for changes in currency
values and price changes versus Nominal GDP, GDP measured in
current dollars or with all components valued at current prices.

4. Purchasing Power Parity—Principle that exchange rates are set so

that the prices of similar products in different countries are about the
same.

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iii. Productivity—Measure of economic growth that compares how much a

system produces with the resources needed to produce it.

There are a number of factors which can inhibit the growth of an economic
system including:
1. Balance of Trade—the economic value of all the products that a
country exports minus the economic value of imported products.

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Trade Deficit—A positive balance of trade results when a country exports (sells to other
countries) more than it imports (buys from other countries).
a. Trade Surplus—A negative balance of trade results when
a country imports more than it exports.

2. National Debt—Amount of money that a government owes its

creditors. The U.S. national debt is over $6 trillion.

b. Economic Stability
Condition in an economic system in which the amount of money available and
the quantity of goods and services produced are growing at about the same
rate.
Factors which threaten stability include:
i. Inflation—Occurrence of widespread price increases throughout an
economic system
1. Measuring Inflation: The CPI—Measure of the prices of typical
products purchased by consumers living in urban areas

ii. Unemployment—Level of joblessness among people actively seeking

work in an economic system. Unemployment may be a symptom of
economic downturns.
1. Recessions and Depressions Recession—Period during which
aggregate output, as measured by real GDP, declines
2. Depression—Particularly severe and long-lasting recession

c. Managing the U.S. Economy

i. Fiscal policies—Government economic policies that determine how the
government collects and spends its revenues
ii. Monetary policies—Government economic policies that determine the
size of a nation’s monetary supply

iii.
Stabilization policy—Government policy, embracing both fiscal and
monetary policies, whose goal is to smooth out fluctuations in output and
unemployment and to stabilize prices
d. The Global Economy in the Twenty-first Century
The decade of the 1990s saw a sustained period of expansion and growth that
served to increase business profits, boost individual wealth, and fuel optimism.
During the latter part of 2001 and into 2002, however, economic growth began to
stall.

i. Three Major Forces

1. The information revolution will continue to enhance productivity
across all sectors of the economy, most notably in such information-
dependent industries as finance, media, and wholesale and retail
trade.
2. New technological breakthroughs in areas such as biotechnology will
create entirely new industries.
3. Increasing globalization will create much larger markets while also
fostering tougher competition among global businesses; as a result,
companies will need to focus even more on innovation and cost
cutting.

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ii. Projected Trends and Patterns—There are a number of projections for

the near future. Sudden changes in environmental factors, such as war,
can alter these projections.

2. THE TECHNOLOGICAL ENVIRONMENT

Technology has a variety of meanings, but as applied to the environment of business, it
generally includes all the ways by which firms create value for their constituents.

a. Product and Service Technologies—the technologies employed for creating

products (both physical goods and services) for customers. Although many
people associate technology with manufacturing, it is also a significant force in the
service sector.
b. Business Process Technologies—are used not so much to create products as
to improve a firm’s performance of internal operations (such as accounting,
managing information flows, creating activity reports, and so forth). They also help
create better relationships with external constituents, such as suppliers and
customers.

i. Enterprise Resource Planning—Large-scale information system for

organizing and managing a firm’s processes across product lines,
departments, and geographic locations

3. THE POLITICAL-LEGAL ENVIRONMENT

Conditions reflecting the relationship between business and government, usually in the
form of government regulation. Pro- or anti-business sentiment in government can further
influence business activity. Political stability is also an important consideration, especially
for international firms.

4. THE SOCIOCULTURAL ENVIRONMENT

Conditions including the customs, mores, values, and demographic characteristics of
the society in which an organization functions
a. Customer Preferences and Tastes—Customer preferences and tastes vary
both across and within national boundaries. Similarly, consumer preferences can
also vary widely within the same country. Consumer preferences and tastes also
change over time. Finally, socio cultural factors influence the way workers in a
society feel about their jobs and organizations.
b. Ethical Compliance and Responsible Business Behavior

5. THE BUSINESS ENVIRONMENT

a. Redrawing Corporate Boundaries—To stay competitive, companies are
removing traditional corporate boundaries. For example building partnerships or
temporary alliances with other companies or competitors.
i. Core competency—Skills and resources with which an organization
competes best and creates the most value for owners

b. Emerging Challenges and Opportunities in the Environment of Business

i. Outsourcing—Strategy of paying suppliers and distributors to perform
certain business processes or to provide needed materials or resources
ii. Outsourcing versus Vertical Integration Outsourcing is why vertical
integration is no longer as popular as it once was.
1. Vertical integration—Strategy of owning the means by which an
organization produces goods or services.

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iii. Disadvantages of Outsourcing—The expected benefits of outsourcing

are sometimes not realized. For example, suppliers often don’t understand
what they are supposed to do, charge too much, and provide poor service.
c. Viral Marketing—Strategy of using the Internet and word-of-mouth marketing to
spread product information. Using various formats—games, contests, chat rooms,
and bulletin boards—marketers encourage potential customers to try out products
and tell other people about them.

d. Business Process Management

i. Process—Any activity that adds value to some input by transforming it
into an output for a customer (whether internal or external)
ii. Business process management—Approach by which firms move away
from department-oriented organization and toward process-oriented team
structures that cut across old departmental boundaries

e. The Aftermath of 9/11—The flexibility and strength inherent in the U.S. political
and economic systems became just as obvious as their flaws. Most people kept
their jobs, and most businesses kept going. Even as some economic sectors
declined, others continued to expand. Exports continue to flow into other countries,
as did foreign direct investment. On the other hand, American business
now faces major changes. A specific effect that businesses themselves are
already addressing involves workplace security.

1. ETHICS IN THE WORKPLACE

Ethics—beliefs about what is right and wrong or good and bad in actions that affect
others.
Ethical Behavior—behavior conforming to generally accepted social norms
concerning beneficial and harmful actions.
Unethical Behavior—behavior that does not conform to generally accepted social
norms concerning beneficial and harmful actions.

Business Ethics—ethical or unethical behaviors by a manager or employer of an

organization.
a. The Problem with Ambiguity—because ethics are based on both individual
beliefs and social concepts, they vary from person to person, from situation to
situation, and from culture to culture. Social standards tend to be broad enough to
support certain differences in beliefs so that, without violating these general
standards, an individual may develop personal codes of ethics that reflect a wide
range of attitudes and beliefs.
b. Individual Values and Codes begin when we are children and are further
developed throughout our life.

c. Business and Managerial Ethics—Standards of behavior that guide individual

managers in their work
i. Behavior toward Employees—this category covers such matters as
hiring and firing, wages and working conditions, and privacy and respect.
ii. Behavior toward the Organization—Ethical issues also arise from
employee behavior toward employers, especially in such areas as conflict
of interest, confidentiality, and honesty.
1. A conflict of interest occurs when an activity may benefit the
individual to the detriment of his or her employer.

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Behavior toward Other Economic Agents—Ethics also comes into play

in the relationship between the firm and its employees with so-called
primary agents of interest—mainly customers, competitors, stockholders,
suppliers, dealers, and unions.

d. Assessing Ethical Behavior—To reduce subjectivity in distinguishing ethical

from unethical behavior, a firm should establish a process for applying ethical
judgments to situations that may arise during the course of business activities.
i. Three-step model for applying ethical judgments to situations:
1. gather relevant factual information
2. determine the most appropriate moral values
3. make an ethical judgment based on the rightness or wrongness of
the proposed activity or policy
ii. Four ethical norms:
1. Utility—does a particular act optimize what is best for those who
are affected by it?
2. Rights—does it respect the rights of the individual involved?
3. Justice—is it consistent with what we regard as fair?
4. Caring—is it consistent with people’s responsibilities to each
other?

e. Company Practices and Business Ethics

Perhaps the single most effective step a company can take is to demonstrate top
management support. Actions by senior managers, whether commendable or
otherwise, often set the tone in the organization.
i. Adopting Written Codes—Many companies have adopted written codes
of ethics that formally acknowledge their intent to do business in an ethical
manner.
ii. Instituting Ethics Programs—The question arises whether business
ethics can be “taught.” Most analysts agree that companies must take the
chief responsibility for educating employees. Some firms have major
training programs or ethical “hot line” numbers employees can call to
discuss troubling situations or report unethical behavior of others.

2. SOCIAL RESPONSIBILITY

3. Social Responsibility—the attempt of a business to balance its commitments to

groups and individuals in its environment, including customers, other businesses,
employees, and investors.
Organizational Stakeholders—those groups, individuals, and organizations which are
directly affected by the practices of an organization and which therefore have a stake in its
performance.
a. The Stakeholder Model of Responsibility
Most companies that strive to be responsible to their stakeholders concentrate
on five main groups: customers, employees, investors, suppliers, and local
communities.
b. Contemporary Social Consciousness
Social consciousness and views continue to evolve, seemingly to today’s
enlightened view stressing the need for a greater social role for business. For
instance, Sears and Target stores refuse to sell handguns and other weapons,
and toy retailers like KayBee and Toys R Us won’t sell toy guns that look
realistic.

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4. AREAS OF SOCIAL RESPONSIBILITY

a. Responsibility toward the Environment
Pollution—the injection of harmful substances into the environment.
i. Air Pollution—Much of the damage to forests and streams in the eastern
United States and Canada has been attributed to acid rain (which occurs
when sulfur is pumped into the atmosphere, mixes with moisture, and falls
to the ground as rain).
ii. Water Pollution—Water quality in many areas of the United States is
improving thanks to new legislation (such as laws forbidding phosphates
in New York and Florida).
iii. Land Pollution—The two key issues in land pollution are restoring land
that has already been damaged and preventing future contamination.
1. Toxic waste disposal—Toxic wastes are dangerous chemical
or radioactive byproducts of manufacturing processes.
2. Recycling—the re-conversion of waste materials into useful
products—has become an issue not only for municipal and state
governments but also for many companies engaged in high-waste
activities.

b. Responsibility toward Customers

The Federal Trace Commission (FTC) regulates advertising and pricing
practices, and the Food and Drug Administration (FDA) enforces guidelines for
labeling food products.
i. Consumer Rights
Consumerism—form of social activism dedicated to protecting the
rights of consumers in their dealings with businesses.
1. President John F. Kennedy’s Consumer Bill of Rights
a. Consumers have a right to safe products.
b. Consumers have a right to be informed about all relevant
aspects of a product.
c. Consumers have a right to be heard.
d. Consumers have a right to choose what they buy.

ii. Unfair Pricing

1. Collusion—illegal agreement between two or more companies to
commit such wrongful acts as price fixing.
iii. Ethics in Advertising—Misleading, deceptive, or morally objectionable
advertising have been criticized by consumers.

c. Responsibility toward Employees

i. Legal and Social Commitments
Legally, businesses cannot practice illegal discrimination against people in
any aspect of the employment relationship. A firm should strive to ensure
that the workplace is physically and socially safe.

1. Whistleblower—employee who detects and tries to put an end to a

company’s unethical, illegal, or socially irresponsible actions by
publicizing them. Whistleblowers are sometimes demoted or fired
when their accusations are made public. The law offers them some
recourse in the form of a civil suit for damages.

d. Responsibility toward Investors

i. Improper Financial Management—Improper Financial Management-Occasionally
organizations or their managers may be guilty of blatant

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financial mismanagement-offenses that are unethical but not necessarily

illegal.
1. Check Kiting—illegal practice of writing checks against money
that has not yet been credited at the bank on which the checks are
drawn.
2. Insider Trading—occurs when someone uses confidential
information to gain from the purchase or sale of stocks.
3. Misrepresentation of Finances—A firm’s failure to conform to
generally accepted accounting practices (GAAP) when reporting
its financial status is illegal.

5. IMPLEMENTING SOCIAL RESPONSIBILITY PROGRAMS

a. Approaches to Social Responsibility
i. Obstructionist Stance—approach to social responsibility that involves
doing as little as possible and may involve attempts to deny or cover up
violations.
ii. Defensive Stance—approach to social responsibility by which a company
meets only minimum legal requirements in its commitments to groups and
individuals in its social environment.
iii. Accommodative Stance—approach to social responsibility by which a
company exceeds legal minimums in its commitments to groups and
individuals in its social environment.
iv. Proactive Stance—approach to social responsibility by which a company
actively seeks opportunities to contribute to the well-being of groups and
individuals in its social environment.

MANAGING SOCIAL RESPONSIBILITY PROGRAMS

Managers must take steps to foster a companywide sense of social responsibility.

i. Social Audit—systematic analysis of a firm’s success in using funds

earmarked for meeting its social responsibility goals.
b. Social Responsibility and the Small Business—Ethics and social responsibility
are decisions faced by all managers in all organizations, regardless of rank or
size.

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LESSON 03
BUSINESS ORGANIZATION

Business organization is an act of grouping activities into effective cooperation to obtain the
objective of the business.

In the words of L. H. Haney

“It is more or less independent complex of land, labour and capital, organized and directed for
productive purposes but entrepreneurial ability.

SCOPE OF BUSINESS ORGANIZATION

The scope of business organization can be defined as under:

Scope of
Business
Organization

Sole Partnership Joint Stock Cooperative Combination

Proprietorship Company Societies

1. Sole Proprietorship

According to D.W.T. Stafford

“It is the simplest form of business organization, which is owned and controlled by one man.”

Sole proprietorship is the oldest form of business organization which is owned and controlled by
one person. In this business, one man invests his capital himself. He is all in all in doing his
business. He enjoys the whole of the profit. The features of sole proprietorship are:
� Easy Formation
� Unlimited Liability
� Ownership
� Profit
� Management
� Easy Dissolution

2. Partnership

According to Partnership Act 1932:

“
Partnership is the relation between persons who have agreed to share the profits of a business
carried on by all or any of them acting for all.”

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Partnership means a lawful business owned by two or more persons. The profit of the business
shared by the partners in agreed ratio. The liability of each partner is unlimited. Small and
medium size business activities are performed under this organization. It has the following
features:

� Legal Entity
� Profit and Loss Distribution
� Unlimited Liability
� Transfer of Rights
� Management
� Number of Partners

3. Joint Stock Company

According to S. E. Thomas:

“A company is an incorporated association of persons formed usually for the pursuit of some
commercial purposes”

A joint stock company is a voluntary association of persons created by law. It has a separate
legal entity apart from its members. It can sue and be sued in its name. In the joint stock
company, the work of organization begins before its incorporation by promoters and it continues
after incorporation. The joint stock company has the following feature:

� Creation of Law
� Separate Legal Entity
� Limited Liability
� Transferability of shares
� Number of Members
� Common Seal

4. Cooperative Societies

According to Herrik:
“
Cooperation is an action of persons voluntarily united for utilizing reciprocally their own forces,
resources or both under mutual management for their common profit or loss.”

Cooperative Societies are formed for the help of poor people. It is formed by economically weak
persons of the society. In this form of organization, all members enjoy equal rights of ownership.
The features of cooperative society are as under:-

� Easy Formation
� Protection of Mutual Interest
� Limited Liability
� Equal Distribution of Wealth
� Equal Rights

5. Combination

According to J. L. Hanson
“
Combination is the association, temporary or permanent, of two or more firms.”

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Int roduc t i on t o B usi ne ss

Business combinations are formed when several business concern undertaking units are
combined to carry on business together for achieving the economic benefits. The combination
among the firms may be temporary or permanent. The salient features of business combination
are:

� Economy in Production
~ Effective Management
� Division of Labour
� Destructive Competition

IMPORTANCE OF BUSINESS ORGANIZATION

The following points elaborate the role of business organizations:
1. Distribution
Another benefit of business organization is that it solves the problems of marketing and
distribution like buying, selling, transporting, storage and grading, etc.

2. Feedback
An organization makes possible to take decisions about production after getting the feedback
from markets.

3. Finance Management
It also guides the businessman that how he should meet his financial needs which is very
beneficial for making progress in business.

4. Fixing of Responsibilities
It also fixes the responsibilities of each individual. It introduces the scheme of internal check.
In this way chances of errors and frauds are reduced.

5. Minimum Cost
It helps in attaining the goals and objectives of minimum cost in the business.
6. Minimum Wastage
It reduces the wastage of raw material and other expenditures. In this way the rate of profit is
increased.

7. Product Growth
Business organization is very useful for the product growth. It increases the efficiency of
labour.

8. Quick Decision
Business organization makes it easy to take quick decisions.
9. Recognition Problems
Business organization makes it easy to recognize the problems in business and their
solutions.

10. Reduces the Cost

Business organization is useful in reducing the cost of production as it helps in the efficient use of
factors of production.

11. Secretariat Functions It also guides the businessman about the best way of
performing the secretarial functions.

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12. Skilled Salesmen

It is also a benefit of the business organization that it provides the skilled salesmen for satisfying
various needs of the customers.

13. Transportation
It is another benefit is that it guides the businessman that what type of transport he should utilize
to increase the sales volume of the product.
What are the factors of consideration before starting a business?

PRE-REQUISITES OF BUSINESS

Following are the main pre-requisites of a successful business:

1. Selection
The first and most important decision before starting a new business is its selection. If once a
business is established, it becomes difficult to change it. One should make a detailed
investigation in the selection of business.

2. Feasibility Report
A person should prepare the feasibility report about the business to be started. This report will
provide the facts and figures whether business is profitable or not.

3. Nature of Business
There are various types of business like manufacturing, trading and services. The businessman
should decide that what type of business he would like to start.

4. Demand of Product
The businessman also keeps in view the demand of the product which he wants to sell. If the
demand is inelastic, the chances of success are bright. If the demand of a product is irregular,
seasonal and uncertain, such business should not be started.
5. Size of Business
The Size of business means the scale of business. The size of business depends upon the
demand of commodity in the market and organizational ability of entrepreneur. The
determination of size of business is an important decision of a person.

6. Availability of Capital
Availability of capital is an important factor in the business. Capital is required for the purchase of
land, machines, wages and raw materials. A businessman must decide that how much capital he
can arrange.

7. Business Location
A businessman has to select the place where he wants to start his business. He should select
that place where raw material, cheap labour and transportation facilities are available. He should
also check the location of business competitors.

8. Government Policy
The businessman should also carefully consider the policies of government before starting a
new business. Some areas are declared as ‘tax free zones’ and for some particular businesses
the loan is provided without any interest.

9. Availability of Raw Material

Availability of Raw material is essential to produce the goods at low cost. Sometimes the raw
material is to be imported which may create problem for him. So a businessman must keep this
factor in mind.

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10. Availability of Machines

Availability of new machines is also an important factor for a business. A businessman must see
whether these machines are easily available inside the country or not. If these are to be imported
then it may create the problems for him.

11. Availability of Labour

Skilled and efficient labour is essential to run the business in profit. But if efficient and skilled
labour is not available where business is going to be started then it will not be profitable.

12. Means of Transportation

Quick and cheap means of transportation are essential for low cost of production and high profit
rate. A businessman must keep in view this factor.

13. Power Resources

There must be availability of power resources like water, oil, coal and electricity. So
businessman must keep in view this factor.

14. Hiring Employees

A businessman must hire the efficient and competent employees in the business. The proper
training must be given to employees.

15. Product Pricing

A businessman must decide the price of his product. In the beginning the price must be low. He
must keep in view that whether he will cover cost of his product and other expenses with such
price.

FUNCTIONS OF BUSINESS
Following are the main functions of a business:

1. Production
Production of goods and services is the first main function of the business. The production must
be regular. The goods and services must be produced in such a way which can satisfy human
needs.

2. Sales
The sale is another important function of the business. Sales are of two types:
� Cash sales
� Credit sales

The sale must be regular and at reasonable price. It is very difficult job because there is hard
competition in each market.

3. Finance
It is also an important function of the business to secure finance. Finance is required for
establishment and expansion of business. There are two sources of raising funds:
(a) Owner’s Capital
(b) Borrowed Funds

4. Management Function
“To do things efficiently and effectively” is known as management. The functions of management
are:
� Planning
� Organizing

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Int roduc t i on t o B usi ne ss

� Leading
� Controlling
� Staffing
The management also provides direction for all subordinates.

5. Innovation
In this era of competition, for the survival of business, innovation is essential. The businessman
must try to find new techniques of production because the business may not sell present output in
future.

6. Accounting
Another function of the business is to maintain its records properly. To record the business
activities is called accounting. With proper accounts, the owner can know the actual
performance of business and chances of fraud are reduced.

7. Marketing - According to Harry Henser

“
Marketing involves the design of the products acceptable by the consumers and the conduct of
those activities which facilitate the transfer of ownership between seller and buyer.”

Through marketing, goods are moved from producers to consumers. It is an important This
function of the business. function includes buying, selling, transportation, product The
designing and storage, etc. concept of marketing mix is very important in marketing. It
includes four Ps:
~ Product
~ Price
~ Place
~ Promotion

8. Quality Improvement

Quality of product must be improved to increase the sale. If quality of product is poor then
business may suffer a loss.

9. Motivation

Motivation is very essential for increasing the efficiency of employees. Motivation encourages
the employees to give their best performance.

10. Research

Research is also an important function of any business. Research is a search for new
knowledge. By research, business becomes able to produce improved and new goods. The
research is of two types:
� Basic Research
� Applied Research

11. Public Relations

It is very important function to make friendly relations with public, In this way sales volume is
increased.

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LESSON 04
SOLE PROPRIETORSHIP AND ITS CHARACTERISTICS

SOLE PROPRIETORSHIP

Sole proprietorship is a simple and oldest form of business organization. Its formation does not
require any complicated legal provision like registration etc. It is a small-scale work, as it is
owned and controlled by one person, and operated for his profit. It is also known as “sole
ownership”, “individual partnership” and “single proprietorship”.

DEFINITION

Following are some important definition of sole proprietorship:

1. According to D.W.T. Staffod

“It is the simplest form of business organization, which is owned and controlled by one
man.”
2. According to G. Baker “Sole proprietorship is a business operated by
one person to earn profit.”

CHARACTERISTICS

Following are the main characteristics of sole proprietorship:

1. Capital
In sole proprietorship, the capital is normally provided by the owner himself. However, if
additional capital is required, such capital can be increased by borrowing.

2. Easy Dissolution
The sole proprietorship can be easily dissolved, as there are no legal formalities involved in it.
3. Easily Transferable
Such type of business can easily be transferred to another person without any restriction.
4. Freedom of Action
In sole proprietorship, single owner is the sole master of the business, therefore, he has full
freedom to take action or decision.

5. Formation
Formation of sole proprietorship business is easy as compared to other business, because it
dos not require any kind of legal formality like registration etc.

6. Legal Entity In sole proprietorship, the business has no separate legal entity apart from
the sole traders.

7. Legal Restriction
There are no legal restrictions for sole traders to set up the business. But there may be legal
restrictions for setting up a particular type of business.

8. Limited Life The continuity of sole proprietorship is based on good health, or life or death of
the sole owner.

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 Int roduc t i on t o B usi ne ss

9.

m
In sole proprietorship, the control of management of the business lies with the sole owner.
10. Ownership
The ownership of business in sole proprietorship is owned by one person.
11. Profit
The single owner bears full risk of business, therefore, he gets total benefit of the business as
well as total loss.

12. Size
The size of business is usually small. The limited ability and capital do not allow the expan-
sion of business.

13. Success of Business

The success and goodwill of the sole proprietorship is totally dependent upon the ability of the
sole owner.

14. Secrecy
A sole proprietorship can easily maintain the secrecy of his business.
15. Unlimited Liability
A sole proprietor has unlimited liability. In case of insolvency of business, even the personal
assets are used by the owner to pay off the debts and other liabilities.

ADVANTAGES AND DISADVANTAGES OF SOLE PROPRIETORSHIP

ADVANTAGES OF SOLE PROPRIETORSHIP

Following are the advantages of sole

proprietorship:
1. Contacted with the customers
In sole proprietorship a businessman has direct contact with the customer and keeps in mind the
like and dislikes of the public while producing his products.

2. Direct Relationship with Workers

In sole proprietorship a businessman has direct relationship with workers. He can better
understand their problems and then tries to solve them.

3. Easy Formation
Its formation is very easy because there are not legal restrictions required like registration etc.
4. Easy Dissolution
Its dissolution is very simple because there are no legal restrictions required for its dissolution
and it can be dissolved at any time.

5. Easy Transfer of Ownership

A sole proprietorship can easily be transferred to other persons because of no legal restriction
involved.

6. Entire Profit
Sole proprietorship is the only form of business organization where the owner enjoys 100%
profit.

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 Int roduc t i on t o B usi ne ss

7. Entire Control
In sole proprietorship the entire control of the business is in the hands of one person. He can do
whatever he likes.

8. Flexibility
There is great flexibility in sole proprietorship. Business policies can easily be changed
according to the market conditions and demand of people.

9. Honesty
The sole master of the business performs his functions honesty and effitively to make the
business successful.

10. Independence
It is an independent form of business organization and there is no interference of any other
person.

11. Personal Satisfaction

As all the Business activities are accomplished under the supervision of sole owner, so he feels
personal satisfaction that the business is running smoothly.

12. Prime Credit Standing A sole proprietor can borrow money more easily
because of unlimited liability.

13. Quick Decisions

Sole proprietor can make quick decisions for the development and welfare of his business and in
this way can save his time.

14. Personal Interest

A sole proprietor5 takes keen intere4st in the affairs of business because he alone is
responsible for profit and loss.

15. Saving in Interest on Borrowed Capital

Sometimes, a sole proprietor borrows money to increase his capital, from his relatives, without
interest.

16. Saving in Legal Expenses

As there are no legal restrictions for the formation of sole proprietorship so it helps in increasing
savings as legal expenses are reduced.

17. Saving in Management Expenses

The owner of the business himself performs most of the functions so it r educes the
management expenses.

18. Saving in Taxes

The tax rates are very low on sole proprietorship because it is imposed on the income of single
person.

19. Secrecy
It is an important factor for the development of business. A sole trader can easily maintain the
secrecy about the techniques of production and profit.

20. Social Benefits It is helpful in solving many social problems

like unemployment etc.

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Int roduc t i on t o B usi ne ss

DISADVANTAGES OF SOLE PROPRIETORSHIP

The disadvantages of sole proprietorship can be narrated as under:

1. Continuity
The continuity of sole proprietorship depends upon the health and life of the owner. In case of
death of the owner the business no longer continues.

2. Chances of Fraud
In sole proprietorship, proper records are not maintained. This increases the chances of errors
and frauds for dishonest workers.

3. Expansion Difficulty
In sole proprietorship, it is very difficult to expand the business because of the limited life of
proprietor and limited capital.

4. Lack of Advertisement
As the sources of single person are limited so he cannot bear the expense of advertisement,
which is also a major disadvantage.

5. Lack of Capital
Generally, one-man resources are limited, so due to financial problems he cannot expand his
business.

6. Lack of Inspection and Audit

In sole proprietorship there is lack of inspection and audit, which increases the chances of fraud
and illegal operations.

7. Lack of Innovation
Due to fear of suffering from loss, a sole proprietor does not use new methods of production. So,
there is no invention or innovation.

8. Lack of Public Confidence

The public shows less confidence in this type of business organization because there is no legal
registration to control and wind up the business.

9. Lack of Skilled Persons

One person cannot hire the services of qualified and skilled persons because he has limited
resources. It is also a great disadvantage.

10. Management Difficulty

One person cannot perform all types of duties effectively. If he is a good accountant, he may not
be a good administrator. Due to this, business suffers a loss.

11. Much Strain on Health

In this type of business organization there is much strain on the health of the businessman
because he alone handles all sorts of activities.

12. Not Durable

This type of business organization is not durable because its existence depends upon the life of
sole proprietor.

13. Permanent Existence

In this type of business there is a need of permanent existence of a businessman. In case of
absence from business for few days may become the cause of loss.

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14. Risk of Careless Drawings

In sole proprietorship owner himself is a boss. There is no question to his decisions or actions.
So, there is a risk of careless drawings by him.

15. Risk of Loss

In case of sole proprietorship a single person bears all the losses, whereas in the case of
partnership or Joint Stock Company all the partners or members bear the loss.

16. Unlimited Liability

In sole proprietorship there is unlimited liability. It means, in case of loss personal property of the
owner can be sold to satisfy the claimants. It is a great disadvantage.

From the above-mentioned detail, we come to the point that despite the above disadvantages,
sole proprietorship is an important form of business organization. This is due to the fact that its
formation is very easy and due to unlimited liability the owner takes great care and interest in the
business, because in case of loss, he is personally responsible. As he enjoys entire profit, this
factor also encourages him to work with great efficiency which promotes his business.

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Lesson 05
PARTNERSHIP AND ITS CHARACTERISTICS

PARTNERSHIP

Partnership is the second stage in the evolution of forms of business organization. It means the
association of two or more persons to carry on as co-owners, i.e. a business for profit. The
persons who constitute this organization are individually termed as partners and collectively
known as firm; and the name under which their business is conducted is called “The Firm Name”.

In ordinary business the number of partners should not exceed 20, but in case of banking
business it must nor exceed 10. This type of business organization is very popular in Pakistan.

DEFINITION

1. According to Section 4 of Partnership Act, 1932 “Partnership is the relation

between persons who have agreed to share the profits of a business carried on by all or
any of them acting for all.”

2. According to Mr. Kent

“A contract of two or more competent persons to place their money, efforts, labour and skills,
some or all of them, in a lawful commerce or business and to divide the profits and bear the
losses in certain proportion.”

Structural Diagram:

Association

Profit & Loss PARTNERSHIP

Money, Labour
And Other Skills

Lawful Business

CHARACTERISTICS
The main characteristics of partnership may be narrated as under:

1. Agreement
Agreement is necessary for partnership. Partnership agreement may be written or oral. It is
better that the agreement is in written form to settle the disputes.

2. Audit
If partnership is not registered, it has no legal entity. So there is no restriction for the audit of

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Int roduc t i on t o B usi ne ss
accounts.

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 Int roduc t i on t o B usi ne ss

3.
Agent In partnership every partner acts as an agent of another

4. Business
Partnership is a business unit and a business is always for profit. It must not include club or
charitable trusts, set up for welfare.

5. Cooperation
In partnership mutual cooperation and mutual confidence is an important factor. Partnership
cannot take place with cooperation.

6. Dissolution
Partnership is a temporary form of business. It is dissolved if a partner leaves, dies or declared
bankrupt.

7. Legal Entity
If partnership is not registered, it has no legal entity. Moreover, partnership has no separate legal
entity from its members and vice versa.

8. Management
In partnership all the partners can take part or participate in the activities of business
management. Sometimes, only a few persons are allowed to manage the business affairs.

9. Number of Partners
In partnership there should be at least two partners. But in ordinary business the partners must
not exceed 20 and in case of banking business it should not exceed 10.

10. Object Only that business is considered as partnership, which is established

to earn profit.

11. Partnership Act In Pakistan, all partnership businesses are running under
Partnership Act, 1932.

12. Payment of Tax In partnership, every partner pays the tax on his share of profit,
personally or individually.

13. Profit and Loss Distribution The distribution of profit and loss among the partners is
done according to their agreement.

14. Registration
Many problems are created in case of unregistered firm. So, to avoid these problems partnership
firm must be registered.

15. Relationship
Partnership business can be carried on by all partners or any of them can do the business for all.

16. Share in Capital

According to the agreement, every partner contributes his share of capital. Some partners
provide only skills and ability to become a partner of business and earn profit.

17. Transfer of Rights

In partnership no partner can transfer his shares or rights to another person, without the consent
of all partners.

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Int roduc t i on t o B usi ne ss

18. Unlimited Liability

In partnership the liability of each partner is unlimited. In case of loss, the private property of
the partners is also used up to pay the business debts.

ADVANTAGES AND DISADVANTAGES OF PARTNERSHIP

ADVANTAGES OF PARTNERSHIP

Following are the advantages of partnership:

1. Simplicity in Formation
This type of business of organization can be formed easily without any complex legal for-
malities. Two or more persons can start the business at any time. Its registration is also very
easy.

2. Simplicity in Dissolution
Partnership Business can be dissolved at any time because of no legal restrictions. Its
dissolution is easy as compared to Joint Stock Company.

3. Sufficient Capital
Partnership can collect more capital in the business by the joint efforts of the partners as
compared to sole proprietorship.

4. Skilled Workers
As there is sufficient capital so a firm is in a better position to hire the services of qualified and
skilled workers.

5. Sense of Responsibility
As there is unlimited liability in case of partnership, so every partner performs his duty honestly.

6. Satisfaction of Partners
In this type of business organization each partner is satisfied with the business because he
can take part in the management of the business.

7. Secrecy
In partnership it is not compulsory to publish the accounts. So, the business secrecy remains
within partners. This factor is very helpful for successful operation of the business.

8. Social Benefit
Two or more partners with their resources can build a strong business. This factor is very
helpful in solving social problems like unemployment.

9. Expansion of Business
In this type of business organization, it is very easy to expand business volume by admitting
new partners and can borrow money easily.

10. Flexibility
It is flexible business and partners can change their business policies with the mutual consulta-
tion at any time.

11. Tax Facility

Every partner pays tax individually. So, a firm is in a better position as compared to Joint
Stock Company.

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 Int roduc t i on t o B usi ne ss

12. Public Factor

Public shows more confidence in partnership as compared to sole proprietorship. If a firm is
registered, people feel no risk in creating relations with such business.

13. Prime Credit Standing

The liabilities of partners are unlimited, so the banks and other financial institutions provide
them credit easily.

14. Minority Protection

In partnership all policy matters are decided with consent of each partner. This gives protec-
tion to minority partners.

15. Moral Promotion

Partnership is the best business for small investors. It promotes moral courage of partners.
16. Distribution of Work
There is distribution of work among the partners according to their ability and experience. This
increases the efficiency of a firm.

17. Combined Abilities

Every partner possesses different ability, which helps in running the business effectively, when
combined together.

18. Absence of Fraud

In partnership each partner can look after the business activities. He can check the accounts.
So, there is no risk of fraud.

DISADVANTAGES OF PARTNERSHIP
The disadvantages of partnership are enumerated one by one as under:
1. Unlimited Liability
It is the main disadvantage of partnership. It means in case of loss, personal property of the
partners can be sold to pay off the firm’s debts.

2. Limited Life of Firm

The life of this type of business organization is very limited. It may come to an end if any
partner dies or new partner enters into business.

3. Limited Capital
No doubt, in partnership, capital, is greater as compared to sole proprietorship, but it is small as
compared to Joint Stock Company. So, a business cannot be expanded on a large scale.

4. Limited Abilities
As financial resources of partnership are limited as compared to Joint Stock Company, so it is
not possible to engage the services of higher technical and qualified persons. This causes the
failure of business, sooner or later.

5. Limited number of Partners

In partnership, the number of partners is limited, so the resources are also limited. That is why
business cannot expand on large scale.

6. Legal Defects
There are no effective rules and regulations to control the partnership activities. So, it cannot
handle large-scale production.

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Int roduc t i on t o B usi ne ss

7. Lack of Interest
Partners do not take interest in the business activities due to limited share in profit and limited
chances of growth of business.

8. Lack of Public Confidence

As there is no need by law to publish accounts in partnership, so people lose confidence and
avoid dealing and entering into contract with such firm.

9. Lack of Prompt Decision

In partnership all decisions are made by mutual consultation. Sometimes, delay in decisions
becomes the cause of loss.

10. Lack of Secrecy

In case of misunderstandings and disputes among the partners, business secrets can be
revealed.

11. Chances of Dispute among Partners

In partnership there are much chances of dispute among the partners because all the partners
are not of equal mind.

12. Expansion Problem

Partnership business may not be expanded due to limited number of partners, limited capital
and unlimited liability.

13. Frozen Investment

It is easy to invest money in partnership but very difficult to withdraw it.
14. Risk of Loss
There is a risk of loss due to less qualified and less experienced people.
15. Transfer of Rights
In partnership no partner can transfer his share without the consent of all other partners.

CONCLUSION
From the above-mentioned findings, we come to this point that despite the above
disadvantages, partnership is an important from of business organization. This is because its
formation is very easy and due to unlimited liabilities, partners take great interest in business,
because in case of loss they are personally responsible.

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 Int roduc t i on t o B usi ne ss

LESSON 6

PARTNERSHIP (Continued)
Partnership is the second stage in the evolution of forms of business organization. It means an
association of two or more persons to carry on a business for profit.

According to Partnership Act, 1932,

“
Partnership is the relation between persons who have agreed to share the profits of a
business, carried on by all or any of them active for all.”

PARTN ERS
“
The individuals who comprise a partnership are known as partners.”

KINDS OF PARTNERS

Partners can be classified into different kinds, depending upon their extent of liability,
participation in management, share of profits and other facts.

1. Active Partner
A partner who takes active part in the affairs of business and its management is called active
partner. He contributes his share in the capital and is liable to pay the obligations of the firm.

2. Secret Partner
A partner who takes active part in the affairs of the business but is unknown to the public as a
partner is called secret partner. He is liable to the creditors of the firm.
3. Sleeping Partner
A partner who only contributes is the capital but does not take part in the management of the
business is known as sleeping partner. He is liable to pay the obligations of the firm.

4. Silent Partner
A partner who does not take part in the management of business but is known to the public as
partner is called silent partner. He is liable to the creditors of the firm.

5. Senior Partner
A partner who invests a large portion of capital in the business is called senior partner. He has a
prominent position in the firm due to his experience, skill, energy, age and other facts.

6. Sub-Partner
A partner in a firm can make an agreement with a stranger to share the profits earned by him
from the partnership business. A sub-partner is not liable for any debt and canot interfere in the
business matters.
7. Junior Partner
A person who has a small investment in the firm and has a limited experience of business is
called junior partner.

8. Major Partner
A major partner is a person who is over 18 years of age. A person is allowed to make contract
when he has attained the age of majority.

9. Minor Partner
A person who is minor cannot enter into a valid contract. However, he can become a partner
with the consent of all other partners. A minor can share profits of a business but not the losses.

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Int roduc t i on t o B usi ne ss

10.
A partner who neither contributes in capital nor does he take part in the management of the
business but allows he name to be used in the business is known as nominal partner. He is
individually and jointly liable for the debts of the firm along with other partners.

11. Deceased Partner

A partner whose life has expired is known as deceased partner. The share of capital and
profit of such partner is paid to his legal heirs in lumpsum or in installment.

12. Limited Partner

A partner whose liabilities are limited to his share in business is called limited partner. He
cannot take active part in the management of the firm.

13. Unlimited Partner

A partner whose liabilities are unlimited is known as unlimited partner. He and his personal
property both are liable to clear the debts of the firm.

14. Incoming Partner

A person who is newly admitted in the firm with the consent of all the partners is called incom-
ing partner. He is not liable for any act of the firm performed before he became the partner
unless he agrees.

15. Retired Partner

A partner who leaves the firm due to certain reasons is known as retired partner or outgoing
partner. He is liable to pay all the obligations and debts of the firm incurred before his retire-
ment.

16. Partner for Profits only

If a partner is entitled to receive certain share of profits and is not held liable for losses is
known as partner in profits only. He is not allowed to take part in the management of the
business.

17. Quasi Partner

A person, who was the par4tner of a firm but has now retired from active participation in
business and has left his capital in the business as a loan, receiving interest on it, is known as
quasi partner.

18. Partner by Estoppels

A person who holds himself out as a partner of a firm, before a third party or allows other to do so,
though he is not a partner of that firm, is called partner by estoppels or holding out partner. He is not
entitled to any right like other partners of the firm. He is not entitled to any right like other partners of
the firm. He is personally liable to the third party for the credit given to the firm, on the faith of his
representation.

What are kinds of partnership?

KINDS OF PARTNERSHIP

There are three kinds of partnership which are described as under:

1. Partnership at will
2. Particular partnership
3. Limited partnership

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 Int roduc t i on t o B usi ne ss

PARTNERSHIP AT WILL

If the partnership is formed for an undefined time, it is called partnership at will. Any partner
can dissolve it at any time by giving the notice.

According to Partnership Act, 1932:

“If no provision is made in the agreement regarding the partnership, it is called partner-
ship at will.”

Partnership at will may be created under the following circumstances:

1. Indefinite Period
If partnership has been formed for an indefinite period, it is called partnership at will.
2. Existence after Completion of Venture
If partnership has been formed for a particular venture and after completion such venture it
remains continue, it becomes a partnership at will.

3. Existence after Expiry of Period

If partnership has been formed for a definite time period, so after the expiry of this period, it
becomes partnership at will.

PARTICULAR PARTNERSHIP

If the partnership is formed for a particular object of temporary nature, it is called particular
partnership. On completion of a particular venture, it comes to an end. Under this no regular
business is done. For example, partnership for the construction of a building and partnership for
producing a film.

LIMITED PARTBNERSHIP
Limited partnership is that in which liabilities of some partners are limited up to the amount of
their capitals. In this partnership, there is at least one partner who has unlimited liability.
In Pakistan, this type of partnership is not formed. There is a separate partnership act for it.

MAIN FEATUTRES

Main features of partnership are:

1. Limited Partner There is at least one partner who

has limited liability.

2. Unlimited Partner There is at least one partner who

has unlimited liability.
3. Number of Partners
There are at least two partners or maximum 20 in an ordinary business and not more than 10 in
banking business.
4. Admission of New Partner
New partners may be admitted in this partnership without the consent of limited partners but with
the consent of unlimited partners.

5. Registration The registration of this partnership is

compulsory by law.

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Int roduc t i on t o B usi ne ss

6. Transferability of Shares
Limited partner can transfer his shares to any other person with the consent of all other partners.

7. Inspection of Books Limited partner has a right to inspect

the books of accounts.

8. Rights of Suggestions Limited partner has a right to give suggestions to others

who manage the business.

9. Participation in Management A limited partner cannot take part in

the management of the business.

10. Withdrawal of Capital A limited partner cannot withdraw his capital until he
remains in partnership business.

11. Separate Legislation It is enrolled under the Limited Partnership Act, 1907,
instead of Partnership Act, 1932.

TERMINATION OF PARTNERSHIP

All forms of partnership under Islamic law may be terminated as:

1. Notice
In all the above forms of partnership each partner has a fight to terminate the partnership by
giving notice to other partners.

2. Death Partnership is also terminated on the death of a

partner.

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 Int roduc t i on t o B usi ne ss

Lesson 7
PARTNERSHIP (Continued)

What is Partnership Agreement? Discuss important points of this document. Discuss its
contents.

PARTNESHIP A GREEMENT

Partnership deed or agreement is a document in which the relations of partners with one another
are clearly written. It is the most important document of partnership, which includes the terms
and conditions related to partnership and the regulations governing its internal management and
organization. It may be oral or written. But it is necessary to have the agreement in writing.

DEFINITION
“Partnership deed or agreement is a document which includes the terms and conditions related
to the partnership; and regulations governing its internal management and organization.”

PROVISIONS
Following are the important provisions of partnership deed:
1. Date
Date of starting the business should be written in it.
2. Name of the Business
Name of the firm under which the business is to be conducted should be written in it.
3. Nature of Business
Nature of business to be conducted by the partners should be mentioned.
4. Location of Business
Location of business, i.e. where it is to be operated, should be written in it.
5. List of Partners
List of partners, their names, addresses and other particulars should be mentioned.
6. Duration of partnership
Duration of partnership, whether it is for a definite period of time or indefinite period of time,
should be written.

7. Dealing Bank
The name of dealing bank should be written in it.
8. Division of Work
Division of work among the partners, for the management of the firm, should be written clearly in
it.

9. Deficiency of Capital
How the deficiency of capital should be covered at the time of insolvency of any partner must be
clearly stated.

10. Total Capital Total capital of the firm and share of each partner in the capital should
be mentioned in it.

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Int roduc t i on t o B usi ne ss

11. Additional Capital

How further capital, if necessary, should be introduced; must be mentioned in it.
12. Amount of Drawings
The amount, which each partner would be allowed to withdraw, in anticipation of profit, should be
clearly stated.

13. Amount of Salary

The amount of salaries payable to the partners should be written in it.
14. Amount of Profit
The fixation of the amount of profit payable to any partner, other than the salary, should be
mentioned in it.

15. Arbitration
In case of dispute, provisions for arbitration should also be available.
16. Rules of Admission and Retirement
Rules regarding admission and retirement of partners should be clearly written.
17. Period of Accounts
Period, after which final accounts are to be prepared, should be written in it.
18. Rights and Duties of Partners
There should also be the provisions of rights and duties of each partner.
19. Witness
The witness of agreement provisions should be mentioned.
20. Ways of Dissolution
The ways, under which the firm may be dissolved, should also be written in it.

CONCLUSION

The above mentioned points are not included in the final list of the clauses. Any clause, which is
mutually agreed to be accepted by the partners, can be included in the agreement. If the deed
is silent on any point, then provisions of Partnership Act, 1932, should be applied.

What are the rights, duties and liabilities of a partner in the absence of partnership
agreement?

INTRODUCTION
A partnership agreement may contain special provisions regarding the rights, duties and liabili-
ties of the partners. But in the absence of such an agreement the rules laid down in the
Partnership Act, 1932, are applicable.

What is Partnership Deed?

“
Partnership deed or agreement is a document which includes the terms and conditions related
to the partnership; and regulations governing its internal management and organization.”

RIGHSTS OF PARTNERS
Section 123 and 13 of Partnership Act, 1932, describe the following rights of the partners:

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 Int roduc t i on t o B usi ne ss

1.
Rights of Participation Every partner has a right to take part in the

2. Right of share in Profits All the partners are entitled to share

the profits of the firm equally.

3. Right to Exercise Power To protect the firm from loss, every partner
has a right to use his power.

4. Right of Existence
A partner cannot be expelled by any other partner from the business. Every partner has a right to
live in the business.

5. Right of Retirement Every partner has a right to retire from the firm
after serving a notice.

6. Right of Inspection Every partner has a right to check the

accounts of the business.

7. Right of Salary
A partner has a right to demand for the salary, for performing his duties in the management of
the business.

8. Indemnify the Expense

A partner has a right to be indemnified by the firm, in respect of any payment made by him in the
ordinary course of business, or in an emergency, for the purposes of protecting the firm from
loss.

9. Issue of Receipt A partner has a right to collect the debts of the firm and
to issue the receipts.

10. Interest on Capital

If a partner make any advance in addition to the amount of his capital, he will be entitled to
receive interest at the rate of 6% per annum.

11. Participation in the Management A partner has a right to

participate in the management of the firm.

12. Right to Use the Property

Every partner has an equal right to use the firm’s property exclusively the purpose of partnership.

13. Right to Act as an Agent Every partner has a right to act as an agent on
behalf of the remaining partners.

DUTIES OF PARTNERS
According to section 9 of Partnership Act, 1932, the general duties of the partners are as follows:
“
Partners are bound to carry on the business of the firm to the greatest common
advantage, to be just and faithful to each other and to render true accounts, and to
provide full information about the things affecting the firm, to any other partner or to their
legal representatives.”

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Int roduc t i on t o B usi ne ss

1. Utmost Good Faith

Every partner is bound to give true and full information under the principle of “utmost good
faith”. All the partners should be just and faithful to one another.

2. Maximum Common Benefit

It is the duty of the partners to work for the maximum common benefit.
3. Maintenance of True Accounts
Every partner should prepare the true account of the firm for other partners.
4. Use of Powers within Limit
It is the duty of the partner that he should use his powers within the limits, delegated by the
firm.

5. Use of Property
It is the duty of a partner that he must not use the property of the firm for his personal interest or
benefit.

6. Provide all Information

It is the duty of the partner that he must provide all the necessary information about the
business to other partners.

7. Profit should be paid to the Firms

If a partner earns profit through any source of the firm. It should be paid to the management of
the firm.

8. Distribution of Loss
In the absence of agreement, each partner should pay the loss equally.
9. Compensation of Loss
If a partner commits a fraud with his co-partners, he must compensate the loss.
10. To be Sincere and Careful
Every partner must be sincere, careful and faithful to other partners. He should discharge his
duties very fairly.

11. To Maintain the Secrecy of the Firm

It is the duty of a partner that he should maintain the secrecy of the business from
outsiders.
12. To Abide by the Decisions
A partner should abide by the decisions made by the majority of the partners.
13. Not to Enter into a Private Agreement
A partner must not enter into private agreement with a customer of the firm. If he does so, it is
his duty to share his profit with his co-partners.

14. Not to Use the Firm’s Name

A partner is not allowed to use the firm’s name and property for the satisfaction of his personal
need. If he does so and gets profit out of it, he must share it with his co-partner.

LIABILITIES OF PARTNERS
Generally, the liability of a partner is unlimited. Thus, each partner is liable not only to the extent
of his share in partnership, but his personal property is also used up to clear the debts unless the
proves that his liability is limited to the extent of his share in the assets of the firm.

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 Int roduc t i on t o B usi ne ss

According to section 13 (c) of Partnership Act, 1932, subject to contract between the
partners, the liabilities of a partner are as follows:

1. Joint liabilities of Partners for all Debts

Every partner is liable, jointly with all other partners for all acts and debts of the firm.
2. Liability of New Partner
A new partner is liable for all the acts of a firm, which are performed after he becomes a
partner.

3. Liability of Retired Partner A retired partner is not responsible for any act of the firm
after the date of his retirement.
4. Liability of Deceased Partner If a partner dies and the firm suffers losses, then the property
of the deceased partner cannot be held liable for any payment.

5. Liability of an Expelled Partner

An expelled partner is not liable to suffer the losses and pay the debts of the firm, which arise
after his expulsion from the firm.

6. Liability of Fraud
If any partner commits a fraud, then partners are also equally liable with him, for it.
7. Liability of Insolvent Partner
The firm is not liable for any transaction of the insolvent partner, after the date of his insolvency
is declared by the court.

8. Liability due to Willful Negligence

A partner is liable to make good the losses, arising due to his willful negligence.
9. Share in Loss
In case of loss, all the partners will have to bear the loss equally.
10. No Private use of Property
A partner cannot use the property of the firm or its goodwill for his private gains. If he does so,
he is liable to surrender the profits, so earned, to the firm.

DISSOLUTION OF FIRM

According to Section 39 of Partnership Act, 1932:

“
The dissolution of partnership among all the partners of firm is called dissolution of
firm.”

Explanation
It means that dissolution of firm includes the dissolution of partnership. But when partnership is
dissolved, firm may or may not be dissolved; because business may be conducted by the
surviving partners on the retirement, death or insolvency of any partner.

MODES OF DISSOLUTION OF FIRM

According to partnership Act, 1932, the dissolution of firm may take place through following
ways:

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Int roduc t i on t o B usi ne ss

1. Dissolution by Agreement
2. Dissolution by Notice
3. Compulsory Dissolution
4. Contingent Dissolution
5. Dissolution by Court

DISSOLUTION BY AGREEMENT
A firm may be dissolved with the consent of all the partners or in accordance with the contract
made between the partners.

DISSOLUTION BY NOTICE
In case of partnership at will, the firm may be dissolved by any partner, serving a notice in
writing, of 14 days, to all the other partners of his intention to dissolve the firm. The firm is
dissolved as from the date mentioned in the notice.

COMPULSORY DISSOLUTION
Following are the causes of compulsory dissolution of firm:
1. Insolvency
Insolvency of all the partners or any one partner may become the cause of compulsory
dissolution.

2. Unlawful Business
The firm is dissolved if its business becomes unlawful.
CONTINGENT DISSOLUTION
A partnership firm may be dissolved due to the following reasons:
1. Expiry of Period
If a firm is established for a fixed period, then it will be dissolved after the expiry of period.
2. Completion of Particular Venture
A firm may be dissolved after the completion of particular venture, for which it is formed:
3. Death of a Partner
A partnership firm may also dissolve with the death of a partner.
4. Insolvency
Insolvency of a partner also serves as a notice for dissolution of firm.
DISSOLUTION BY COURT
The court may dissolve a firm due to the following reasons:
1. Case of Unsound Mind
A partnership firm may be dissolved by the order of court, if any partner becomes of unsound
mind.

2. Case of Incapable Partner

A partnership firm may be dissolved by the order of court if any partner permanently become
incapable of performing his duties.

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 Int roduc t i on t o B usi ne ss

3. Case of Misconduct
A partnership firm may be dissolved if a partner is found guilty of misconduct in affairs of
business.

4. Transfer of Interest
A partnership firm may be dissolved if any partner transfers his share of interest to other
persons, without the consent of existing partners.

5. Breach of Agreement A partnership firm may be dissolved if any partner commits

a breach of agreement.

6. Assurance of Loss
Court may dissolve a partnership firm if the business of that firm is suffering from continuous
loss.

7. Others Reasons
The court has the right to accept or reject the application of dissolution. The just and equitable
reason is determined by the court.

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Int roduc t i on t o B usi ne ss

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 Int roduc t i on t o B usi ne ss

LESSON 9
JOINT STOCK COMPANY

JOINT STOCK COMPANY

Joint Stock Company is the third major form of business organization. It has entirely different
organizational structure from sole proprietorship and partnership. There are two advantages of
Joint Stock Company. First of all, it enjoys the advantage of increased capital. Secondly, the
company offers the protection of limited liability to the investors.

The law relating to Joint Stock Company has been laid in Companies Ordinance, 1984, which
came into force on January 1, 1985 in Pakistan.

DEFINITION

Following are some important definition of Joint Stock Company:

1. Simple Definition
“A company may be defined as an association of persons for the purpose of making
profit.”

2. According to Kimball,
“A corporation by nature is an artificial person, created or authorized by a legal statue for
some specific purpose.”

3. According o S.E. Thomas,

“ A company is an incorporated association of persons formed usually for the pursuit of
some commercial purpose.”

Structural Diagram

Joint Stock Company

Specific Purpose Association of

Persons

Legal Statute FEATURES OF JOINT STOCK C PANY

Following are the main features of a Joint Stock Company.

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Int roduc t i on t o B usi ne ss

1. Creation of Law
A joint stock company is the creation of law or special ‘Act’ of the state. It is formed and
governed by the Companies Ordinance or by a special Act of the legislature. Pakistani
companies are incorporated under the Companies Ordinance, 1984.

2. Capital Borrowing The company can borrow capital in its own name to
expand the business.

3. Separate Legal Entity

A Joint Stock Company has separate legal entity, apart from its members. It can sue in a court of
law in its own name.

4. Legal Person
A Joint Stock Company, as a legal person, has the usual rights of any person to carry on the
business in its own name, to own property, to borrow or lend money and to enter into contract.

5. Long Life A joint stock company has long life as compared to other forms of business
organizations.

6. Limited Liability
The liability of the shareholder is limited to the extent of the face value of the shar4es they hold.

7. Large Scale Business

Because of more members, a company has larger capital as compared to sole trade ship and
partnership, which helps in doing business on large scale.

8. Management of Company
The shareholders elect the Board of Directors in the Annual General Meeting and all the
management is selected by the Board of Directors.

9. Number of members
In case of private limited company, minimum number of shareholders is ‘2’ and maximum is ‘50’;
but in case of public limited company, minimum number is ‘7’ and there is no limit for maximum
number.

10. Transferability of Shares

A shareholder of a company can easily transfer his shares to other persons. There is no
restriction on the purchase and sale of shares.

11. Trade Agreement

A joint stock company enjoys separate existence, so it can join the trade agreements with other
firms in its own name.

12. Purchases and Sale of Property A joint stock company can

purchase and sale the property in its own name.

13. Payment of Taxes A joint stock company pays double

taxes to the government.

14. Object
The basic object of a joint stock company is to earn profit. Whole profit is not distributed among
the shareholders. Some portion is transferred to General Reserve for emergencies.

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 Int roduc t i on t o B usi ne ss

15. Government Control

A joint stock company has to comply with the rules of the government. It has to audit its
accounts.

16. Easy Mode of Investment

The capital of a joint stock company is divided into the shares of small value. So, every
person can purchase these shares according to his income and saving.

17. Common Seal

Since a company is an artificial person created by law, therefore, it cannot sign documents for
itself. The common seal, with the name of the company is used as a substitute for its signature.
ADVANTAGES AND DISADVANTAGES OF JOINT STOCK COMPANY

ADVATNAGES OF JOINT STOCK COMPANY

pany:
1. Expansion of Business
A joint stock company sells the shares, debentures and bond s on large scale. So, a joint
stock company can collect a large amount of capital and can expand its business.

2. Easy Access to Credit

A joint stock company can get a huge amount of capital from banks and other institutions.
3. Easy to Exit
It is easy to separate oneself from a joint stock company by selling his shares.
4. Experts’ Services
Because a joint stock company has a strong financial position, so it may hire the service of
qualified and technical experts.

5. Employment
Joint stock companies are also playing very important role to provide employment to unem-
ployed persons of the country.

6. Flexibility
There is flexibility in such business organizations.
7. Limited Liability
The liability of the owner is limited. In case of loss, the shareholders are not required to pay
anything more than the face value of the shares.

8. Large Scale Production

Availability of huge amounts of capital makes possible for a joint stock company to produce
goods on very large scale, at a lower cost.

9. Larger Capital
There is no problem of capital in a joint stock company because there is not limit for maximum
number of members. So, a joint stock company collects capital from many people.

10. Long Life

A joint stock company has a permanent life. If one or more than one shareholder die, or sell
their shares, it makes no difference to the company. New shareholders take their place.

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Int roduc t i on t o B usi ne ss

11. Long-term Projects

A joint stock company has a permanent and long life and huge capital. Such organizations
can undertake the projects, which may give profit after many years.

12. Spread of Risk

In joint stock company, the risk of business is spread over a large number of people. Such
organizations can undertake risky projects, which other types or organization do not take.

13. Transfer of Shares

In joint stock company, the shares of public limited company can be easily transferred or
disposed off. There is no restriction on the transfer of shares in a joint stock company.

14. Increase in Saving and Investment

The shares are in large number but their value is small. The shares of a company may have a
value of Rs. 10, Rs. 100 etc. So, rich as well as poor can purchase the shares of a company.
This leads to increase in savings and investment.

15. Better Management

Such organization is administered by the elected directors. These directors are generally
experienced and qualified in business field. This increases the efficiency of the company.

16. Beneficial Advices

A joint stock company can take beneficial advices from the government at the time of need
which reduces the chances of its failure.

17. Public Confidence

A joint stock company is created by law and is supervised by legal authority. So, a joint stock
company can easily win the public confidence.

18. Higher Profits

With the help of larger capital and technical skill, the cost of production is reduced, which
increases the rate of profit.

Some of the disadvantages of the joint stock company are given below:
1. Initial Difficulties
It is more difficult to establish a joint stock company as compared to other business organiza-
tions.

2. Lack of Interest
Most shareholders become relaxed and leave all the functions to be carried out by the di-
rectors. This usually encourages the directors to promote their own interest at the cost of the
company.

3. Labor Disputes
In such organization there is no close contact of the workers with the owners or the sharehold-
ers. This leads to formation of labor unions to fight against the company’s management.

4. Lack of Responsibility
There is lack of personal interest and responsibility in the business of a joint stock company. If
any mistake occurs, everybody tries to shift or transfer his responsibilities to other persons and
he remains safe.

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 Int roduc t i on t o B usi ne ss

5. Lack of Secrecy
A joint stock company cannot maintain its secrecy due to the reason that a company has to
submit various reports to the registrar.

6. Lack of Freedom
A joint stock company cannot perform its functions freely because it has to submit various
reports to the registrar form time to time.

7. Monopoly
Due to larger size and resources, a joint stock company is in a position to create monopoly.
Sometimes a few customers make agreement and exploit the consumers.

8. Speculation
Due to free transfer of shares and limited liability, speculation in the stock market takes place,
which may affect the economy of the country.

9. Corruption
The directors of the company do not show the picture of the company to the public and
encourage corruption by changing the policies for their personal interest.

10. Complicated Process The formation of a joint stock company is a complicated process
due to many legal formalities.

11. Centralization of Power

In joint stock company, all the powers have in a few hands and due to this, an ordinary
shareholder cannot participate in the affairs of a company.

12. Double Taxes

A joint stock company has to pay double taxes to the government. Firstly, company pays tax on
the whole profit of the company. Secondly, every shareholder pays tax on his individual income.

13. Exploitation
Ordinary shareholders do not have full information about the affairs of their company. So, they are
exploited.

14. Problem of Large-Scale Production Since joint stock company produces on large-
scale, so many problems arise in the economy.

15. Nepotism
In a joint stock company, the directors of company employ their inefficient and incapable
relatives and friends and give key jobs to them. As a result, the company suffers a loss.

16. Late Decision

In joint stock company, the decision making process in time consuming because a meeting is
necessary to solve the business problems and matters.

Distinguish between Public Limited Company and Private Limited Company.

PUBLIC COMPANY
It is a company which is formed by a least ‘7’ members, and there are no restrictions:

� for the transfer of shares.

� for maximum numbers, and
� for subscription of shares and debentures.

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Int roduc t i on t o B usi ne ss

PRIVATE COMPANY
It is a company which is formed by at least ‘2’ members and has certain restrictions:

� for the transfer of shares

� for maximum number of members,
� for subscription of shares and debentures.

DISTINCTION BETWEEN PUBLIC LIMITED

COMPANY AND PRIVATE LIMITED COMPANY

Public Limited Company Private Limited Company

1. Number of Members Its shareholders may elect at least ‘2’

Minimum number of members should directors and
be ‘7’ and there is no restriction for the maximum number of directors is
maximum number of members appointed according to its Articles of
Association.
2. Number of Directors Minimum
number of directors Is ‘7’ and
maximum number of directors is It cannot invite the public for subscription of
appointed any type of security.
according to its Articles of
Association.
It is not compulsory to file the
3. Issue of Security prospectus with registrar’s office.
It can invite the public for subscription
of its shares and debentures.

4. Prospectus It can commence business soon

It is compulsory for public company by after it receives the certificate of
law of file the prospectus with the incorporation.
registrar’s office.

5. Certificate of Incorporation It cannot

start the business after receiving the
certificate of incorporation, unless it It is not compulsory by law to obtain
receive the certificate of the certificate of commencement of
commencement. business

6. Certificate of Commencement It is
necessary for public limited company to
obtain the certificate of commencement of Every private company has to use the
business. word “Private limited” after its name.

7. Title
Every public company has to use the
word “limited after its name.

There must be at least ‘2’ members

and maximum number should not
exceed ‘50’.

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Int roduc t i on t o B usi ne ss

8. Publication
Public company must publish its annual
performance report. There is no restriction for
publication of annual report.
9. Shares Transferability
It shares can be transferred to
others without restriction. Its shares cannot be
transferred and disposed off to
10. Statutory Meeting It others without any restriction.
has to hold a statutory
meeting within prescribed It is not required by law to
limited. hold statutory meeting

11. Submission of Report It

is required by law to submit
It is not required by law to
various types of reports to the
fulfill the conditions of
registrar’s office, i.e.
minimum subscription before
Auditors’ Report, Profit and
its incorporation.
Loss Account, Balance Sheet.

12. Minimum Subscription It

cannot obtain the certificate of It is not required by law to
commencement of business fulfill the conditions of
without fulfilling the condition of minimum subscription before
minimum subscription. its incorporation.

13. Written Consent of Directors

In public company directors have to he directors of private
give written consent that they are company are not required to
ready to act as the directors of the give their consent for directorship.
company.

14. Tax Payment

Public company has to pay Private company only pays tax
double tax to the government. on its whole profit.

15. Dissolution
Public company is dissolved A separate legal procedure is
according to Companies adopted for the dissolution of
Ordinance, 1984. private company.

PROCEDURE OF FORMATION OF A JOINT STOCK COMPANY IN PAKISTAN.

Joint Stock Company is the third major form of business organization. It has entirely different
organizational structure from sole proprietorship and partnership. There are two advantages of
Joint Stock Company. First of all, it enjoys the advantage of increased capital. Secondary, the
company offers the protection of limited liability to the investors.

The law relating to Joint Stock Company has been laid in Companies Ordinance, 1984,
which came into force on January 1, 1985 in Pakistan.

Following are the important stages or steps for the formation of a joint stock company:

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Int roduc t i on t o B usi ne ss

Promotion Incorpo Capital Certificate

Stage ration Subscription of Com-
Stage Stage mencement

PROMOTION STAGE
The promoters do the basic work for the start of a commercial or an industrial business on
corporate basis.

Promotion is the discovery of ideas and organization of funds, property and skill, to run the
business for the purpose of earning income. Following steps are involved in the stage of
promotion.

1. Idea about Business

Before starting the business, promoters have to think about the nature and production of
company’s business.

2. Investigation
After deciding the nature of business, promoters go in preliminary investigation and make out
plans as regard to the availability of capital, means of transportation, labour, electricity, gas,
water etc.

3. Assembling various Factors

After making initial investigation, the promoter starts accumulating various factors in order to
assemble them. They arrange license, copyrights, employment of necessary employees etc.

4. Financial Sources
The promoters also decide the capital sources of the company and they work out the ways
through which capital can be generated.

5. Preparation of Essential Documents

In addition to above discussed matters, the promoters also prepare following essential docu-
ments for the formation of company:
� Memorandum of company ~
Articles of company
� Prospectus of company

The promoters carrying out these various activities give the company its physical form in the
shape of:
� Giving a name to the company ~
Sanctioning of Capital Issue

INCORPORATION STAGE
The second stage for establishment of a company is to get it incorporated.
1.Filling of Document
Following documents are to be submitted by the promoters in the Registrar’s office. (a)
Memorandum of Association
A document indicating name, address, objects, authorized capital etc. of a company.

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(b)
Articles of Association A document containing laws and rules for internal control and
(c) List of Directors A list of the names, occupations, addresses, along with the
declaration of directors.
(d) Written Consent of Directors A written consent showing their willingness to act at
directors, to be sent to the Registrar.
(e) Declaration of Qualifying Shares
A declaration certificate showing that the directors have taken up qualifying shares and have
paid up the money or pay it in near future to the registrar.
(f) Prospectus Promoters have to file a prospectus
with the registrar.
(g) Statutory Declaration
A statutory declaration is to be sent to the Registrar that all legal formalities have been
completed.

2. Payment of Registration Fee

For the registration of company, the registration fee is also paid to the Registrar. For example.

� Application and documents filing fee

� Registration fee
� Stamp fee on Memorandum and Articles

3. Certificate of Incorporation

If the registrar finds all the documents right and thinks that all formalities have been fulfilled
then he issues the certificate of incorporation to promoters.

CAPITAL SUBSCRIPTION STAGE

After getting certificate of incorporation, the next stage is to make arrangement for raising
capital. For any kind of business, the company raises its capital through following sources:

� By Issuing Shares
� By Issuing Debentures
~ By Savings

CERTIFICATE OF COMMENCEMENT
For the commencement of business, every public company has to obtain the certificate of
commencement, which requires the fulfillment of following conditions:
1. Issue of Prospectus A company has to issue prospectus for selling shares
and debentures to public.
2. Allotment of Shares
The shares and debentures are allotted according to the pro visions of memorandum, when
applications are received from the public.
3. Minimum Subscription
It is also certified that the shares have been allotted up to an amount, not less than the
minimum subscription. After verifying the foregoing documents, the registrar issues a certificate
of commencement of business to public company.

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LESSON 10

LEGAL DOCUMENTS ISSUED BY A COMPANY

BASIC LEGAL DOCUMENTS

A public company must have three basic legal documents.

Basic Legal Documents

Memorandum Articles of
of Association Association

The “Memorandum of Association” is the constitution of a company. The “Articles of

Association” are the basic rules to run the business and the Prospectus” is a notice to the public
for the purchase of securities of the company.

MEMORANDUM OF ASSOCIATION

DEFINITION

According to Companies Ordinance, 1984:

“
Memorandum means the memorandum of association of a company as originally framed
or as altered from time to time tin pursuance of the provisions of any previous Companies
Act or of this Ordinance.”

Explanation

Memorandum of association is known as “Charter of Company”, as it sets the limits, which the
company cannot go out of. Through this, the shareholders and creditors can know about the
range of business activities of the company. Any work or business not stated in the
memorandum cannot be carried out by the management.

The memorandum of public limited company

· Must be printed
· Divided into paragraphs
· Numbered consecutively
· signed by the members
· Name, occupation, nationality, address and number of shares taken by each
subscriber

CLAUSES OF MEMORANDUM OF ASSOCIATION

The memorandum of association may has the following six clauses:

1. Name Clause
The name of a company should be carefully selected and it must not be similar to any existing
company. The Companies Ordinance provides that the name of a public company must end

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with the word “Limited”. In case of private company the name must end with the words “(Private)
Limited”.

2. Situation of Registered Office

The company should have registered head office in the state or province where it wants to
conduct its business. The company cannot start its business without registered head office.

3. Object Clause
This is the most important clause of the memorandum. In this clause it is mentioned that what
type of business company will do. If the company does not work according to its objects then this
action would be considered as illegal.

4. Capital Clause
It is also mentioned in the memorandum that what will be the amount of total capital, its division
in share and the value of each share.

5. Liability Clause
It is clearly written in the memorandum that the liability of the shareholders is limited or unlimited.

6. Association Clause
This clause contains a declaration by the subscribers (promoters) that they are desirous to form
a company and agree to have a number of shares written against their names.

ALTERNATION IN MEMORANDUM

According to sections 20 and 21 of the Companies Ordinance, any clause of memorandum can
be altered with the sanction of court or Central Government.

DEFINITION
According to Companies Ordinance, 1984:

“Articles mean the articles of association of a company as originally framed or as altered

in accordance with the provisions of any previous Companies Act or this Ordinance,
including so far as they apply to the company, the regulations contained in Table A in the
first schedule.”

Explanation
Articles of association are the by-laws of a company. It includes the rules and regulations,
necessary to manage the internal affairs of the company and to achieve the objectives stated in
the memorandum. Articles are responsible for the good conduct of the whole management.

The articles of association must be:

· In a printed form
· Divided into paragraphs
· Numbered consecutively
· Signed by the subscribers
· Properly dated

CONTENTS OF ARTICLES
The articles usually state the rules and regulations about the following matters:
1. Share capital and its division into different types
2. Methods for the transfer of shares

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3. Conversion of shares
4. Alternation in share capital
5. Methods to call the meetings of the company
6. Voting power of members
7. Appointment of directors
8. Powers and duties of directors
9. Right regarding shareholders
10. Proceedings of Directors’ meetings
11. Disqualification of directors
12. Seal of the company
13. Dividends and reserves
14. Accounts and their audits
15. Notices to be issued by the company
16. Winding up a company

ALTERNATION IN ARTICLES

The shareholders of the company can change the articles by passing special resolution but this
change should not be against the memorandum and the ordinance.

PROSPECTUS

DEFINITION

According to English Companies Act,

“
Any prospectus, circular, notice, advertisement or other invitation, offering to the public
for subscription or purchase any shares or debentures of the company.”

Explanation

A prospectus is a notice to general public about the formation of new company. The company
tries to attract the public to purchase its shares through the prospectus, as the terms and
conditions for the purchase of shares and debentures are written in it. There is an application
form in every copy of a prospectus. Only the public company is required to issue the prospectus.

CONTENTS OF PROSPECTUS

The important matters to be included in a prospectus are divided in numbers with separate
headings. Some of them are briefly discussed below:

1. Share Capital Authorized, issued and subscribed capital with

basis of allotment.

2. Commission, Brokerage and Tax Exemption

Commission to be paid to the bankers on issue, brokerage and tax exemption on investment in
shares.

3. Brief history and Prospectus Brief history, main objects and location of the company,
information about project, plant, etc.

4. Financial Information Auditor’s report, shareholders’ equity and

liabilities, share capital, etc.

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5.
Board of Directors Names, addresses and occupations of

6. Interest of Directors Interest of directors in dividends, remuneration to be paid to

directors, secretaries, etc.

7. General Information
General information like:

· Appointment,, election and powers of directors

· Voting rights
· Transfer of shares
· Quorum of general meeting

8. Miscellaneous Place of registered office, factory and bankers, consultants, legal advisor of
the company, etc.

9. Application and Allotment

The procedure for applying for shares and their allotment is made clear to the prospectus
investor.
Distinction between Memorandum of Association and Articles of Association.

MEMORANDUM OF ASSOCIATION

Memorandum of association is a basic document of a joint stock company. It is known as the

charter of the company. It sets out the limits, which a company cannot go out of. It main
purpose is to enable the shareholders, creditors and all those who deal with the company, to
know about its permitted range of enterprise.

ARTICLES OF ASSOCIATION
Articles of association is a legal document, secondary in importance of memorandum of
association. The articles of association are the regulations by law which govern the internal
organization and conduct of a company.

Distinction between Memorandum of Association and Articles of Association

Memorandum of Association Articles of Association

1.
Status
It is the charter of the It contains regulation and
company to regulate the laws, which govern the
external affairs of the internal administration and
company management of the company.
2. Preparation
It is prepared under the It is prepared under the
provisions of Companies provisions of Companies
Ordinance, 1984. Ordinance, 1984, and
memorandum of association
3. Registration
No company can be registered Articles of association are not
without submitting memorandum necessary for the registration
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to registrar. of the company.

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4. Limits
This document determines the Business limits are not
limit of company’s business mentioned in it.

5. Alteration
It is not alterable, but it can be It can be altered by a special
altered by court and central resolution at any time.
government.

6. Nature
It deals with external It deals with internal
contracts. administration and management
of the company
7. Priority
If there is a conflict between Priority is not given to articles
memorandum of association of association.
and articles of association,
then priority is given to
memorandum of association.

8. Incorporation
The registration of articles of
A public company cannot be
association by a company,
incorporated unless the
memorandum of association is limited by shares, is optional.
submitted to the registrar.

9. Clauses The articles are not limited to

The memorandum of six clauses. For example,
association has usually six Table A of Companies
clauses, which can be altered Ordinance has 85 clauses.
as per the requirement.

10. Importance It is the secondary document

It is most important and of the company.
primary document of
company.
Discus briefly various types of meetings which are held in a joint stock company.

WHAT IS A “MEETING”

“A gathering of two or more persons by previous notice or by mutual arrangement for the
discussion and transaction of some business is called meeting.”

SHAREHOLDERS’ MEETINGS AND COMPANY’S MEETING

“
When the members of a company gather at a certain time and place to discuss the business
and managing affairs it is called meeting of the company.”

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Kinds of Company’s Meeting

Shareholders’ Directors’
Meetings Meeting

Statutory Annual Extra-

Meeting General ordinary
Meeting Meeting

SHAREHOLDERS’ MEETINGS

The meetings, which are called to discus the affairs of the company with shareholders, are
called shareholders’ meetings. These meetings have following three kinds:

STATUTORY MEETING

According to section 157, this meting is held only once in the life of a public company. It is the
first meeting of the members of a public limited company. Its main objective is to provide the
shareholders with first hand information about the exact position of company’s affairs.

1. By whom and when held

Section 77 of the Companies Ordinance, 1984, makes it compulsory for:

· every public company limited by shares,

· every public company limited by guarantee, and
· every private company converted into public company

that statutory meeting must be held within a period of not less than 3 months and not more than
6 months from the date at which the company is entitled to commence business.

2. Objects
Its main object is:

· To provide exact and latest information about the affairs of the company,
· To win the confidence of shareholders of the company, and
· To discuss the statutory report.

3. Notice
At least 21 days before the meeting, a notice must be sent to each shareholder along with the
statutory report, by the secretary.

4. How the meeting is called

Under section 157(2) of Companies Ordinance, the directors should send a notice of statutory
meeting, to all the shareholders, at least 21 days before the meeting. Directors also send
statutory report, duly certified by at least 3 directors – one of them should be the chief executive
of the company.

5. Privileges to the members

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The members of the company in meeting have the liberty to discuss any matter relating to
company’s affairs.

STATUTORY REPORT

The report prepared by the secretary, certified by at least 3 directors – one of them being the
chief executive of the company is called statutory report. The statutory report contains the
following information:

1. Share Allotment Total number of shares allotted and their

consideration for allotment.

2. Summary of Cash received Summary of cash

received in respect of shares allotted.

3. Expenses List of basic expenses of

the company.

4. Commission Detail of commission for the sale of

shares, if any.

5. Particulars of Contract The particulars of contract and

their modifications, if any,

6. Particulars of Directors The names, addresses and occupations of the directors and
other officers of the company.

7. Underwriting Contract The particulars of

underwriting contract, if any.

8. List of Arrears The arrears, if any, due on calls from director or

managing agents.

ANNUAL GENERAL MEETING

According to section 158 of Companies Ordinance, every company must hold an annual general
meeting of its shareholders, once in a year. The meeting provides an opportunity to evaluate and
measure the efficiency of the directors and other officers in carrying out the company’s affairs.

1. Notice
A notice of annual general meeting should be sent to the shareholders, at least 21 days before
the date of the meeting.

2. Place of Meeting
In case of listed company, annual general meeting should be held in town where the registered
office of the company is situated.

3. Role of shareholders
The shareholders can criticize the policies of the directors and other officers and can offer
suggestions for their improvement.

4. Occasion
The first meting of this nature must be held within 18 months from the date of incorporation. The
gap between two annual general meetings must not be more than 15 months.

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5. Objects
The main objective of this meeting is to check that ordinary business is being done according to
the rules laid down in articles of association of the company. The directors submit their report
about the affairs of the company during the proceeding year. This report is known as director’s
report. Other objectives are:

• Electionof Directors
· Appointment of auditors
· Declaration of dividend
· Fixation of director’s, auditor’s and managing agent’s remuneration
· Auditor’s report and balance sheet are presented in the meeting

6. Winding up
According to section 305(b), a company may be wound up by the court if it does not hold the two
consecutive annual general meetings.

EXTRAORDINARY GENERAL MEETING

All the general meetings other than annual general meeting and statutory meeting shall be called
extraordinary general meetings. There is no time limit for it. It may be held from time to time

1. Right to Call Meeting

(a) The directors of the company may call extraordinary general meeting for doing
some urgent business.

(b) This meeting can also be called by the directors, on the request of shareholders,
having not less than one tenth of the voting power.

© In case the directors fail to call the extraordinary general meeting within 21 days, the
shareholders themselves may call the meeting. In such, case, meeting must be
held within 3 months.

2. Notice
To call the extraordinary meeting, 21 days notice is served.

3. Procedure
The shareholders have to submit their demand to the secretary of the company. With the
consultation of directors, he will arrange to call the meeting. The company bares the expenses of
the meeting.

• To issue the debentures

• To alter the memorandum and
articles
• To alter the share capital of the
company
DIRECTOR’S MEETINGS
The members of the company elect their representatives to run the business and management
of the company. These representatives are called the directors of the company and they are
different in numbers in different companies. All the business affairs are settled with mutual
consultation of all directors. So, the meeting called for directors to discuss the policies or to take
the decisions is called directors’ meeting.

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1.
When is it held? This meeting must be held at least once in three months and at least

2. Notice
Notice of every meeting must be sent to each directors, otherwise the proceedings of the
meeting may be declared void.

3. Objects
· To allot shares
· To invest company’s fund
· To recommend dividend
· To keep reserve out of profit
· To make loans
· To appoint officers or committee
· To discuss the contracts of the company
· To determine the date of next meeting

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LESSON 11
WINDING UP OF COMPANY

A company is created by law and when the legal existence of company abolishes or comes to
an end it is called winding up of a company or liquidation of company.

MODES OF WINDING UP

A company can be wound up in the following three ways:

Winding up of Joint Stock Company

By Members By Creditors
Compulsory Voluntary Under the
COMPULSORY WINDING
Winding up UP BY Winding
COURT Up Supervision
by Court of Court
According to Section 305 of Companies Ordinance, a company may be wound up by court under
the following circumstances:

1. Special Resolution If a special resolution has been passed by the

company for winding up.

2. Statutory Meeting
If the company fails to submit statutory report to the Registrar for failure to hold statutory meeting
within specified time.

3. Commencement of Business
If a company fails to start its business within one year from the date of incorporation or
postpones its business for one year.

4. Reduction in Members
If the number of members fall below seven in case of public company and below two in case of
private company.

5. Satisfaction of Court If the court is not satisfied with the working, management and business
affairs of the company

6. Payment of Loans If a company is

unable to pay its debts.

7. Unlisted If a company declares itself unlisted due to

any reason.

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VOLUNTARY WIDNIGN UP
A joint stock company may be wound up voluntarily in following two ways:

1. By Members
According to section 362 of Companies Ordinance, 1984, the members can wind up a company
voluntarily under following circumstances:
(i ) Expiry of Period
A company may be wound up voluntarily by the members, after the expiry of period, by passing
resolution in the general meeting.

(ii) Statutory Declaration

If majority of directors makes a statutory declaration to registrar that the company will be able to
pay its debts in full within one year.

(iii) Special or Ordinary Resolution

After submitting the statutory declaration to the registrar, the company, in general meeting
passes an ordinary or special resolution to wind up the company.

(iv) Appointment of Liquidators

In general meeting, the company appoints liquidators to wind up the company’s affairs. Within
ten days after the appointment must be sent to registrar.
(v) Final Meeting
After winding up the affairs of company, the liquidators call the general meeting of the
shareholders. In this meeting, the liquidators must submit the final accounts of company’s
affairs to the members.

(vi) Dissolution
Within one week of general meeting, liquidators must file a copy of full accounts to the registrar.
At the end of 3 months from the date of registration of return, the company shall be dissolved
and its name will be struck off by the Registrar of Joint Stock company.

2. By Creditors
The Members can wind up a company voluntarily under following circumstances:

(i) Statutory Declaration

In case of creditors voluntary winding up, it is not necessary for the company to make a
statutory declaration regarding its solvency.

(ii)Special Resolution
A general meeting of the company’s shareholders is called to pass an extra ordinary resolution for
the dissolution of the company because it cannot continue its business due to heavy liabilities.
(iii) Creditors’ Meeting
On the same or next day, a meeting of creditors must be called by the company. A notice of
meeting must be sent to each creditor.

(iv) Statement of Affairs

In the creditors’ meeting, the directors must submit a statement of affairs of the company,
together with a list of creditors of the company and estimated amount of their claims.

(v)Intimation to Registrar
The information regarding the notice of passed resolution must be sent to the registrar within
ten days after the date of creditors’ meeting.

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(vi) Appointment of Liquidator

The creditors and shareholders nominate the persons to act as liquidators in their respective
meetings. the opinion of the creditors is preferred.

(vii) Inspection Committee

The creditors and shareholders, in their respective meetings can appoint eh inspection
committee consisting of five persons in each case.

(viii) Liquidators’ Remuneration, Rights and Duties The inspection committee

fixes the remuneration, rights and duties of the liquidators.

(ix) Final Meeting

In the final meeting, the liquidators place before them the full accounts of the company’s affairs
and a copy of these accounts is also sent to registrar within 7 days.

(x) Dissolution
The registrar registers the documents, sent by the company, After 3 months from the date of
registration, the company will be dissolved.

VOLUNTARY WINDING UP UNDER THE SUPERVISION OF COURT

According to section 396 of Companies Ordinance, a voluntary winding up of a company can
also be carried under the strict registration of the court.

1. Resolution
At first, company has to pass special resolution for the voluntary winding up of the company.

2. Supervision Order
Following are the common grounds on which the court issues the supervision order:

1. The liquidator performs his duty in partial manner.

2. The winding up resolution is obtained by fraud.
3. The liquidator does not strictly observe the rules of winding up the company

3. Power of the Court

The court has the power to appoint an additional liquidator, or to remove any liquidator.

4. Dissolution
After the supervision order is made, the liquidator may exercise his powers in winding up of a
company. On completion of winding up, the court will make an order that the company is
dissolved.

SHARE CAPITAL
In simple words, the term “capital” means the particular amount of money with which a business
is started.

In company, share capital means the amount contributed by the shareholders.

DEFINITION

1. According to alan Issacs,

Share capital is that part of the capital of a company that arises from the issue of shares.

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2. L. B. Curzon says,

Share capital is the total amount which a company’s shareholders have contributed or are
liable to contribute as payment for their shares.

KINDS OF SHARE CAPITAL

According to Companies Ordinance, 1984, the following are the kinds of share capital:

1. Authorized Capital
This is maximum amount of capital with which a company is registered or authorized to issue. It
is divided into shares of small value.

For example, the authorized capital of the company Rs. 10,00,000 divided into
1,00,000 shares of Rs. 10 each.

2. Issued Capital It is a part of authorized capital which is offered to the

general public for sale.

For example, a company has an authorized capital of Rs. 10,00,000 dividend into 1,00,000
shares of Rs. 10 each. It offers 20,000 shares of Rs. 10 each to general public. So it means
issued capital is Rs. 2,00,000.

3. Un-Issued Capital It is a part of authorized capital which is not offered to the

general public for sale.

For example, a company has an authorized capital of Rs. 10,00,000 divided into 1,00,000 shares
of Rs. 10 each. It offers 20,000 shares of Rs. 10 each to general public. So it means un-issued
capital is Rs. 8,00,000 consisting of 80,000 shares of Rs. 10 each.

4. Subscribed Capital
That part of issued capital for which application are sent by the public and which are accepted is
called subscribed capital.

For example, out of 20,000 shares offered by the company, the general public takes up only
10,000 shares. So subscribed capital, is Rs. 1,00,000.

5. Called up Capital
A company may require payment of the par value either in installments or in lump sum. So
amount of shares demanded by company is known as “called up capital”.

For example, out of 10,000 shares taken by public, company requires a payment of 6 per share.
So “called up” capital of the company is Rs. 60,000 (10,000 share @ Rs. 6).

6. Un-Called up Capital
A company may require payment of the par value either in installments or in lump sum. So
amount of shares not demanded by company is known as “un-called up capital”.

For example, out of 10,000 share taken by public, the company requires a payment of 6 per
share. So “un-called up” capital of the company is rs. 40,000 (10,000 shares @ Rs. 4).

7. Paid up Capital
It is that part of called up capital which is actually received by the company. If some
shareholders could not pay all the money of called up capital, such money is called as “calls in
arrears” or “calls unpaid”.

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8. Reserve Capital
The capital which is reserved for unexpected events or for future needs is called reserve capital.
Company decides not to call up some part of uncalled up capital until winding up. It is normally
kept for the payment of debts at the time of winding up.

9. Redeemable Capital A company can obtain

redeemable capital by issue of:

Participation Term Certificates

Musharika Certificate
Term Finance Certificate

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LESSON 12
COOPERATIVE SOCIETY

COOPERATIVE SOCIETY

A cooperative society is formed by the people of limited means for self help through mutual
help. It is set up to protect economically the poor sections of the society. It is set up for
cooperation, not for competition. The motto of a society is self help, without dependence on
other business units.

DEFINITION

1. According to Herrik,
“
Cooperation is an action of persons voluntarily united for utilizing reciprocally their own
forces, resources or both under mutual management for their common profit or loss.”

2. According to Mr. Plunket,

“
The cooperation is self help made effective by organization.”

Diagram Cooperative Society

Welfare Number of persons

Business Pool Resources

ADVANTAGES OF COOPERATIVE SOCIETY

Following are the important advantages or merits of cooperative society:

1. Advantage for Farmers

Farmers can get fertilizers and seeds at low prices from such cooperative societies. Farmers can
also self their production at high rate or prices through cooperative societies.

2. Easy Formation
the formation of cooperative society is very easy. the formalities for registration are simple and
formation expenses are also normal. The registration of a society is not compulsory but it is
desirable to have its registration.

3. Equal Rights
All members of cooperative society enjoy equal right of vote and ownership. Each shareholder
has only one vote in the management of cooperative societies.

4. Equal Distribution of Wealth

The profit of middlemen is also distributed among the workers. These societies remove the
unequal distribution of wealth.

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5. Economic Democracy
Cooperative society is a domestic form of organization. Every member is allowed to participate in
the management of the business. Each member has the right to cast vote. The decision of
majority is honored.

6. Elimination of Middlemen
Cooperative society eliminates the profit of middlemen. These societies purchases goods
directly from the producers for members and provide them on wholesale rate to society
members.

7. Financial Assistance
These societies also provide financial assistance to its members. In case of house building
cooperatives housing society provides loan for the purchase of inputs.

8. Friendly Relations
A cooperative society is a mean of developing friendly relations among the members. A society
provides a platform for the introduction of members with each other.

9. Improve the Standard of Living

Such societies provide the goods and services to the members of the society at low prices. Due
to this, the purchasing power of the people increases and their standard of living improves.

10. Increase in Employment

The cooperative societies also increase the employment opportunities for people. Thousands of
people are engaged in different types of cooperative societies.

11. Limited Liability

The liability of each member in cooperative society is limited to the share capital, which he
invested. His remain safe.

12. Mutual Cooperation

It is worthwhile to mention here that cooperative society is very useful for creating the spirit of
friendship and brotherhood among the members. Cooperative society is the basic need of
human being in modern era.

13. No Monopoly
A start of the society is the end of monopoly. The monopoly eliminates the competition and
controls the market and prices. The society tries to restore competition and to eliminate control
over market and prices.

14. Open Membership

The membership of a cooperative society is open for all people living in the same area. It is a
voluntary association of persons of any caste, colour and creed.

15. Protection of Mutual Interest

In cooperative societies its members take an advantage of mutual interest and cooperate with
each other achieve the common interest.

16. Responsibility
A society is a training centre for the members to feel their responsibility. A cooperative society is
an ideal place for building up the moral character and development of personal qualities of the
members.

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17. Supply according to Demand

Such societies purchase the goods according to the demand of members. The question of
surplus does not arise.

18. Stable Life

The cooperative societies, as compared to other business organization like sole-proprietorship or
partnership, exists for a longer period. It has a fairly stable life.
19. Saving in Expenditure
In cooperative societies, most of offices bearers work voluntarily. So, there are no heavy
expenditures on management. It also reduces the cost of production.

20. Tax Concession

Government provides certain concessions to cooperative societies, i.e. exemption from stamp
duty, super tax, income tax and registration fee etc.

DISADVANTAGES OF COOPERATIVE SOCIETY

Following are the disadvantages of cooperative societies:

1. Lack of Capital
Generally the members of cooperative societies are related to poor group and they cannot
provide the capital on large scale. External financial resources are also limited. So, cooperative
society faces the shortage of capital, which is a handicap to their development.
2. Untrained Supervision
The government has sufficient control over the movement of these societies. These societies
cannot prosper because the staff appointed for supervision is mostly untrained.

3. Defective Organization
The organizations of cooperative societies are defective and these cannot operate efficiently to
fulfill their objectives.

4. Illiterate and Ignorant

In our country, the villagers are generally illiterate and ignorant. So, they are not familiar with the
basic concept of the cooperative societies.

5. Lack of Experience
The members of societies have less experience of business. Due to lack of capital, they cannot
hire the services of experts.
6. Lack of Discipline
Every member of the cooperative society considers himself as the owner of the business. Due to
lack of discipline, business suffers a loss.

7. Lack of Sincere Management

It is our common observation that the management of society remains in the hands of selfish and
dishonest persons or members who obtains undue advantage form their powers. So, business
suffers a loss.

8. Lack of Profit Incentive

It is not a profit earning institution. Due to absence of profit incentive, the progress of cooperative
society is very poor.

9. Lack of Secrecy There is no secrecy in the business of

cooperative societies.

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10. Lack of Knowledge

The members of cooperative society do not know the principles and rules of society. So, they
create great problem for society.

11. Lack of Unity

In the absence of proper education and training, it is useless to think about unity. The lack of
unity leads towards the destruction of the business.

12. No use of New Technology

The cooperative societies cannot use the latest technology in production. As a result of this,
demand and profit remains low.

13. No Public Confidence

A cooperative society is not bound to publish annual financial statements for the information of
general public. Due to this public shows less confidence in them.

14. Delay in Decision The main cause of failure of cooperative societies is

delayed in decisions.

15. Government Control

The cooperative department of the provincial government supervises the work of all cooperative
societies. The business of a society is not free like other forms of business, so it cannot earn
maximum profit.

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Lesson 13
WHO ARE MANAGERS?

SETTING GOALS AND FORMULATING STRATEGY

Setting goals is the starting point of effective management. Every business needs goals, and
the program for guiding decisions to achieve those goals is called a strategy. Goals are
objectives that a business hopes and plans to achieve.

a. Types of Strategy
i. Corporate strategy—Strategy for determining the firm’s overall attitude
toward growth and the way it will manage its businesses or product lines.
ii. Business (or competitive) strategy—Strategy, at the business-unit or
product-line level, focusing on a firm’s competitive position.
iii. Functional strategy—Strategy by which managers in specific areas
decide how best to achieve corporate goals through productivity

b. Setting Business Goals

Goals are performance targets–the means by which organizations and their
managers measure success or failure at every level.
i. Purposes of Goal Setting
1. to provide direction and guidance for managers at all levels
2. to help firms allocate resources
3. to help define corporate culture
4. to help managers assess performance

ii. Kinds of Goals

Goals differ from company to company depending on the firm’s purpose
and mission. A firm’s basic mission is usually easy to identify. Businesses
often have to rethink their missions as the competitive environment
changes.
1. Mission Statement—organization’s statement of how it will
achieve its purpose in the environment in which it conducts its
business.

2. Three kinds of goals for every firm are:

a. long-term goals—goals set for an extended time, typically
5 years or more into the future
b. intermediate goals—goals set for a period of 1 to 5 years
into the future
c. short-term goals—goals set for the very near future,
typically less than 1 year

c. Formulating Strategy—The creation of a broad program for defining and meeting

an organization’s goals
i. Setting Strategic Goals—long-term goals derived directly from a firm’s
mission statement
ii. SWOT Analysis—Identification and analysis of organizational strengths
and weaknesses and environmental opportunities and threats as part of
strategy formulation

Analyzing the Organization and Its Environment

1. Environmental analysis—process of scanning the business
environment for threats and opportunities (external factors)

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2. Organizational analysis—process of analyzing a firm’s strengths

and weaknesses (internal factors)

iv. Matching the Organization and Its Environment—The heart of strategy

formulation matches environmental threats and opportunities against
corporate strengths and weaknesses.
v. A Hierarchy of Plans
1. Strategic plans—plans reflecting decisions about resource
allocations, company priorities, and steps needed to meet
strategic goals
2. Tactical plans—generally short-range plans concerned with
implementing specific aspects of a company’s strategic plans
3. Operational plans—plans setting short-term targets for daily,
weekly, or monthly performance

d. Contingency Planning and Crisis Management

Even the best-laid plans can become impractical. Managers prepare for these
situations with contingency planning and crisis management.
i. Contingency Planning—recognizes the need to find solutions to specific
aspects of a problem by seeking to identify in advance important aspects
of a business or its market that might change.
ii. Crisis Management—describes an organization’s methods for dealing
with emergencies.

2. THE MANAGEMENT PROCESS

The management process is the process of planning, organizing, directing, and controlling
an organization’s resources to achieve business goals. The four functions of management
are not discrete. They overlap and influence one another. To transform a vision into a
successful business, managers must perform the functions of planning, organizing, leading,
and controlling.
a. Planning—management process of determining what an organization needs to
do and how best to get it done. Yahoo’s creation of partnership agreements with
firms like Reuters, Standard & Poor’s, and the Associated Press for the new
coverage it provides it users represent a form of operational planning.
b. Organizing—management process of determining how best to arrange an
organization’s resources and activities into a coherent structure. Hewlett-
Packard’s recent realignment into an integrated, centralized firm, rather than a
corporate confederation of individual businesses, has served its comeback
strategy well.
c. Directing—management process of guiding and motivating employees to meet
an organization’s objectives. Gordon Bethune, CEO of Continental Airlines, has
turned around morale and performance through his leadership skill, listening to
and rewarding employees to guide the company back on track.

d. Controlling—management process of monitoring an organization’s performance

to ensure that it is meeting its goals. Bethune of Continental instituted a variety of
performance indicators including on-time arrivals, baggage-handling errors,
number of empty seats per plane, and surveys of customer and employee
satisfaction.

3. TYPES OF MANAGERS Not all managers have the same degree of responsibility
for planning, organizing, directing, and controlling.
a. Levels of Management

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i. Top Managers—managers responsible to the board of directors and

stockholders for a firm’s overall performance and effectiveness. They set
strategic goals, make long-range plans, establish major policies, and
represent the company to the outside world.
ii. Middle Managers—managers responsible for implementing the
strategies, policies, and decisions made by top managers. In more
innovative management structures, they may function as team leaders,
acting as consultants who must understand every department’s function
and are granted more decision-making authority, previously reserved for
high-ranking executives.
iii. First-line Managers—managers responsible for supervising the work of
employees
b. Areas of Management
i. Human Resources Managers—managers responsible for hiring and
training employees, evaluating performance, and determining
compensation.
ii. Operations Managers—managers responsible for the production
system, inventory and inventory control, and quality control.
iii. Marketing Managers—managers responsible for the development,
pricing, promotion, and distribution of goods and services.
iv. Information Managers—managers responsible for designing and
implementing systems to gather, organize, and distribute information.
v. Financial Managers—managers responsible for the firm’s accounting
functions and financial resources.
vi. Other Managers—some firms also employ other specialized managers,
such as public relations managers, research & development managers,
etc.

4. BASIC MANAGEMENT SKILLS

Whatever the type or size of the organization, managers employ basic kinds of skills. As
they rise through the hierarchy, they may need to strengthen one or more of these
skills.
a. Technical Skills—skills needed to perform specialized tasks such as writing
computer code, drawing animated characters, or auditing a company’s records.
b. Human Relations Skills—skills in understanding and getting along with
people, such as communicating and motivating.
c. Conceptual Skills—abilities to think in the abstract, diagnose and analyze
different situations, and see beyond the present situation to recognize future
market opportunities and threats.
d. Decision-Making Skills—skills in defining problems and selecting the best
course of action. Basic steps in decision making:
i. define the problem, gather facts, and identify alternative solutions
ii. evaluate each alternative and select the best one
iii. implement the chosen alternative, periodically following up and evaluating
the effectiveness of that choice
e. Time Management Skills—skills that involve the productive use managers
make of their time. Time wasters include paperwork, the telephone, meetings,
and e-mail.
f. Management Skills for the Twenty-First Century
i. Global Management Skills—special tools, techniques, and skills
necessary to compete in a global environment. Managers need to
understand foreign markets, cultural differences, and the motives and
practices of foreign rivals as well as understanding international
operations.

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ii. Management and Technology Skills—abilities to process, organize, and

interpret a plethora of data and information. Information now flows to
everyone in the organization simultaneously, decisions are made more
quickly, and more people are involved.

5. MANAGEMENT AND THE CORPORATE CULTURE

Corporate Culture—The shared experiences, stories, beliefs, and norms that characterize
an organization. A strong corporate culture directs employees’ efforts and helps everyone
work toward the same goals and helps newcomers learn accepted behaviors. Culture either
originates with the company’s founders (as at Walt Disney Co, Wal-Mart, and JC Penney) or
is forged over a long period guided by a constant, focused business strategy (as at PepsiCo).
Some cultures are best described as “countercultures,” such as Apple’s self-styled image as
the alternative to staid competitors in the computer industry.

a. Communicating the Culture and Managing Change

To use its culture to a firm’s advantage, managers must understand the culture
and also transmit it to others in the organization.
i. Communicating the Culture—A clear and meaningful statement of the
organization’s mission is a valuable communication tool.

ii. Managing Change --- Organizations must sometimes change their

cultures and also communicate the nature of the change to both
employees and customers. The process has three stages:
1. Analysis of the company’s environment highlights change as the
most effective response to its problems
2. Top management begins to formulate a vision of a new company.
3. The firm sets up new systems for appraising and compensating
employees who enforce the firm’s new values.

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Lesson 14
HUMAN RESOURCE MANAGEMENT

The goal of human resource management (HRM) is to attract, develop, and maintain an effective
workforce. Planning for human resources involves analyzing jobs, forecasting supply and
demand for the number and types of workers necessary in the organization, and matching
supply with demand for workers. Recruiting is the process of attracting qualified people to apply
for open jobs. Human resource managers can recruit either internally (from within the
organization) or externally (from outside the organization). Organizations use a variety of
methods—including applications, tests, and interviews—to select employees from the pool of
applicants. Once workers have been hired, performance appraisals, which typically incorporate
either ranking or rating techniques, help managers decide who needs training and who should
be promoted. Wages and salaries, incentives, and benefit packages may all be part of a
company’s compensation program, playing a critical role in attracting and retaining qualified
personnel.

In recruiting, hiring, compensating, and managing workers, managers must comply with a variety
of federal laws. Equal employment opportunity legislation forbids discrimination based on factors
that do not relate to legitimate job requirements. The concept of comparable worth holds that
different jobs requiring equal levels of training and skill must pay the same. And the
Occupational Health and Safety Administration establishes guidelines for ensuring a safe
working environment. Human resource managers must also deal with other contemporary legal
issues including employment-at-will, AIDS and sexual harassment.

Key changes that affect the workplace today include workforce diversity, the management of
knowledge workers, and the growing use of contingent employees. Many firms are striving to
create workforces that reflect the increasing diversity of the population, but not all firms have
been equally successful in, or eager to implement, diversity programs. Recruiting, retaining, and
managing knowledge workers—employees whose value is based on what they know rather than
on their experience—is a particular challenge for technology-related firms who depend on them.
Hiring contingent workers—temporary or part-time employees—is a growing trend that offers
managers more flexibility, but also creates a new set of management issues.

A labor union is a group of employees working together to achieve shared job-related goals,
such as higher pay, shorter working hours, more job security, or improved benefits. For
unionized employees, the foundation of labor-management relations is collective bargaining, the
process by which union leaders and managers negotiate terms of employment for those workers
represented by unions. Both labor and management have a range of tactics that they can use
against each other if negotiations fail.

1. THE FOUNDATIONS OF HUMAN RESOURCE MANAGEMENT

The ability to attract and retain talented and motivated employees often marks the difference
between success and failure in today’s competitive business environment. Human
Resource Management—set of organizational activities directed at attracting, developing,
and maintaining an effective workforce.
a. The Strategic Importance of HRM
i. Human resources are critical for effective organizational functioning.
ii. The effectiveness of the HR function has a substantial impact on a firm’s
bottom-line performance.
The chief human resource executive of most large businesses is a vice
president directly accountable to the CEO, and many firms develop
strategic HR plans that are integrated with other strategic planning
activities.

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Human Resource Planning

iv. Job Analysis—systematic analysis of jobs in an organization.
1. Job Description—systematic evaluation of the duties, working
conditions, tools, materials, and equipment related to the
performance of a job.
2. Job Specification—description of the skills, abilities, and other
credentials required by a job.

v. Forecasting HR Demand and Supply

1. Forecasting the supply of labor is two tasks:
a. Forecasting internal supply—the number and type of
employees who will be in the firm at some future date.
b. Forecasting external supply—the number and type of
people who will be available for hiring from the labor market
at large. Large organizations use extremely sophisticated
models to forecast staffing levels.
2. Replacement Chart—listing of each managerial position, who
occupies it, how long that person will likely stay in the job, and who
is qualified as a replacement. Replacement charts are used at
higher levels of the organization to plan developmental experiences
for people identified as potential successors to critical managerial
jobs.
3. Skills Inventories (or Employee Information System)—
computerized system containing information on each employee’s
education, skills, work experiences, and career aspirations.
vi. Matching HR Supply and Demand—After comparing future demand and
internal supply, managers can make plans to manage predicted shortfalls
or overstaffing. If the organization needs to hire, the external labor-supply
forecast helps managers plan how to recruit.

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LESSON 15
STAFFING

Staffing is the practice of finding, evaluating, and establishing a working relationship with future
colleagues on a project and firing them when they are no longer needed. Staffing involves
finding people, who may be hired or already working for the company (organization) or may be
working for competing companies.

In knowledge economies, where talent becomes the new capital, this discipline takes on added
significance to help organizations achieve a competitive advantage in each of their marketplaces.

"Staffing" can also refer to the industry and/or type of company that provides the functions
described in the previous definition for a price. A staffing company may offer a variety of
services, including temporary help, permanent placement, temporary-to-permanent placement,
long-term and contract help, managed services (often called outsourcing), training, human re-
sources consulting, and PEO arrangements (Professional Employer Organization), in which a
staffing firm assumes responsibility for payroll, benefits, and other human resource functions.
The term "staffing company" has replaced the term "temporary service".

STAFFING THE ORGANIZATION

Staffing is one of the most complex and important tasks of good HR management.
a. Recruiting Human Resources—process of attracting qualified persons to apply for
open jobs.
i. Internal Recruiting—practice of considering present employees as
candidates for job openings.
ii. External Recruiting—practice of attracting people outside an organization
to apply for jobs. By early 1998, unemployment had dropped to a 23-year
low of 4.6 percent, making recruiting a more difficult task. By 2001, the
situation reversed.

b. Selecting Human Resources

Validation–process of determining the predictive value of information.
i. Application Forms
ii. Tests— tests of ability, skill, aptitude, or knowledge.
iii. Interviews—Interviews are sometimes a poor predictor of job success
although they remain a popular means of screening candidates. Validity
can be improved by training employees to be aware of potential biases
created in the interview situation and by using structured interviews, in
which questions are written in advance and all interviews follow the same
list of questions for each candidate.
iv. Other Techniques— Polygraph tests are declining in popularity, although
some organizations require physical exams. More organizations are using
drug tests, particularly in which drug-related performance problems could
create serious safety hazards for customers or employees.

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LESSON 16
STAFF TRAINING & DEVELOPMENT

As a brief review of terms, training involves an expert working with learners to transfer to them cer-
tain areas of knowledge or skills to improve in their current jobs. Development is a broad, ongoing
multi-faceted set of activities (training activities among them) to bring someone or an organization
up to another threshold of performance, often to perform some job or new role in the future.

Typical Reasons for Employee Training and Development

Training and development can be initiated for a variety of reasons for an employee or group of
employees, e.g.,:
a.) When a performance appraisal indicates performance improvement is needed
b.) To "benchmark" the status of improvement so far in a performance improvement effort
c.) As part of an overall professional development program
d.) As part of succession planning to help an employee be eligible for a planned change in role
in the organization
e.) To "pilot", or test, the operation of a new performance management system
f.) To train about a specific topic (see below)

Typical Topics of Employee Training

1. Communications: The increasing diversity of today's workforce brings a wide variety of

languages and customs.
2. Computer skills: Computer skills are becoming a necessity for conducting administrative
and office tasks.
3. Customer service: Increased competition in today's global marketplace makes it critical
that employees understand and meet the needs of customers.
4. Diversity: Diversity training usually includes explanation about how people have different
perspectives and views, and includes techniques to value diversity
5. Ethics: Today's society has increasing expectations about corporate social responsibility.
Also, today's diverse workforce brings a wide variety of values and morals to the workplace.
6. Human relations: The increased stresses of today's workplace can include
misunderstandings and conflict. Training can people to get along in the workplace.
7. Quality initiatives: Initiatives such as Total Quality Management, Quality Circles, bench-
marking, etc., require basic training about quality concepts, guidelines and standards for
quality, etc.
8. Safety: Safety training is critical where working with heavy equipment , hazardous
chemicals, repetitive activities, etc., but can also be useful with practical advice for avoiding
assaults, etc.
9. Sexual harassment: Sexual harassment training usually includes careful description of the
organization's policies about sexual harassment, especially about what are inappropriate
behaviors.

General Benefits from Employee Training and Development

There are numerous sources of on-line information about training and development. Several of
these sites (they're listed later on in this library) suggest reasons for supervisors to conduct
training among employees. These reasons include:

1. Increased job satisfaction and morale among employees.

2. Increased employee motivation.
3. Increased efficiencies in processes, resulting in financial gain.
4. Increased capacity to adopt new technologies and methods.
5. Increased innovation in strategies and products.

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6. Reduced employee turnover.

7. Enhanced company image, e.g., conducting ethics training (not a good reason for ethics
training!).
8. Risk management, e.g., training about sexual harassment, diversity training.

Training Methods

i. On-the-Job Training—work-based training, sometimes informal,

conducted while an employee is in the actual work situation. As much as
60 percent of training in the United States occurs on the job.
ii. Off-the-Job Training—Training conducted in a controlled environment
away from the work site.
iii. Vestibule Training—work-based training conducted in a simulated
environment away from the work site. Airline pilots and machine operators
frequently learn via vestibule training.
a. Performance Appraisal—formal evaluation of an employee’s job performance in
order to determine the degree to which the employee is performing effectively.
The individual supervisor is usually responsible for the performance of his or her
subordinates. Appraisals help managers assess the extent to which they are
recruiting and selecting the best employees and contribute to effective training
and appropriate compensation.

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LESSON 18
COMPENSATION AND BENEFITS

Set of rewards that organizations provide to individuals in return for their willingness to perform
various jobs and tasks within the organization. Compensation includes base salary, incentives,
bonuses, benefits, and other rewards.
a. Wages and Salaries
i. Wages—compensation in the form of money paid for time worked.
ii. Salary—compensation in the form of money paid for discharging the
responsibilities of a job.

b. Incentive Programs—Special compensation program designed to motivate high

performance
i. Individual Incentives—incentive-based pay plan that rewards individual
performance.
1. Bonus—Individual performance incentive in the form of a special
payment made over and above the employee’s salary
2. Merit Salary Systems—Individual incentive linking
compensation to performance in nonsales jobs
3. Pay-for-performance (or variable pay)—Individual incentive that
rewards a manager for especially productive output

Company-wide Incentives
1. Profit-sharing plan—Incentive plan for distributing bonuses to
employees when company profits rise above a certain level
2. Gain-sharing plan—Incentive plan that rewards groups for
productivity improvements
3. Pay-for-knowledge plan—Incentive plan to encourage employees
to learn new skills or become proficient at different jobs

c. Benefit Programs—compensation other than wages and salaries. Some may be

required by law, such as, workers’ compensation insurance (insurance for
compensating workers injured on the job)
i. Retirement Plans—prearranged company pensions provided to retired
employees.
ii. Containing the Costs of Benefits
1. Cafeteria Benefit Plan—benefit plan that sets limits on benefits per
employee, each of whom may choose from a variety of alternative
benefits. It allows employees to choose those benefits they really
want.

2. THE LEGAL CONTEXT OF HR MANAGEMENT

Laws impact many areas of human resource management.
a. Equal Employment Opportunity—The basic goal of all equal employment
opportunity regulation is to protect people from unfair or inappropriate
discrimination in the workplace. Legally mandated nondiscrimination in
employment on the basis of race, creed, sex, or national origin

i. Protected Classes in the Workplace

1. Protected Class—set of individuals who by nature of one or more
common characteristics are protected by law from discrimination
on the basis of any of those characteristics.

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Enforcing Equal Employment Opportunity

1. Equal Employment Opportunity Commission (EEOC)—Dept. of
Justice agency created by Title VII to enforce discrimination-
related laws.
2. Affirmative Action Plan–practice of recruiting qualified employees
belonging to racial, gender, or ethnic groups who are
underrepresented in an organization.

iii. Legal issues in Compensation

b. Contemporary Legal Issues in HR Management

i. Employee Safety and Health
1. Occupational Safety and Health Act of 1970 (OSHA)—federal
law setting and enforcing guidelines for protecting workers from
unsafe conditions and potential health hazards in the workplace.
Violators are fined for each incident.
ii. Emerging Areas of Discrimination Law
1. AIDS in the Workplace—Organizations must follow a certain set
of guidelines and employ common sense when dealing with AIDS-
related issues. AIDS is considered a disability under ADA.
2. Sexual Harassment—practice or instance of making unwelcome
sexual advances in the workplace. It is a violation of Title VII of the
Civil Rights Act of 1964.
a. quid pro quo harassment—form of sexual harassment in
which sexual favors are requested in return for job-related
benefits
b. hostile work environment—form of sexual harassment,
deriving from off-color jokes, lewd comments, and so forth,
that makes the work environment uncomfortable for some
employees
3. Employment-at-Will—principle, increasingly modified by legislation
and judicial decision, that organizations should be able to retain or
dismiss employees at their discretion. Employees, however, cannot
be fired for exercising rights protected by law such as filing worker
compensation claims or taking excessive time off to serve jury duty.

3. NEW CHALLENGES IN THE WORKPLACE

a. Managing Workforce Diversity
i. Workforce Diversity—range of workers’ attitudes, values, and behaviors
that differ by gender, race, and ethnicity. Workforce diversity has been
increasing in recent years and by 2006 it is expected that almost half all
workers in the labor force will be women and almost one-third will be
Blacks, Hispanics, Asian Americans, and others.

b. Managing Knowledge Workers

i. The Nature of Knowledge Work
Knowledge Worker—employee who is of values because of the
knowledge that he or she possesses. Knowledge workers include
computer scientists, engineers, and physical scientists who tend to work in
high-technology firms and are usually experts in some abstract knowledge
base.

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Knowledge Worker Management and Labor Markets

1. The demand for knowledge workers has been growing at a
dramatic rate.
2. The growing demand for knowledge workers has inspired some
fairly extreme measure for attracting them, such a high starting
salaries and sign-on bonuses.

c. Contingent and Temporary Workers

i. Trends in Contingent and Temporary Employment—About 10 percent
of the U.S. workforce currently uses an alternative form of employment
relationship such as contingent or temporary employment.
1. Contingent Worker—employee hired on something other than a
full-time basis to supplement an organization’s permanent
workforce.
ii. Managing Contingent and Temporary Workers—HR managers must
understand how to use contingent workers by using careful planning,
acknowledging both their advantages and disadvantages, and assessing
the real cost of using them.

4. DEALING WITH ORGANIZED LABOR

Labor Union—Group of individuals working together to achieve shared job-related goals,

such as higher pay, shorter working hours, more job security, greater benefits, or better
working conditions.

Labor Relations—Process of dealing with employees who are represented by a union.

Collective Bargaining—Process by which labor and management negotiate conditions of

employment for union-represented workers.

a. Unionism Today
i. Trends in Union Membership—U.S. labor unions have experienced
increasing difficulties in attracting new members. Union membership has
declined, together with the percentage of successful union-organizing
campaigns. There are some recent exceptions.

Trends in Union-Management Relations—The gradual decline in

unionization in the United States has been accompanied by some
significant trends in union-management relations. Unions remain quite
strong in some sectors, notably the automobile and steel industries. Unions
generally are in a weakened position, and many have taken a more
conciliatory stance in their relations with management. Most experts agree
that improved union-management relations have benefited both sides.

Trends in Bargaining Perspectives—Changes in bargaining

perspectives have occurred in response to recent trends. Organizational
downsizing and several years of low inflation in the U.S. have found unions
fighting against wage cuts, rather than striving for wage increases. Another
common goal of union strategy is preserving what’s already been won, as
organizations seek lower health care and other benefits. Unions also place
greater emphasis on job security and improved pension plans. Unions
have begun to set their sights on preserving jobs for workers in the United
States in the face of business

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efforts to relocate production in some sectors to countries where labor

costs are lower.

iv. The Future of Unions—Despite declining membership and some loss of

power, labor unions remain a major factor in the U.S. business world.
Some unions still wield considerable power, especially in the traditional
strongholds of goods-producing industries.

5. COLLECTIVE BARGAINING

Collective bargaining is an ongoing process involving both the drafting and the administering
of the terms of the labor contract. It begins as soon as the union is recognized as the
exclusive negotiator for its members.
a. Reaching Agreement on Contract Terms—Law requires that union leaders and
management representatives must sit down at the bargaining table and negotiate
in good faith. Sessions focus on identifying the bargaining zone.

b. Contract Issues
i. Compensation—Unions generally want their members to earn higher
wages; compensation is the most common contract issue.
1. cost-of-living adjustment (COLA)–labor contract clause tying
future raises to changes in consumer purchasing power
2. wage reopener clause–clause allowing wage rates to be
renegotiated during the life of the labor contract

Benefits (e.g., health insurance, retirement benefits, paid holidays,

working conditions)—Unions typically want employers to pay all or most of
the costs of benefits.

Job Security—In some cases, demands for job security entail the
company’s promise not to move to another location, or a stipulation that if
workforce reductions must occur, seniority will be used to determine which
employees lose their jobs.

iv. Other Union Issues (e.g., working hours, overtime policies, rest period
arrangements, differential pay plans for shift employees, the use of
temporary workers, grievance procedures, and allowable union activities)

v. Management Rights—Management wants as much control as possible

over hiring policies and work assignments. Unions try to limit management
rights by specifying hiring, assignment, and other policies.

c. When Bargaining Fails

Although it is generally agreed that both parties suffer when, after bargaining, an
impasse is reached and action is taken, both sides can use several tactics to
support their cause.
i. Union Tactics
1. Strike—labor action in which employees temporarily walk off the job
and refuse to work. Most strikes in the United States are economic
strikes, triggered by stalemates over mandatory bargaining items
including such noneconomic issues as working hours.

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2. Sympathy Strike (or Secondary Strike) —strike in which one

union strikes to support action initiated by another.
3. Wildcat Strike—strike that is unauthorized by strikers’ union.
4. Other Labor Actions
a. Picketing—labor action in which workers publicize their
grievances at the entrance to an employer’s facility.
b. Boycott—labor action in which workers refuse to buy the
products of a targeted employer.
c. Slowdown—labor action in which workers perform jobs at
a slower than normal pace.

Management Tactics—Like workers, management can respond forcefully

to an impasse.
1. Lockout—management tactic whereby workers are denied access
to the employer’s workplace.
2. Strikebreaker—worker hired as permanent or temporary
replacement for a striking employee.

Mediation and Arbitration—Mediation and arbitration make use of a third

party to help resolve the dispute.
1. Mediation–method of resolving a labor dispute in which a third
party suggests, but does not impose, a settlement.
2. Voluntary Arbitration–method of resolving a labor dispute in
which both parties agree to submit to the judgment of a neutral
party.
3. Compulsory Arbitration–method of resolving a labor dispute in
which both parties are legally required to accept the judgment of a
neutral party.

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Lesson 19
COMPENSATION AND BENEFITS (Continued)

Psychological contracts in the workplace are the set of expectations held by employees
concerning what they will contribute to an organization (contributions) and what the organization
will in return provide to them (inducements). Psychological contracts have changed significantly
in the last decade. Employers offer less security, but more benefits, while employees offer less
loyalty, but are often willing to work longer hours and assume more responsibility.

Good human relations—positive interactions between employers and employees—lead to high

levels of job satisfaction and morale. As a result, employees are more productive and more loyal,
with a lower level of grievances, absenteeism, and turnover.

Theories of employee motivation have changed dramatically over the years. The most important
models are summarized below:
· Classical Theory: People are motivated solely by money. This theory impacted business
via scientific management, which focused on analyzing jobs and finding more efficient
ways to perform tasks.

· Behavior Theory: People’s needs play a role in motivation. Employees perform better
when they believe that management is paying attention to them. This theory was first
demonstrated in the Hawthorne studies (1927-1932 at the Western Electric Hawthorne
works in Chicago).

· Human Resources Model: There are two kinds of managers—Theory X managers who
believe that people are inherently uncooperative and must be constantly punished or
rewarded, and Theory Y managers who believe that people are naturally responsible and
self motivated to be productive.

· Maslow’s Hierarchy of Needs Model: People have different needs which they attempt
to satisfy in their work. Lower level needs must be satisfied before people seek to meet
higher level needs.

· Two-Factor Theory: If basic hygiene needs are not met, workers will be dissatisfied.
Only by increasing more complex motivation factors can companies increase employee
performance.

· Expectancy Theory: People will work hard if they believe that their efforts will lead to
desired rewards.

· Equity Theory: Motivation depends on the way employees evaluate their treatment by
an organization, relative to its treatment of other workers.

Managers can use several strategies to improve employee satisfaction and motivation. The
principle of reinforcement or behavior modification theory proposes that rewards and
punishments can control behavior. Management by objectives, participative management, and
empowerment can improve human relations by increasing the level of employee commitment
and involvement in the organizational team. Job enrichment, job redesign, and modified work
schedules can build job satisfaction by adding motivation factors to jobs in which they are
normally lacking.

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Effective managerial leadership is a key contributor to employee satisfaction and motivation.

Autocratic managers typically issue orders that they expect employees to obey. Democratic
managers generally seek subordinates’ input into decisions. Free-rein managers more often
advise than make actual decisions. The contingency approach to leadership suggests that
managers should assess each situation individually, and exercise a leadership style based on
the elements of the situation.

1. PSYCHOLOGICAL CONTRACTS IN ORGANIZATIONS

Set of expectations held by an employee concerning what he or she will contribute to an

organization (referred to as contributions) and what the organization will in return provide the
employee (referred to as inducements). All organizations face the basic challenge of
managing psychological contracts. The massive wave of downsizing and cutbacks that
swept the U.S. economy in the 1980s and early 1990s has complicated that challenge.
Because job permanence is less likely now, alternative inducements such as lavish benefits
packages may be needed instead.

Human Relations—Interactions between employers and employees and their attitudes

toward one another

2. THE IMPORTANCE OF SATISFACTION AND MORALE

Job Satisfaction—degree of enjoyment that people derive from performing their jobs.
Satisfied employees are likely to have higher morale, fewer grievances, and fewer
negative behaviors than dissatisfied counterparts.

Morale—overall attitude that employees have toward their workplace. Low morale may
result in high turnover, with negative consequences for production schedules,
productivity, and skill level within the firm.

Turnover—Annual percentage of an organization’s workforce that leaves and must be

replaced
a. Recent Trends in Managing Satisfaction and Morale
i. Many major companies went through periods of massive layoffs and
cutbacks during the late 1980s through the mid-1990s, creating a sense of
job insecurity.
ii. A booming economy and the creation of thousands of new jobs led to low
unemployment in most industries and regions by the late 1990s. As a
result, companies found themselves having to work harder not only to
retain current employees but also to offer creative incentives to attract new
employees. Innovative benefits and perks have soared as firms try to
maintain job satisfaction and employee morale and make themselves
more attractive places to work.
iii. The 2000s have brought back layoffs and cutbacks. Workers appear
satisfied enough.

3. MOTIVATION IN THE WORKPLACE

Employee motivation is even more critical to a firm’s success than job satisfaction and
morale.
a. Classical Theory—theory holding that workers are motivated solely by money. i.
Scientific Management–an approach to employee motivation incorporating
the classical theory of motivation.

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ii. Frederick Taylor (Principles of Scientific Management, 1911) reasoned

that if workers were motivated by money, paying the more should prompt
them to produce more. At the same time, firms that analyzed jobs and
found better ways to perform them would be able to produce goods more
cheaply, make more profits, and be able to pay and motivate workers
better than its competitors.

Time-and-motion studies–industrial-engineering techniques applied to

each facet of a job in order to determine how to perform it most efficiently

b. Behavior Theory: The Hawthorne Studies—a set of experiments aimed at

examining the relationship between changes in the physical environment and
worker output.
i. In 1925 Harvard researchers studied Hawthorne Works of Western
Electric, outside Chicago. Their experiment with increasing lighting levels
to examine the relationship between changes in the physical environment
and worker output showed the surprising result that both higher and lower
levels increased productivity, while increased pay failed to do so.
ii. The answer proved to be that workers were reacting to the attention they
were receiving, leading to the conclusion that productivity rose in response
to almost any management action that workers interpreted as special
attention.
iii. Hawthorne Effect—tendency for productivity to increase when workers
believe they are receiving special attention from management.

c. Contemporary Motivational Theories—Following the Hawthorne studies,

managers and researchers focused more attention on the importance of good
human relations in motivating employee performance. Most motivation theorists
are concerned with the ways in which management thinks about and treats
employees.

i. Human Resources Model: Theories X and Y—Douglas McGregor’s

theory of motivation suggesting that managers have radically different
beliefs about how best to use the human resources employed by a firm.
1. Theory X—theory of motivation holding that people are naturally
irresponsible and uncooperative.
2. Theory Y—theory of motivation holding that people are naturally
responsible, growth oriented, self-motivated, and interested in
being productive.

ii. Maslow's Hierarchy of Needs Model—Psychologist Abraham Maslow’s

theory of motivation proposing that people have several different needs
that they attempt to satisfy in their work. These needs are hierarchical in
importance; lower-level needs must be met before a person will try to
satisfy higher-level needs. Once a set of needs has been satisfied, it
ceases to motivate behavior.

Two-Factor Theory—Frederick Herzberg’s theory of motivation holding that job

satisfaction depends on two types of factors, hygiene and motivation.
This theory suggests that managers should follow a two-step approach to enhancing motivation
—first, ensure that hygiene factors (working conditions, policies) are acceptable, and then offer
motivation factors such as recognition and added responsibility.

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i. Expectancy Theory—theory of motivation holding that people are motivated to work

toward rewards that they want and that they believe they have a reasonable chance of
obtaining. In this theory, a reward that is out of reach is likely to be undesirable even if it
is intrinsically positive.

ii. Equity Theory—theory of motivation holding that people evaluate their treatment by
employers relative to the treatment of others. People derive a ratio of contribution to
return from analyzing what they contribute to their jobs (inputs) and what they receive in
return (outputs); they then compare their own ratios with those of other employees. The
ratios do not have to be the same, only fair.

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LESSON 20
STRATEGIES FOR ENHANCING JOB SATISFACTION AND MORALE

These strategies are ways to apply manager’s knowledge of what provides job satisfaction
and motivates workers.

a. Reinforcement/Behavior Modification Theory—theory that behavior can be

encouraged or discouraged by means of rewards or punishments. Most managers
prefer giving rewards and placing positive value on performance to doling out
punishment.

b. Management by Objectives—set of procedures involving both managers and

subordinates in setting goals and evaluating progress. Experts agree that
motivation is the biggest advantage of MBO if it is used properly.

c. Participative Management and Empowerment—method of increasing job

satisfaction by giving employees a voice in the management of their jobs and the
company. As an example, workers who no longer report product defects to
supervisor but have the freedom to correct problems themselves, or even return
defective products to the workers who are responsible for them, have been
empowered to take greater responsibility for their own performance.

Teamwork is not for every situation. Levi Strauss dismantled production teams in
which faster workers became resentful of slower workers who reduced the group ’s
total output, when teach member ’s pay was determined by the team’s level of
productivity.

i. Team Management—employees are given decision-making responsibility

for certain narrow or broad activities.

d. Job Enrichment and Job Redesign

i. Job Enrichment Programs—method of increasing job satisfaction by

adding one or more motivating factors to job activities. Job rotation plans,
for example, expand growth opportunities and the chance to learn new
skills.
ii. Job Redesign Programs—method of increasing job satisfaction by
designing a more satisfactory fit between workers and their jobs. Job
redesign is usually implemented in one of three ways: through combining
task, forming natural work groups, or establishing client relationships.

e. Modified Work Schedules

i. Work-Share Programs—method of increasing job satisfaction by allowing
two or more people to share a single full-time job.
ii. Job sharing usually benefits both employees and employers, although
job-sharing employees generally receive fewer benefits than full-time
counterparts.

Flextime Programs and Alternative Workplace Strategies—method of

increasing job satisfaction by allowing workers to adjust work schedules on
a daily or weekly basis. Flextime can include starting later and leaving
later in the day, starting

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and leaving earlier, or choosing which 4, 5, or 6 days to work during the

week while still completing 40 hours.
iv. Telecommuting and Virtual Offices
Telecommuting—form of flextime that allows people to perform some
or all of a job away from standard office settings. Among salaried
employees, the telecommuter workforce grew by 21/5 percent in 1994, to
7.6 million; the number of telecommuters now
exceeds 25 million employees. The key to telecommuting is technology—
networked computers, fax machines, cellular phones, and overnight
delivery services make it
possible to work from home or while traveling. Virtual office—redesigned
conventional office space to accommodate jobs and schedules that are far
less dependent on assigned spaces and
personal apparatus. Informal work carrels or nooks and open areas can
be made available to every employee.

Advantages and Disadvantages of Modified Schedules and Alternative Workplaces

1. Employees benefit from more freedom in their professional and

personal lives.
2. Employers benefit from higher levels of commitment and job
satisfaction.
3. Flextime sometimes complicates coordination because people who
need to work together are working different schedules.
4. Telecommuting and virtual offices may not be for everyone. Those
who can work best in these new environments tend to be
disciplined self-starters who require little direct supervision during
the day and are not uncomfortable working away from their
managers and colleagues.

One other disadvantage is that it can be difficult for telecommuters to convince management that
if they are not being supervised, they are still working, a perception based on the often
erroneous assumption that “if you can see them, they are working.”

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LESSON 21
MANAGERIAL STYLES AND LEADERSHIP

There are many valid styles of leadership. Most managers do not conform to anyone style, but
under different circumstances, any given style or combination of styles may prove appropriate.

Leadership — A process of motivating others to work to meet specific objectives.

a. Managerial Styles—pattern of behavior that a manager exhibits in dealing with

subordinates.
i. Autocratic Style—managerial style in which managers generally issue
orders and expect them to be obeyed without question.
ii. Democratic Style—managerial style in which managers generally ask for
input from subordinates but retain final decision-making power.
iii. Free-Rein Style—managerial style in which managers typically serve as
advisers to subordinates who are allowed to make decisions.

The Contingency Approach to Leadership—The contingency approach acknowledges that

people in different cultures behave different and expect different things from their managers.
Managers will be more effective when they adapt their styles to the contingencies of the
situations they face.

Contingency Approach—approach to managerial style holding that the appropriate behavior in

any situation is dependent (contingent) on the unique elements of that situation.

a. Motivation and Leadership in the Twenty-First Century

i. Changing Patterns of Motivation

1. Today’s employees want rewards that are often quite different from
those valued by earlier generations. —Money is no longer the
prime motivator for most people, and because businesses cannot
offer the same degree of job security that many workers want,
motivation requires skillful attention from managers. —One re-cent
survey found that workers wanted flexible working hours (67
percent), casual dress (56 percent), unlimited Internet access (51
percent), opportunities to telecommute (43 percent), nap time (28
percent), massages and other perks. In another study of fathers,
many men said they wanted more flexible working hours in order to
spend more time with their families. Today’s workers have a
complex set of needs and their motivations are increasingly complex.
2. The diversity inherent in today’s workforce makes motivating
behavior more complex.
ii. Changing Patterns of Leadership
1. Today’s leaders are finding it necessary to change their own
behavior as organizations become flatter and workers more em-
powered. —The autocratic style is less acceptable and many
managers are functions more as coaches than bosses.
2. Diversity is affecting leadership processes. —Women, African
Americans, and Hispanics are entering the managerial ranks in

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increasing numbers, and they are more and more likely to be

younger than some of the people they are leading.
3. Leaders must adopt more of a “network” mentality rather than a
“hierarchical” one. — New forms of organizational design may call
for one person to be the leader on one project and a team member
on another.

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Lesson 22
MARKETING

The American Marketing Association defines marketing as the process of planning and
executing the conception, pricing, promotion, and distribution of ideas, goods, and services to
create exchanges that satisfy individual and organizational objectives.

Marketing plays an important role in society by helping people satisfy their needs and wants and
by helping organizations decide what to produce. Value compares a product’s benefits with its
costs. Consumers seek products that offer value. Utility is the value to the customer that is
added by the marketer. There are four types of utility: time, place, ownership, and form utility.

The external environment consists of the outsides forces that influence marketing strategy and
decision making. The political/legal environment includes laws and regulations, both domestic
and foreign, that may define or constrain business activities. The social/cultural environment is
the context within which people’s values, beliefs, and ideas affect marketing decisions. The
technological environment includes the technological developments that affect existing and new
products. The economic environment consists of the conditions, such as inflation, recession, and
interest rates, that influence both consumer and organizational spending patterns.

Market segmentation is the process of dividing markets into categories of customers.

Businesses have learned that marketing is more successful when it is aimed toward specific
target markets groups of consumers with similar wants and needs. Markets may be segmented by
geographic, demographic, psychographic, or product use variables.

Market research is the study of what buyers need and of the best ways to meet those needs. This
process entails studying the firm’s customers, evaluating possible changes in the marketing mix, and
helping marketing managers make better decisions about marketing programs. The marketing
research process involves the selection of a research method, the collection of data, the analysis
of data, and the preparation of a report that may include recommendations for action. The four
most common research methods are observation, surveys, focus groups, and experimentation.

A number of personal and psychological considerations, along with various social and cultural
influences, affect consumer behavior. When making buying decisions, consumers first determine
or respond to a problem or need and then collect as much information as they think necessary
before making a purchase. Post-purchase evaluations are also important to marketers because
they influence future buying patterns.

The industrial market includes firms that buy goods falling into one of two categories: Goods to
be converted into other products and goods that are used up during production. Farmers and
manufacturers are members of the industrial market, Members of the reseller market (mostly
wholesalers) are intermediaries who buy and resell finished goods. Besides governments and
agencies at all levels, the government and institutional market includes such non-government
organizations as hospitals, museums, and charities.

There are four main differences between consumer and organizational buying behavior. First,
the nature of demand is different; in organizational markets it is often derived (resulting from
related consumer demand) or inelastic (largely unaffected by price changes). Second,
organizational buyers are typically professionals, specialists, or experts. Third, organizational
buyers develop product specifications, evaluate alternatives more thoroughly, and make more

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systematic post-purchase evaluations. Finally, they often develop enduring buyer-seller

relationships.

1. What Is Marketing?

Although you may be just beginning your classroom study of marketing, organizations like
Microsoft and Coca-Cola have been trying to sell you things for many years. You have
probably become accustomed to many marketing techniques—contests, advertisements,
fascinating displays placed in strategic locations, price markdowns and giveaways. What you
are about to learn is that marketing requires a lot of planning and implementation to develop
a new product, set its price, get it to consumers, and convince them to buy it.

Marketing, as defined by the American Marketing Association, is planning and executing the
conception, pricing, promotion, and distribution of ideas, goods, and services to create
exchanges that satisfy individual and organizational objectives. However, in laymen’s terms,
marketing is quite simply finding a need and filling it.

a. Marketing: Providing Value and Satisfaction Marketing plays an important role

in society by helping people satisfy their needs and wants and by helping
organizations decide what to produce.
i. Value compares a product’s benefits with its costs.
ii. Utility is the value to the customer that is added by the marketer. In other
words, utility is the ability of a product to satisfy a human want or need.
There are four types of utility:

Time Utility is making the product available when the customer

wants it.

Place Utility is making the product available where consumers

want it.

Ownership Utility is the customer value created when someone

takes ownership of a product. Marketers create possession utility
by facilitating the transaction.

Form Utility refers to the characteristics of the product such as its

shape, size, color, function, and style.

b. Marketing: Goods, Services, and Ideas

The influence of marketing permeates everyday life, applying to goods, services,
and ideas. Marketing applies to tangible and intangible goods and include:

Consumer Goods—products purchased by consumers for personal

use.

Industrial Goods—products purchased by companies to produce other

products.

Services—intangible products, such as time, expertise, or an activity,

that can be purchased.

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Relationship Marketing emphasizes lasting relationships with customers

and suppliers. Purchase incentives and customer loyalty programs are just
some of the ways in which firms try to promote these relationships.
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LESSON 23

THE MARKETING ENVIRONMENT

The powerful forces of the external marketing environment heavily influence marketing
programs by posing opportunities and threats.
a. Political and legal environment: From taxes to regulations to laws, the political and legal
environment has a profound impact on marketing. This is especially true for certain
industries, such as telecommunications, automobiles, and tobacco.
b. Social and cultural environment: Trends in this arena, present enormous opportunities for
companies that are both farsighted and flexible. Issues and changes include increasing diversity
in the U.S., more single-parent families, a rapidly growing senior population, etc.
c. Technological environment: New technologies create new goods and services, but also
make
some existing products obsolete (witness the growing dominance of DVDs at Blockbuster).
In recent years, the emergence of the Internet has had the greatest impact on marketing.
d. Economic environment: Inflation, interest rates, recession, and recovery-both in the U.S.
and (to an increasing extent) abroad-have a dramatic influence on every element of the
marketing mix.
e. Competitive environment: Creating a competitive advantage is a fundamental goal of
marketing that can only be accomplished by carefully and continually monitoring every
element of the competitive environment.
f. The competitive environment drives many marketing decisions. By studying the
competition, marketers determine how best to position their own products. Knowing the
alternatives available to your customers, who your competitors are and what they offer is
as vital to success as watching for the next big food or fashion craze or technological
innovation.

There are three specific types of competition:

Substitute product competition: Products that are dissimilar from those of competitors, but
can fulfill the same need (e.g. television and computer games are very different from one
another, but both fulfill the need for entertainment).

Brand competition: Occurs between similar products (e.g. Zest bar soap and Irish Spring bar
soap).

International competition: matches the products of domestic marketers against those of

foreign competitors (e.g. Neutrogena skin care products vs. L'Oreal skin care products,
or Heineken vs. Budweiser).

THE MARKETING MIX

A firm’s marketing mix (often called the four Ps) consists of product, place (or distribution),
price, and promotion.

Product: The good, service, or idea that is marketed to fill consumer wants and needs. Improving
existing products and developing new products are among the marketer's most important tasks.
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Product differentiation: Creation of a product or product image that differs enough from
existing products to attract consumers. Differentiation is a source of competitive advantage.
Combinations of physical goods and services can also be sources of differentiation.

Pricing: Selecting the most appropriate price at which to sell a product. Lower prices generally
lead to higher sales volume, while higher prices generally lead to higher profits per unit. Prices
must support a variety of costs, such as the organization ’s operating, administrative, and
research costs, and marketing cost like advertising and sales salaries

Place (distribution): Determining the most effective and efficient way to get products from pro-
ducers to consumers. Distribution also involves choosing which channels of distribution are most
appropriate.

Promotion: All of the activities a firm undertakes to communicate and promote its products to
the target market. This is clearly the most visible element of the marketing mix.

Target Marketing and Market Segmentation

A market contains all the customers or businesses who might be interested in a product and
can pay for it.

a. Identifying Market Segments: Companies subdivide the market into market seg-
ments, homogeneous groups of customers within a market that are significantly
different from one another. The goal of the market segmentation process is to
group customers with similar characteristics, behavior and needs. These target
markets can then be offered products that are priced, distributed, and promoted
differently. Four factors marketers frequently use to identify market segments are:

Geographic segmentation divides markets into certain areas such as regions, cities, counties, or
neighborhoods to customize and sell products that meet the needs of specific markets.

i. Demographics uses statistical analysis to subdivide the population according

to characteristics such as age, gender, income, race, occupation, and
ethnic group.

ii. Psychographics is the analysis of people by psychological makeup, including

activities, interests, opinions, and lifestyles (e.g. fashion-consciousness,
thrill-seeking).

iii.Behavioral segmentation divides markets according to customers’ knowledge

of, attitude toward, use of, or response to products or their characteristics.

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LESSON 24
MARKET RESEARCH

Market research is the process of systematic gathering, recording and analyzing of data about
customers, competitors and the market. Market research can help create a business plan,
launch a new product or service, fine tune existing products and services, expand into new
markets etc. It can be used to determine which portion of the population will purchase the
product/service, based on variables like age, gender, location and income level. It can be found
out what market characteristics your target market has. With market research companies can
learn more about current and potential customers.

The purpose of market research is to help companies make better business decisions about the
development and marketing of new products. Market research represents the voice of the
consumer in a company.

A list of questions that can be answered through market research:

·What is happening in the market? What are the trends? Who are the competitors?
·How do consumers talk about the products in the market?
·Which needs are important? Are the needs being met by current products?

A simple example of what market research can do for a business is the following. At the com-
pany Chevrolet they brought several disciplines together in a cross-functional team to develop a
concept for a completely new Corvette. This team enabled the marketers to come up with an
alternative concept, one that balanced 4 attributes: comfort and convenience, quality, styling, and
performance. This was considered radical because comfort and convenience were not traditional
Corvette values. However, market research demonstrated that consumers supported the alter-
native concept. As a result the new Corvette was a huge success in the market. [Burns 2001]

With market research you can get some kind of confirmation that there is a market for your
idea, and that a successful launch and growth are possible.

Market research for business planning

Market research is discovering what people want, need, or believe. It can also involve discov-
ering how they act. Once that research is complete it can be used to determine how to market
your specific product. Whenever possible, try to reduce risks at the earliest possible stage. For
example you could carry out market research early on and not wait until you are almost ready to
enter the market. If early market research reveals that your business idea has real potential, you
can use this information in planning the build-up of your business. [Ilar 1998]

For starting up a business there are a few things should be found out through market research in
order to know if your business is feasible. These are things like:

· Market information

Market information is making known the prices of the different commodities in the market, the supply
and the demand. Information about the markets can be obtained in several different varieties and
formats. The most basic form of market information is the best quotation and last sale data, including
the number of shares, with respect to a particular security at a given time. [Market research 2006]

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Examples of market information questions are:

Who are the customers?

Where are they located and how can they be contacted?
What quantity and quality do they want?
What is the best time to sell?
What is the long-term or historical price data over a number of years?
What is the expected production in the country?
Is there more demand for one product or another? Etc.

Market Segmentation

Market segmentation is the division of the market or population into subgroups with similar mo-
tivations. Widely used bases for segmenting include geographic differences, personality differences,
demographic

differences, use of product differences, and psychographic differences.

Market Trends

The upward or downward movements of a market, during a period of time.

The market size is more difficult to estimate if you are starting with something completely new. In
this case, you will have to derive the figures from the number of potential customers or customer
segments. [Ilar 1998]

But besides information about the target market you also

need information about your competitor, your customers, products etc. A few techniques are:

Customer Analysis

Competitor analysis
Risk analysis
Product research

Advertising Research

In the last chapter you can read how to perform market research, with interviews and
questionnaires, but there is already a lot of information available. Market research firms and
industry experts publish much of their information on websites, and in trade and business
magazines. Reference sites index these magazines, many offer the texts online and if not the
libraries stock them. Trade associations publish any listings and statistics
on their websites as well as in hard copy publications. So there is already a lot of information
available.

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LESSON 25
MARKET RESEARCH PROCESS

This chapter introduces the steps involved in the market research process. It also provides you
with a brief preview of each of the steps necessary to conduct a market research effort. As you
can see in figure 1, the market research process has 4 basic steps. These steps include:

Defining the research problem

Establishing the research design
Collecting and analyzing data
Formulate findings

Meta-process model for Market research

Before these four steps are discussed it is important to make a few comments about these
steps. First although the list does strongly imply an orderly step-by-step process, it is rare that a
research project follows these steps in the exact order that they are presented

in the figure. Market research is more of an interactive process whereby a researcher, by

discovering something in a given step, may move backward in the process and begin again at
another step [Market research 2006] Finding some new information while collecting data, may
cause the researcher to establish different research objectives

In the following the different market research steps are described.

Defining the research problem

The step defining the research problem exists of 2 main steps: (1) formulating the problem and
(2) establishing research objectives.

Defining the problem is the single most important step in the market research process. A clear
statement of the problem is a key to a good research. A firm may spend hundreds or thousands of
dollars doing market research, but if it has not correctly identified the problem, those dollars are
wasted. In our case it is obvious that the problem here is setting up a business. But even if this is
clear, you still need to know what exactly you need to know to make the new business a success
and what specific related to the product is difficult to find out. Problems that may be encountered are:
it is unknown what potential markets there are, what customer groups are interested in your prod-
ucts, who the competitors are? After formulating your problem, you need to formulate your research
questions. What questions need to be answered and which possible sub-questions do you have.

With the problem or opportunity defined, the next step is to set objectives for your market
research operations. Research objectives, related to and determined by the problem formulation,
are set so that when achieved they provide the necessary information to solve the problem. A
good way of setting research objectives is to ask,

“
What information is needed in order to solve the problem?" Your objective might be to explore
the nature of a problem so you may further define it, or perhaps it is to determine how many
people will buy your product packaged in a certain way and offered at a certain price. Your

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objective might even be to test possible cause and effect relationships. For example, if you lower
your price, how much will it increase your sales volume?

And what impact will it have on your profit?

Clear objectives can lead to clear results. An example of this is a situation at Camaro/Firebird.
Auto manufacturers are sometimes criticized for creating expensive vehicles with unwanted
features and technologies that do not meet the needs of the target market. To avoid this trap
engineering team of this company turned to market research to evaluate how changes in
performance and fuel economy would affect sales volume and customer satisfaction. It turned
out that customers were willing to pay more for greater performance if the car also offered
simultaneous increases in fuel economy. [Burns 2001]

The problem description, the research question, sub questions and the research objectives are
part of an overall document problem description.

After describing and formulating the problem and the objectives, the next step is to prepare a
detailed and realistic time frame to complete all steps of the market research process. If your
business operates in cycles, establish target dates that will allow the best accessibility to your
market. For example, a holiday greeting card business may want to conduct research before or
around the holiday season buying period, when their customers are most likely to be thinking
about their purchases. [Market research 2006]

Selecting and establishing research design

The step selecting and establishing research design consists of 3 main steps: (1) select the
research design, (2) identify information types and sources and (3) determine and design
research instrument.

Select the research design

As stated earlier, every research project and every business is different. Still, there are enough
commonalities among research projects to categorize them by research methods and proce-
dures used to collect and analyze data. There are three types of research design:

1. Exploratory research is defined as collecting information in an unstructured and informal

way. For example if the owners of a new restaurant often eat out at competitor’s restau-
rants in order to gather information about menu selections, prices and service quality.
2. Descriptive research refers to a set of methods and procedures that describe marketing
variables. Descriptive studies portray these variables by answering who, what, why and
how questions. These types of research studies may describe such things as consumers’
attitudes, intentions, and behaviours, or the number of competitors and their strategies.
3. Causal research design is conducted by controlling various factors to determine which
factor is causing the problem. It allows you to isolate causes and effects. By changing
one factor, say price you can monitor its effects on a key consequence such as sales.
Although causal research can give you a high level of understanding of the variable you
are studying, the designs often require experiments that are complex and expensive.
Identify information types and sources

There are two types of information available to a market researcher: primary data and secondary
data. Primary data is original information gathered for a specific purpose. Secondary data refers
to information that already exists somewhere and has been collected for some other purpose.
Both types of research have a number of activities and methods of conducting associated with
them. Secondary research is usually faster and less expensive to

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obtain than primary research. Gathering secondary research may be as simple as making a trip
to a local library or business information center or browsing the Internet. There is already a lot of
statistics about different businesses that can be used for this research.

Determining and design research instrument

After determining which type(s) of information are needed, the methods of accessing data must
be determined. There are several different methods of collecting data. These methods include
telephone surveys, mail surveys, personal interviews or group surveys.

The actual design of the research instrument, the data collection form that is used to ask and
record the information is critical to the success of the project. There are two basic methods to
collect information: by asking questions or by observing. The most common research instrument
is the questionnaire. There are two types of forms: structured and unstructured. Structured
questionnaires list close-end questions. These include multiple choice questions which offer
respondents the ability to answer "yes" or "no" or choose from a list of several answer choices.
Close-end questions also include scales refer to questions that ask respondents to rank their
answers at a particular point on a scale. Unstructured questionnaires have open-ended
questions. Respondents can answer in their own words.

Collecting and analyzing data

Data collection is usually done by trained interviewers who are employed by field data collection
companies to collect primary data. A choice has to be made between collecting the data yourself
or hiring an external office who are specialized in interviews. Data analysis is needed to give the
raw data any meaning. The first step in analyzing the data is cleaning the data. This is the
process of checking the raw data to verify that the data has been correctly entered into the files
from the data collection form. After that the data have to be coded. This is the process of
assigning all response categories a numerical value.

For example males = 1, females = 2. After that the data can be tabulated, which refers to the
actual counting of the number of observations that fall in to each possible response category.

Formulate findings

After analyzing the data you can make your findings based on this data. Once the findings about
the target market, competition and environment are finished, present it in an organized manner
to the decision makers of the business. In this case report the findings in the market analysis
section of your business plan. In summary, the resulting data was created to help guide your
business decisions, so it needs to be readily accessible to the decision makers.

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LESSON 26
MARKETING RESEARCH

Marketing Research is the process of gathering data about marketing issues and transforming
that raw data into meaningful information that can improve decisions and reduce risks. Market
research can help with nearly every phase of marketing from setting goals for market share to
developing new products to monitoring the program’s effectiveness. It is also important to
monitor the competition, track industry trends, and measure customer satisfaction. Marketing
Research can occur at any point in the product's existence.

The Research Process

~ Study the current situation

� Select a research method

� Collect data

� Secondary data are already available from previous research. ~ Primary data is

newly performed research.

� Analyze the data

� Prepare a report

Research Methods
i. Observation-Market Research technique that involves simply watching and
recording consumer behavior. Probably the oldest form of market
research, it has been brought up to date with such tools as electronic
supermarket scanners that allow managers to see what is selling without
having to check shelves or inventory.

ii. Survey-Market Research technique using a questionnaire that is either

mailed to individuals or used as the basis of interviews. Surveys can be
expensive and may vary widely in accuracy; it is also difficult to find
representative groups of respondents.

Focus Group-Market Research technique in which a small group of people

is gathered, presented with an issue, and asked to discuss it in depth. At
its best it allows exploration of complex issues and can produce creative
solutions. Its small size (6 to 15 people is best) means it may not
represent the larger market well. Focus groups are often used as a first
step, leading to some other form of research.

iv. Experimentation-market research technique that attempts to compare the

responses of the same or similar people under different circumstances. This
method is very expensive but can supply answers to questions that surveys
cannot address, by allowing customers to sample new products, for instance.

Data Warehousing and Data Mining

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i. Data Mining uses electronic technologies for searching, sifting through, and
reorganizing date in order to collect marketing information and target
products in the marketplace. Some benefits are:

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LESSON 27

LEARNING EXPERIENCES OF STUDENTS EARNING LOWER LEVEL CREDIT:

Work in an environment where one or more of the basic principles of marketing are practiced
regularly; e.g. marketing department or marketing communications agency have college-level
and/or company-sponsored training in marketing-related subjects including: pricing, promotion,
distribution, product development, customer relations, direct marketing, marketing analysis and
planning or marketing research.

Typical Learning Experience of Students Earning Upper level Credit:

Lower level requirements as stated above.

Five or more years of experience as a marketing practitioner.

Knowledge of modern marketing concepts; e.g. Internet marketing, target marketing, mass
customization, global marketing, etc.

Three or more years' experience managing a specific marketing function.

Discussion Topics:

If students are familiar with some (but not all) of the following topics, they may be eligible for
lower level credit in the area of marketing. Students familiar with the advanced questions may be
eligible for upper level credit. If knowledge of some of the topics is substantial, students may
consider requesting additional credit in more narrowly defined areas.

What is Marketing?

Facts, definitions, concepts (lower level):

What are consumer needs? Wants?

Describe the components in the marketing mix.

Relationships, knowledge of discipline, methodologies (upper level):

Describe the marketing mix as it relates to consumers.

How is a marketing department organized?

Analyzing Marketing Opportunities

Facts, definitions, concepts (lower level): Describe a company’s marketing environment.

What is involved in gathering and accessing environmental marketing data?

Relationships, knowledge of discipline, methodologies (upper level): Discuss

the characteristics affecting consumer behavior.

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Discuss the characteristics of business markets and the behavior of business buyers.

Market Segmentation

Facts, definitions, concepts (lower level):

What are the bases for segmenting consumer markets? Business markets?

Relationships, knowledge of discipline, methodologies (upper level):

What is target marketing?

Describe

Positioning for competitive advantage.

Product Strategies

Facts, definitions, concepts (lower level):

What are product attributes?

What is product branding?

Relationships, knowledge of discipline, methodologies (upper level):

Describe a product line vs. a product mix.

Discuss product life cycle marketing strategies.

Describe the stages of a product life cycle.

Pricing

Facts, definitions, concepts (lower level):

Discuss internal and external factors contributing to product pricing.

What is cost-based pricing? Value-based pricing? Competition-based pricing?

Relationships, knowledge of discipline, methodologies (upper level):

Describe product-mix pricing strategies.

Describe price adjustment pricing strategies.

Distribution

Facts, definitions, concepts (lower level): Why are marketing intermediaries used?

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Discuss distribution channels and their relationship to marketing.

Relationships, knowledge of discipline, methodologies (upper level):

What are some of the marketing issues related to channel design decisions?

How are channel members motivated?

Retailing and Wholesaling

Facts, definitions, concepts (lower level):

What is retailing? Wholesaling?

What is non-store retailing?

Relationships, knowledge of discipline, methodologies (upper level):

Components of retail marketing decisions. Types of wholesalers?

Marketing Communications

Facts, definitions, concepts (lower level):

What are the steps in developing effective communications?

What is integrated marketing communications?

Relationships, knowledge of discipline, methodologies (upper level):

Discuss “promotional mix.”

Discuss the attributes of mass media advertising vs. direct marketing.

How is public relations used to support marketing objectives? Global

Facts, definitions, concepts (lower level):

Why go international?

How would you decide which markets to enter?

What steps would you take before entering a market?

Relationships, knowledge of discipline, methodologies (upper level):

Discuss the global marketing plan.

Discuss the global marketing organization.

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Internet Marketing

(Lower and upper levels):

What are the characteristics of electronic marketing?

Discuss consumer vs. B2B marketing.

Marketing Ethics

(Lower and upper levels)

Describe marketing impact on the individual consumer and on society as a whole.

Discuss citizen and public actions to regulate marketing.

What is “socially responsible marketing?”

Discuss privacy issues and Internet marketing.

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LESSON 28
UNDERSTANDING CONSUMER BEHAVIOR

Marketers study consumer buying behavior to learn what makes individuals buy one product instead
of another. Consumer markets consist of individuals or households that purchase goods and
services for personal use. Issues to be considered are the differences between organizational and
consumer markets, the buyer’s decision process, and the factors that affect that decision process.

Influences on Consumer Behavior

Consumer behavior is essentially the study of why consumers purchase and consume
products. Four key factors influence consumer behavior:

i. Psychological: Motivations, perceptions, ability to learn, attitudes

ii. Personal: Lifestyle, personality, economic status
iii. Social: Family, opinion leaders, reference groups (e.g. friends, associates)
iv. Cultural: Culture, subculture, social class

The Consumer Buying Process

One way to look at the psychology of buying is to understand the decision-making process
people go through when making a purchase. Deciding what to buy is a problem-solving process.
Sometimes consumers become

Brand Loyal to specific products based on the satisfaction they have received from previous
purchases. Nevertheless, consumers decide what to purchase by gathering information to help
them make a choice. The more complex the problem, the more information they are likely to
seek. The steps in the process usually follow this sequence:

i. Problem/Need recognition: The consumer buying process begins with recognizing a problem
or need. Needs often arise when our personal circumstances change, creating windows of
opportunity for marketers (e.g. getting married, entering the workforce, etc.).

ii. Information seeking: Sources of information can range from personal sources, to marketing
sources, to public sources, to experience. Depending on the product, information seeking ranges
from superficial (e.g. "Where is the soft drink machine?") to extensive (e.g. library research).

Evaluation of alternatives: This step is essentially a matching process: How do the attributes
of the products you are considering match with your needs and wants? Here, too, the
evaluation process can range from brief to protract.

iv. Purchase decision: Purchase decisions are typically based on a combination of rational and
emotional motives. Rational motives are based on logical evaluation of product attributes
(e.g. cost, quality, usefulness). Emotional motives are based on non-objective factors (e.g.
"All my friends have 4-inch high heel shoes!").

v. Post-purchase evaluation: This includes everything that happens after the sale.
Satisfied customers are likely to repurchase products they have used and enjoyed, while
unhappy customers are not only unlikely to repurchase, but also are prone to broadcast their
negative experience to other potential consumers.

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Organizational Marketing and Buying Behavior

a. Organizational Markets can be divided into three main subgroups:

i. Industrial/commercial market (companies that buy to produce their own
goods and services such as Toyota);
ii. Reseller market such as wholesalers like Ingram Micro, which wholesales
computers; retailers such as Ann Taylor
iii.Government and Institutional market including Federal, State and Local
governments, hospitals, churches, museums, and charitable or-
ganizations. Products sold to organizational markets include raw materials
and highly complex manufactured goods such as printing presses,
telecommunications systems, and consulting services.

Organizational buyers are quite different from consumer purchasers:

i. Professionals: They are trained in the field of purchasing and negotiating,

and they typically use formal contracts.
ii. Specialists: They are often specialists in a line of products (e.g. a drug
store buyer might specialize in personal care products).
iii.Experts: They are often experts (or at least very knowledgeable) about the
products they are buying. The buyer-seller relationship is often much closer.
The development of a long-term connection is beneficial to both parties.

The International Marketing Mix

Entering foreign markets, a firm must reconsider-and often must adjust-each element of the
marketing mix:

Products --- Must the products be adapted? Redesigned? Recreated?

Some products can be sold abroad with virtually no changes, while other products need to be
adapted to fit the needs of the foreign buyer.

Pricing --- Pricing decisions must include all elements considered domestically, but also
transportation and delivery costs, and exchange rates.

Distribution --- Gaining a distribution foothold is often expensive and time-consuming.

Purchasing local businesses can help in this regard.

Promotion --- Elements of promotional messages should be matched to the customs and
values of each country.

Many standard U.S. promotional devices do not succeed in other countries. Marketers must
consider differences in language and culture when promoting products abroad.

Small Business and the Marketing Mix

Small businesses also face special considerations in terms of the marketing mix:

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Products --- Some new products and firms are doomed at the start because few consumers
want or need what they have to offer. A thorough understanding of what customers want has
paid off for many small firms.

Is there really a consumer need? How can the products be tailored to better meet the need?
(Research can be very helpful in this regard.)

Pricing --- Small business owners must accurately forecast operation expenses. Do prices truly
cover the costs of running the business? Haphazard pricing that is often little more than
guesswork can sink even a firm with a good product. When small businesses set prices by
carefully assessing costs, many earn very satisfactory profits.

Distribution --- Perhaps the most important distribution issue for small businesses is location,
which can help attract and retain customers. Problems in arranging distribution can make or
break a small business. The ability of many small businesses to attract and retain customers
depends on the choice of location.

Promotion --- Promotional expenses should be considered a necessity. Many small businesses
are ignorant when it comes to the methods and cost of promotion. Successful small businesses
plan for promotional expenses as part of start-up costs. Targeted promotion (e.g. through trade
associations) can be very cost-effective.

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Lesson 29
THE DISTRIBUTION MIX

In selecting a distribution mix, a firm may use any or all of eight distribution channels. The first
four are aimed at getting products to consumers, the fifth is for consumers or business
customers, and the last three are aimed at getting products to business customers. Channel 1
involves direct sales to consumers, Channel 2 includes a retailer. Channel 3 involves both a
retailer and a wholesaler, and Channel 4 includes an agent or broker who enters the system
before the wholesaler and retailer. Channel 5 includes only an agent between the producer and
the customer. Channel 6, which is used extensively for e-commerce, involves a direct sale to an
industrial user. Channel 7, which is used infrequently, entails selling to business users through
wholesalers. Channel 8 includes retail superstores that get products from producers or
wholesalers (or both) for reselling to business customers. Distribution strategies include
intensive, exclusive, and selective distribution, which differ in the number of products and
channel members involved and in the amount of service performed in the channel.

Wholesalers act as distribution intermediaries. They may extend credit as well as store,
repackage, and deliver products to other members of the channel. Full-service and limited-
function merchant wholesalers differ in the number and types of distribution functions they offer.
Unlike wholesalers, agents and brokers never take legal possession of products. Rather they
function as sales and merchandising arms of manufacturers who do not have their own sales
forces. They may also provide such services as advertising and display merchandising. In e-
commerce, e-agents assist Internet users in finding products and best prices.

Retailers fall into two classifications: product line and bargain. Product line retailers include
department stores, supermarkets, hypermarkets, and specialty stores. Bargain retailers include
discount houses, off-price stores, catalog showrooms, factory outlets, warehouse clubs, and
convenience stores. These retailers differ in terms of size, goods and services offered, and
pricing. Some retailing also takes place without stores. Non-store retailing may use direct mail
catalogs, vending machines, video marketing, telemarketing, electronic retailing, and direct
selling. Internet retail shopping includes electronic storefronts where customers can examine a
store’s products, receive information about sellers and their products, place orders, and make
payments electronically. Customers can also visit cybermalls–collections of virtual storefronts
representing a variety of product lines on the Internet.

Physical distribution includes all the activities needed to move products from manufacturers to
consumers, including customer service, warehousing, and transportation of products.
Warehouses may be public or private and may function either as long-term storage warehouses
or as distribution centers. In addition to storage, insurance, and wage-related costs, the cost of
warehousing goods also includes inventory control (maintaining adequate but not excessive
supplies) and material handling (transporting, arranging, and retrieving supplies).

Trucks, railroads, planes, water carriers (boats and barges), and pipelines are the major transportation
modes used in the distribution process. They differ in cost, availability, reliability, speed, and number of
points served. Air is the fastest but most expensive mode; water carriers are the slowest but least
expensive. Since transport companies were deregulated in 1980, they have become more cost-efficient
and competitive by developing such innovations as inter modal transportation and containerization.

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The Distribution Mix

Getting products from producer to consumer is the next element of the marketing mix, known as dis-
tribution, or place. An organized network of firms used to move goods and services from producers
to customers is called a distribution channel, or marketing channel. A company’s decisions
about which channels to use, the distribution mix, plays a major role in the firm’s success.

Intermediaries and Distribution Channels

For most of your purchases, you rely on market intermediaries, also known as middlemen,
who channel goods and services from producer to end-users.

Wholesaler-intermediary those who sells products to other businesses for resale to final
consumers.

Retailer-intermediary those who sells products directly to consumers.

A firm's choice between using an independent intermediary and employing its own distribution
network and sales force depends on three factors: (1) the company's target markets (2) the
nature of its products (3) the costs of maintaining distribution and sales networks

The number and type of market intermediaries involved in the channel of distribution depend on
the kind of product and the marketing practices of a particular industry. There are important dif-
ferences among the channels of distribution for consumer products and business products.

i. Distribution of Consumer Products

Channels for consumer goods are usually the most complex, although
they can be categorized. Typical channels include:
1. Channel 1: Direct Distribution of Consumer Products, ex.
Avon, Fuller Brush, Tupperware
2. Channel 2: Retail Distribution of Consumer Products, ex.
Levi's, Goodyear, PeaPod.com
3. Channel 3: Wholesale Distribution of Consumer Products, ex.
combination convenience store/gas station
4. Channel 4: Distribution through Sales Agents or Brokers, ex.
food brokers, travel agents, realtors

ii. The Pros and Cons of Non-direct Distribution

Non-direct distribution becomes higher priced for end users because
each distribution link charges a markup or commission.
1. Intermediaries can save consumers both time and money by pro-
viding added value.

iii. Channel 5: Distribution by Agents to Consumers and Businesses,

ex. some travel agencies. Channel 5 differs from the other channels in
two ways: (1) it includes an agent as the sole intermediary (2) it
distributes to both consumers and business customers

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Distribution of Business Products

Industrial Distribution-network of channel members involved in the flow of manufactured

goods to industrial customers.

i. Channel 6: Direct Distribution of Business Products, ex. Dell

Computers
ii. Channel 7: Wholesale Distribution of Industrial Products, ex. distrib-
ution of office equipment and accessories
iii.Channel 8: Wholesale Distribution to Business Retailers, ex. Staples,
Office Depot, Office Max

Distribution Strategies --- A distribution strategy is a company’s overall plan for moving
products to buyers and it plays a major role in the company ’s success. One part of that strategy,
choosing the appropriate market coverage, depends primarily on the type of product, as
convenience goods require different strategies from organizational supplies.

i. Intensive distribution, where the market is saturated with a product, al-

most certainly needs a long distribution chain. Normally used for low-cost
consumer goods with widespread appeal such as candy and magazines.
ii. Exclusive distribution severely limits the number of outlets for the item in a
particular geographic area and is most often used for expensive specialty or
technical products, such as Jaguar automobiles and Rolex watches.
iii. Selective distribution uses a limited number of outlets and might work
better for shipping goods that a buyer is likely to want to compare for
features and prices. Examples are fashions and appliances.

Channel conflict --- can occur when one channel member places its own success above the
success of the entire channel, or when the members of a distribution channel disagree over the
roles they should play or the rewards they should receive.

Channel Leadership --- can occur when a channel member who is most powerful in
determining the roles and rewards of other members. That member is called the Channel
Captain. Power may come from the desirability of a producer's product, or from the large sales
volume generated by a wholesaler or retailer.

Wholesaling --- Wholesalers sell primarily to retailers, other wholesalers, and industrial or
institutional users. Wholesalers provide a variety of services to customers who are buying
products for resale or business use. The types of wholesale intermediaries are:

Merchant wholesalers — independent wholesaler who takes legal possession of goods pro-
duced by a variety of manufacturers and then resells them to other businesses. Merchant
wholesalers also provide storage and deliver; the merchant wholesaling industry employs 6
million people in the United States.

i. Full-Service Merchant Wholesaler--merchant wholesaler who provides

credit, marketing, and merchandising services in addition to traditional
buying and selling services. Approximately 80 percent of all merchant
wholesalers are full-service merchant wholesalers.

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ii. Limited-Service Merchant Wholesaler—merchant wholesaler who

provides a limited range of services, sometimes only storage.
iii. Drop Shipper—limited-function merchant wholesaler who receives
customer orders, negotiates with producers, takes title to goods, and
arranges for shipment to customers.
iv. Rack jobbers—limited-function merchant wholesaler who sets up
displays in retail outlets, stock inventory, and mark prices on merchandise
displayed in a certain area of a store.

Agents and Broker — independent intermediary who usually represents many manufacturers and sells
to wholesalers or retailers. Provides a wide range of services including shelf and display mer -
chandising and advertising layout. Agents and brokers never actually own the merchandise they sell.

The Advent of the E-Intermediary — Internet distribution channel member who assists in
moving products through to customers or who collects information about various sellers to be
presented in convenient format for Internet customers.

i. Syndicated Selling—e-commerce practice whereby a Web site offers

other Web sites commissions for referring customers.
ii. Shopping Agent (E-Agent) —e-intermediary (middleman) in the Internet
distribution channel that assists users in finding products and prices but
who does not take possession of products.
iii.Business-to-Business Broker—e-commerce intermediary serving the
business customer.

Retailing --- Retailers sell to individuals who buy products for ultimate consumption and are a
visible element in the distribution chain. Retailers represent the end of the distribution channel,
making the sale of goods or services to final consumers. Today’s retail stores include depart-
ment stores, discount stores, warehouse clubs, hypermarkets, factory outlets, category killers,
supermarkets, convenience stores, and catalog stores. Retailers save consumers time and money.

Types of Retailer Outlets

Line Retailer-retailer featuring broad product lines.

Department Store—large product line retailer characterized by
organization into specialized departments.
Supermarket—large product line retailer offering a variety of food
and food-related items in specialized departments. Ex., Safeway,
Kroger, etc.
Hypermarket—very large product line retailer carrying a wide
variety of unrelated products.
Specialty Stores—carry only a particular type of good, but an
extensive selection of brands, styles, sizes, models, and prices within
each line stocked such as children’s clothing, books, or sporting
goods. Category killers are superstores such as Toys R Us or
Office Depot that dominate a market by stocking every conceivable
variety of a particular line of merchandise.

Scrambled merchandising—retail practice of carrying any product

that is expected to sell well regardless of a store's original product
offering

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ii. Bargain Retailer—retailer carrying a wide range of products at bargain

prices.
1. Discount House—bargain retailer that generates large sales
volume by offering goods at substantial price reductions. K-Mart,
Wal-mart
2. Off-Price Store—bargain retailer that buys excess inventories from
high-quality manufacturers and sells them at discounted prices.
Marshall's is one of the most successful.
3. Catalog Showroom—bargain retailer in which customers place
orders for catalog items to be picked up at on-premises warehouses.
4. Factory Outlet—bargain retailer owned by the manufacturer
whose products it sells.
5. Warehouse Club (or Wholesale Club) —bargain retailer offering
large discounts on brand-name merchandise to customers who have
paid annual membership fees. Ex., Price Club, which merged with
rival Costco.
6. Convenience Store—retail store offering easy accessibility,
extended hours, and fast service. Ex. 7-Eleven and Circle K.

Non-store and Electronic Retailing

i. Major Types of Non-store Retailing

1. Direct Response Retailing—non-store retailing by direct in-
teraction with customers to inform them of products and to receive
sales orders, including mail-order (catalog) marketing,
telemarketing, direct selling (Avon), and electronic marketing
(including video shopping), and mail marketing.

ii. The Boom in Electronic Retailing

Electronic retailing is non-store retailing in which information about the
seller's products and services is connected to consumers' computers,
allowing consumers to receive the information and purchase the products
in the home. The Internet is a borderless shopping environment with great
potential for some products. Some companies, known as pure-plays, only
do business through the Internet.

1. Internet-Based Stores—Use of the Internet to interact with

customers is booming. Internet usage by small businesses in the
United States doubled in 1998, nearly doubled again in 1999, and
added another 2.1 million Websites during 2000. Similar growth has
been seen in the B2B market.
2. Electronic-Catalog—a way of using the Internet to display
products and services for both retail shoppers and business
customers. This format reaches an enormous number of potential
customers at relatively low cost. Some catalogs have connected
with FedEx’s Business Link for ordering and shipping.
3. Electronic Storefronts and Cybermalls
a. Electronic Storefront—a Web site in which consumers
collect information about products and buying opportunities.
b. Cybermall—A cybermall is a Web-based retail complex
that houses dozens of electronic storefronts or Internet-

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based stores that sell everything from computer software to

gourmet chocolates. These Internet storefronts offer the
advantage of “walk-in” traffic and provide Web pages and
servers to their tenants for a sizable fee.

iii. From Door-to-door to E-Sales

c. Multilevel Marketing—channel in which self-employed

distributors are paid commissions for recruiting new cus-
tomers and new company representatives. Ex. Amway.
d. Interactive and Video Marketing Interactive Marketing—
multimedia Web sites using voice, graphics, animation, film
clips, and access to live human advice. Ex. LivePerson.com
Video Marketing-non-store retailing to consumers via
standard and cable television. Ex. QVC

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Lesson 30
PHYSICAL DISTRIBUTION

Physical distribution encompasses all activities required to move finished products from a
producer to the consumer. It is a complex strategic activity with many trade-offs that affect the
organization and profits. Technology used in physical distribution systems today includes
satellite navigation and communication, robots, machine vision, voice input computers, on-board
computer logbooks, and planning software that uses artificial intelligence.

The overriding objective of all physical distribution systems should be to achieve a competitive
level of customer service standards at the lowest total cost. Producers must be able to analyze
whether it is worth it to deliver a product in three days instead of five, if doing so reduces the cost
of an item. The goal is to optimize the total cost of achieving the desired level of service by
analyzing each step in the process and its relation to the other steps.

Warehousing Operations — Warehouses are holding facilities for inventory, whereas

distribution centers serve as command posts for moving goods to customers and collect, sort,
code, and redistribute products to fill customer orders.

i. Types of Warehouses:
1. Private Warehouse-warehouse owned by and providing storage
for a single company.
2. Public Warehouse-independently owned and operated ware-
house that stores goods for many firms.
3. Storage Warehouse-warehouse providing storage for extended
periods of time.
4. Distribution Center-warehouse providing short-term storage of
goods for which demand is both constant and high.

ii. Warehousing costs include rental or mortgage payments, insurance, and

wages. Other costs include:
1. Inventory Control-warehouse operation that tracks inventory on
hand and ensures that an adequate supply is in stock at all times.
2. Material Handling-warehouse operation involving the transporta-
tion, arrangement, and orderly retrieval of goods in inventory.

Transportation Operations

i. Major transportation modes are:

1. Trucks are most frequently used and offer door-to-door delivery and
use of public highways, but are unable to carry all types of cargo.
2. Railroads are able to carry heavier and more diversified cargo,
but are unable to deliver directly to the customer.
3. Water carriers—Boats are the cheapest form of transport, especially
for bulk items, but service is slow and infrequent, and delivery is
restricted.
4. Air transport is the fastest means of moving goods, but it doesn’t
go everywhere, it can carry only certain types of cargo, and is
unreliable and expensive.
5. Pipelines, although expensive to build, are extremely economical
to operate and maintain.

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ii. Changes in Transportation Operations

1. Intermodal Transportation—combined use of several different
modes of transportation.
2. Containerization—use of standardized heavy-duty containers in
which many items are sealed at points of shipment and opened
only at final destination.
3. Physical Distribution and E-Customer Satisfaction—New e -
commerce companies need to focus not only on sales but also on
after-sale distribution in order to avoid customer dissatisfaction that
discourages repeat sales. Order Fulfillment and E-Customer
Satisfaction—Order fulfillment begins when the sale is made: It
ends with getting the product, in good condition and on time, to the
customer for each sales transaction.

Distribution as a Marketing Strategy

Distribution is an increasingly important way of competing for sales. Many firms have turned to
distribution as a cornerstone of their business strategies, which means assessing and improving
the entire stream of activities involved in getting products to customers.

i. The Use of Hubs--central distribution outlet that controls all or most of the
firm's distribution activities. There are three contrasting kinds of hubs.
1. Supply-side hubs handle thousands of incoming supplies and
can run into logistical nightmares.
2. Prestaging hubs are a form of outsourced distribution that can al-
leviate some of the congestion of supply-side hubs; they are located
near the manufacturing firm, managed by separate firms, and
function solely to meet the first company's production schedules.
3. Distribution-side hubs are located far from their industrial cus-
tomers and help to streamline delivery system by consolidating
storage, sorting, and shipping in fewer locations around the world.

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Lesson 31
PROMOTION
The ultimate goal of a promotion is to increase sales. Other goals include communicating
information, positioning a product, adding value, and controlling sales volume. In deciding on the
appropriate promotional mix, marketers must consider the good or service being offered,
characteristics of the target audience and the buyer’s decision process, and the promotional mix
budget.

Advertising strategies often depend on the product life cycle stage. In the introductory stage,
informative advertising helps to build awareness. As a product passes through the growth and
maturity stages, persuasive advertising, comparative advertising, and reminder advertising are
often used. Advertising media include the Internet, newspapers, television, direct mail, radio,
magazines, and outdoor advertising, as well as other channels such as Yellow Pages, special
events, and door-to-door selling. The combination of media that a company chooses is called its
media mix. Personal selling tasks include order processing, creative selling (activities that help
persuade buyers), and missionary selling (activities that promote firms and products rather than
simply close sales). The personal selling process consists of six steps: prospecting and
qualifying (identifying potential customers with the authority to buy), approaching (the first
moments of contact), presenting and demonstrating (presenting the promotional message that
explains the product), handling objections, closing (asking for the sale), and following up
(processing the order and ensuring after-sale service).

Coupons provide savings off the regular price of a product. Point-of-purchase (POP) displays are
intended to grab attention and help customers find products in stores. Purchasing incentives
include samples (which let customers try products without buying them) and premiums (rewards
for buying products). At trade shows, sellers rent booths to display products to customers who
already have an interesting in buying. Contests are intended to increase sales by stimulating
buyers’ interest in products.

Many firms began exploring the possibilities of international sales when domestic sales flattened out
in the mid-twentieth century. Because advertising is the best tool for stimulating product awareness
on a country-by-country basis, it has played a key role in the growth of international marketing.
Whereas some firms prefer a decentralized approach (separate marketing management for dif-
ferent countries), others have adopted a global perspective (coordinating marketing programs
directed at one worldwide audience). Because the global perspective requires products designed
for multinational markets, companies such as Coca-Cola, McDonald ’s, and many others have
developed global brands. In promoting these products, global advertising must overcome such chal-
lenges as product variations, language differences, cultural receptiveness, and image differences.

Small business can advertise effective and economically on the Internet. They can also engage
in personal selling activities in local, national, and international markets. Because coupons and
contests are more expensive and harder to manage, small business owners are likely to rely
more heavily on premiums and special sales.

The Importance of Promotion ---- Of the four ingredients in the marketing mix—product, price,
distribution, and promotion — promotion is perhaps the one most often associated with
marketing. Although there are no guarantees of success, promotion has a profound impact on a
product’s performance in the marketplace.

Promotion --- is persuasive communication that motivates people to buy whatever an

organization is selling — goods, services, or ideas. Promotion may take the form of advertising,
personal selling, publicity, public relations, or sales promotion. A company’s

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promotional strategy defines the direction and scope of the promotional activities that will be
implemented to meet marketing objectives.

Information and Exchange Values

A business uses promotional methods to communicate information about itself and its products to
consumers and industrial buyers. From an information standpoint, promotions seek to
accomplish four things with potential customers:

i. Make them aware of products.

ii. Make them knowledgeable about products. Potential customers need to
know where the item can be found, how much it will cost, and how to use
it.
iii. Persuade them to like products
iv. Persuade them to purchase products. Persuading motivates people to satisfy
their wants in a particular way. Persuasive advertising lets them know how
your product will benefit them.

Promotional Objectives --- Promotions experts recognize that not all objectives are sales
objectives. Some communications objectives use an indirect approach to make an audience
aware of a new product or change a company’s negative image. In addition to increasing sales,
promotion can have four other objectives.

i. Communicating Information--Information can advise customers about a

product's existence or about its features.
ii. Positioning Products--process of establishing an identifiable product image
in the minds of consumers. They can base their strategies on several posi-
tioning strategies: on specific product features or attributes, on the services
that accompany the product, on the product’s image, on price, or on category
leadership.
iii. Adding Value--Value-conscious customers gain when the promotional mix is
shifted so that it communicates value-added benefits in its products.
iv. Controlling Sales Volume--Increasing promotional activities in slow periods
can help firms in seasonal businesses to achieve more stable sales
volume throughout the year.

Promotional Strategies

i. A push strategy is a promotional approach designed to motivate

wholesalers and retailers to push a producer’s products to end users.
ii. A pull strategy is a promotional approach that stimulates consumer demand,
which then exerts pressure on wholesalers and retailers to carry a prod-
uct. Many firms use combinations of these two very different strategies.

Promotional Mix --- Marketers use four types of promotional tools: advertising, personal sell -
ing, sales promotions, and publicity and public relations. Market-related factors influence the
promotion mix. The best combination of promotional tools will depend on many factors,
such as

i. The nature of the product

ii. The Target Audience

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iii. Promotion and the Buyer Decision Process. This is the five-step process
outlined in Chapter 10. Marketers match promotion efforts with different
stages of the buying decision process.
iv. The Promotional Mix Budget. The combined costs of personal selling,
advertising, sales promotion, and public relations must fall within the
budgeted amount and be balanced to have the desired effects on attitudes
and purchasing decisions.

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Lesson 32

ADVERTISING PROMOTION

Advertising—promotional tool consisting of paid, non-personal communication used by an identified

sponsor to inform an audience about a product. The average U.S. resident is exposed to roughly
250 ads every day through a variety of media — including floor ads. All forms of advertising have
three objectives: to create product awareness, to create and maintain the image of a product, and to
stimulate consumer demand. It not only determines what we buy, but it shapes our view of the world.

Advertising: (1) The best form of promotion for reaching mass audiences quickly at a low per-
person cost. (2) Gives the organization the greatest control over the message. (3) Promotes goods,
services, or ideas, using a full range of creative approaches and media to convey your message. (4)
Must conform to the law, as well as the ethical and moral standards of the medium and trade
associations.

Advertising Strategies --- The advertising strategies used for a product most often depend on
which stage of the product life cycle the product is in. During a product's growth and maturity
stages, marketers may choose one of three common approaches:

i. Persuasive Advertising—advertising strategy that tries to influence consumers to

buy one company's products instead of those of its rivals.
ii. Comparative Advertising—advertising strategy that directly compares two or more
products.
iii. Reminder Advertising—advertising strategy that tries to keep a product's name in the
consumer's mind.

Advertising Media — variety of communication devices for carrying a seller's message to

potential customers.

i. Television sometimes leads viewers to confuse commercials because of their brevity

and their great number.
ii. Newspapers—the most widely used medium, accounting for about 20 percent of all
advertising expenditures.
iii. Direct Mail—about 18 percent of all ad spending. Direct mail has the largest advance
costs of any technique but the highest cost-effectiveness.
iv. Radio-8 percent of all advertising outlays. Radio ads are quite inexpensive but easy for
consumers to ignore.
v. Magazines—roughly 5 percent of all advertising. Huge variety of magazines makes for a
high level of ready market segmentation.
vi. Outdoor Advertising—about 1 percent of all advertising. Billboards, signs, ads on buses,
taxis, stadiums, etc. are inexpensive and have high repeat exposure. It's growing
faster than newspapers, magazines, and television and offers animation and
changing images.
vii.The Internet—Still in its infancy but offers high potential, particularly for targeted
advertising.
1. Use Data Mining and Data Warehousing (see chapter 10) to tailor advertising to
specific target markets. Has the ability to tailor a message directly to individuals
and use interactive options to gather information about each interaction such as
the exact information accessed by a visitor; develop a profile for their regular
visitors; present information of special interest to the

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visitor; and alert customers to special savings or remind them of past purchases.

vii. Virtual Advertising—Uses digital implants of brands or products onto live

or taped programming, giving the illusion that the product is part of the show.

xii. Other Advertising Channels: Catalogs, sidewalk handouts, Yellow Pages, skywriting, tele-
phone calls, special events, and door-to-door communication represent additional media.
1. The Media Mix—combination of advertising media chosen to advertise a
company's products. Determinants of the Media Mix include:

� The characteristics of the target audience and the types of media

that will reach it are determined.
� The choice of media is also determined by what it is expected to do.

Preparing the Campaign with an Advertising Agency

Advertising Campaign — arrangement of ads in selected media to reach targeted audiences. It

consists of six steps:

i. Identify the target audience

ii. Establish the advertising budget
iii. Define the objectives of the advertising messages
iv. Create the advertising messages
v. Select the appropriate media
vi. Evaluate advertising effectiveness

Advertising Agency—independent company that provides some or all of a client firm's

advertising needs.

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LESSON 33
PERSONAL SELLING
A promotional tool in which a salesperson communicates one-on-one with potential customers. It
is the most expensive form of promotion per contact. Most companies spend twice as much on
personal selling as on all other marketing activities combined. Expenses include salespeople's
compensation and overhead, usually travel, food, lodging. The cost of a single sales call has
been estimated at about $300.

Sales force automation and new technologies are relieving salespeople of nonproductive
tasks, making the time they spend with customers more efficient and profitable.

Telemarketing and Personal Sales

Telemarketing, selling over the telephone, is a low-cost, efficient way to reach many people.
However, its intrusive nature has led many states to enact legislation that gives consumers
rights to place their names on “Do Not Call” lists, restricts telemarketers from calling at certain
hours, and prohibits telemarketers from blocking their caller ID technology.

Sales Force Management

Sales force management means setting goals at top levels of the organization, setting practical
objectives for salespeople, organizing a sales force that can meet those objectives, and
implementing and evaluation the success of the overall sales plan.

Personal Selling Situations

i. Retail Selling—personal selling situation in which products are sold for

buyers' personal or household use.
ii. Industrial Selling—personal selling situation in which products are sold to
businesses, either for manufacturing other products or for resale.

Personal Selling Tasks

i. Order Processing—personal selling task in which salespeople receive

orders and see to their handling and delivery.
ii. Creative Selling—personal selling task in which salespeople try to persuade
buyers to purchase products by providing information about their benefits.
iii.Missionary Selling—personal selling task in which salespeople promote
their firms and products rather than try to close sales.

The Personal Selling Process

i. Prospecting and Qualifying—Prospecting is the process of identifying

potential customers; qualifying identifies those who have the authority to
buy and the ability to pay.
ii. Approaching—the all-important first few minutes of contact with a qualified
prospect.
iii. Presenting and Demonstrating—a full explanation of the product, its
features, and its uses, linking its benefits to the prospect's needs.
iv. Handling Objections—Objections show the prospect is interested and
pinpoint the parts of the presentation with which the buyer has a problem.
The salesperson must work to overcome these objections.

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v. Closing—the most critical part of the selling process in which the

salesperson asks the prospect to buy the product.
vi. Following Up—a key activity for relationship marketing in which sellers
supply after-sale support that provides convenience and added value.

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Lesson 34
SALES PROMOTIONS

Sales Promotion — short-term promotional activity designed to stimulate consumer buying or

cooperation from distributors and sales agents.

Sales promotion covers a wide variety of activities from arranging plant tours and trade show
exhibits to distributing free samples and publishing promotional booklets. Sales promotion may
be divided into two basic categories:

Consumer promotion, aimed at the final consumer, and trade promotion, aimed at
wholesalers and retailers.

Types of Sales Promotions

i. Coupons aim to spur sales by offering a discount through redeemable

coupons. It is the biggest category of consumer promotion. Rebates are
similar to coupons, except that customers have to mail in proof of
purchase with a prepared manufacturer’s rebate form.
ii. Point-of-purchase displays are devices used to show a product in a way
that stimulates immediate sales. It may be an end-of-aisle display in a
supermarket or the computerized kitchen design systems for cabinets in
building-supply stores.
iii. Purchasing Incentives (Free samples and Premiums) —free samples and
premiums that allow customers to try products without risk.
iv. Trade Shows—Companies rent booths to display and demonstrate products
to customers who have a special interest or are ready to buy. These
shows are inexpensive and quite effective.
v. Contests—Customers, distributors, and sales reps may all be persuaded
to increase sales by means of contests.
vi. Special-event sponsorship has become one of the most popular types of
sales promotion.
vii. Cross-promotion uses one brand to promote another non-competing brand,
as in McDonald’s bundling with Beanie Babies and Intel inside with
computer cases.

Publicity and Public Relations

Publicity --- a promotional tool in which information about a company or product is transmitted
by general mass media. Publicity is free, but you have little or no control of the content and
delivery. Be aware, there is both good and bad publicity.

Public Relations — company-influenced publicity directed at building goodwill between an or-

ganization and potential customers. Smart companies know they need to maintain positive relations
with their communities, investors, industry analysts, government agencies, and the news media.

Companies seek favorable publicity to create interest in their products. Companies with a good public
image are more attractive to investors. Press relations refer to the process of communicating with
reporters and editors from newspapers, magazines, and radio and television networks and stations.

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News releases are brief statements or video programs released to the press announcing new
products, management changes, sales performance, and other potential news items; also called a
press release. News conferences are gatherings of media representatives at which companies
announce new information; also called a press briefing.

Promotional Practices in Small Business 1.

Small Business Advertising

Methods available for small-business advertising depend on the market that the firm is trying to
reach: local, national, or international. The Internet has provided advertising opportunities.

Local advertising (non-prime-time slots on local TV or cable shows) offers great impact at affordable
cost. Targeted direct mail can help a small firm reach a national audience. For international advertis-
ing, most small firms find direct mail and carefully targeted magazine advertising most effective.

The Role of Personal Selling in Small Business

The personal selling strategies used by small businesses depend on their intended markets.
Many firms combine telemarketing with catalogs and other product literature.

Small Business Promotions — Small companies use the same sales promotion incentives as
larger companies.

International Promotional Strategies

Worldwide advertising is a large part of many companies' promotional expenditures.

Emergence of the Global Perspective

Global Perspective-company's approach to directing its marketing toward worldwide rather

than local regional markets.

Movement toward Global Advertising

i. The truly global perspective means designing products for multinational appeal.
Four factors make global advertising a challenging proposition: product varia-
tions, language differences, cultural receptiveness, and image differences.

Universal Messages and Regional Advertising Skills

In recognizing national differences, many global marketers try to build on a universal advertising
theme that nevertheless allows for variations.

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Lesson 35
THE PRODUCTIVITY
Productivity is a measure of economic performance. It compares how much is produced with
the resources used to produce it. Quality is a product ’s fitness for use. However, an emphasis
solely on productivity or solely on quality is not enough. Profitable competition in today’s
business world demands high levels of both productivity and quality.

Although the United States is the most productive country in the world, by the early 1970s other
nations had begun catching up with U.S. productivity. In particular, the U.S. growth rate of produc -
tivity slowed from about 1979 into the early 1990s. Moreover, even though U.S. manufacturing
productivity is increasing, the service sector is bringing down overall productivity growth.
Because services now account for 60 percent of national income, productivity in this area must
improve. Finally, certain industries and companies remain less productive than others.

On the other hand, in the years just before 1994, U.S. firms began regaining significant market
share in such industries as airplanes, computers, construction equipment, and transistors.
Abandoning a long-standing focus on lower wage rates in other countries, U.S. companies
focused instead of revitalizing productivity by becoming more customers oriented. In addition,
quality improvement practices were widely implemented. Recover has results from recognition of
the connection among customers, quality, productivity, and profits.

Total quality management (TQM) is the planning, organizing, directing, and controlling of all the
activities needed to get high-quality goods and services into the marketplace. Managers must
set goals for and implement the processes needed to achieve high quality and reliability levels.
Value added analysis evaluates all work activities, materials flows, and paperwork to determine
what value they add for customers. Statistical process control methods, such as process
variation studies and control charts, can help keep quality consistently high. Quality/ cost
studies, which identify potential savings, can help firms improve quality. Quality improvement
teams also can improve operations by more fully involving employees in decision making.
Benchmarking — studying the firm’s own performance and the best practices of other
companies to gather information for improving a company’s own goods and services — has
become an increasingly common TQM tool. Finally, getting closer to the customer provides a
better understanding of what customers want so that firms can satisfy them more efficiently.

Recent trends include ISO 9000, a certification program (originating in Europe) attesting that an
organization has met certain international quality management standards. Business process
reengineering involves the fundamental redesign of business operations in the interest of gaining
improvements in quality, cost, and service. The reengineering process consists of six steps,
starting with the company’s vision statement and ending with the implementation of the reengineered
process.

Productivity and quality can be competitive tools only if firms attend to all aspects of their
operations. To increase quality and productivity, businesses must invest in innovation and
technology. They must also adopt a long-run perspective for continuous improvement. In add i -
tion, they should realize that placing greater emphasis on the quality of work life can also help
firms compete. Satisfied, motivated employees are especially important in increasing productivity
in the fast-growing service sector.

The Productivity-Quality Connection

Productivity — a measure of economic performance, comparing how much we produce with

the resources we use to produce it.

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Quality — A product’s fitness for use; its success in offering features that consumers want

Responding to the Productivity Challenge

Productivity has both international and domestic ramifications.

i. A Reality Check for International Business Survival. After declines in

productivity in the 1980s, around 1994 U.S. businesses began to refocus
on understanding the true meaning of productivity and to devise ways of
measuring it. As quality-improvement practices were gradually
implemented, more firms began to realize the payoffs that came from
highlighting four factors: customers, quality, productivity, and profits.
1. Measuring Productivity—Labor productivity Partial productivity
ratio calculated by dividing total output by total labor inputs

2. Productivity among Global Competitors—Differences in

productivity among nations arise from differences in technologies,
human skills, economic policies, natural resources, and traditions
and culture. For example, in the time it takes a U.S. worker to
produce $100 worth of goods, Japanese workers produce about
$68 worth and Belgians about $107 worth.

ii. Domestic Productivity --- Nations must care about domestic productivity
regardless of their global standing. Additional wealth from higher
productivity can be shared among workers, investors, and customers.

1. The United States remains one of the most productive nations in

the world. Output per worker hour rose steadily throughout most of
the 1980s and 1990s.
2. Growth Rate of Productivity—annual increase in a nation’s
output over the previous year.
3. Uneven Growth in the Manufacturing and Service Sectors.
Throughout most of the 1970s, productivity in manufacturing trailed
behind the service sector, but services averaged zero im-
provement from 1978 to 1990, and by 1993 manufacturing
productivity in the United States had grown to more than double
that of services, a margin sustained through 2001. With services
now accounting for about 60 percent of U.S. national income,
productivity must increase more rapidly in this sector for the United
States to maintain its competitive edge in world markets.
4. Industry wide Productivity—various industries differ vastly in
terms of productivity. Some have seen productivity gains (men’s/
boy’s furnishings) and other have fell (plywood manufacturing).
5. Companywide Productivity—high productivity gives a company a
competitive edge because its costs are lower than those of other
companies. Increased productivity allows the firm to pay higher
wages without raising prices.

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Lesson 36
THE PLANNING PROCESS

Planning is the process by which you determine whether you should attempt the task, work out
the most effective way of reaching your target, and prepare to overcome unexpected difficulties
with adequate resources. It is the start of the process by which you turn empty dreams into
achievements. It helps you to avoid the trap of working extremely hard but achieving little.

Planning is an up-front investment in success- by applying the planning process effectively you
can:

· A v o i d w a s t i n g e f f o r t : It is easy to spend large amounts of time on activities that in

retrospect prove to be irrelevant to the success of the project. Alternatively you can miss
deadlines by not assessing the order in which dependent jobs should be carried out.
Planning helps you to achieve the maximum effect from a given effort.

· Take into account all factors, and focus on the critical ones:

This ensures that you are aware of the implications of what you want to do, and that you are
prepared for all reasonable eventualities.

· Be aware of all changes that will need to be made:

If you know these, then you can assess in advance the likelihood of being able to make those
changes, and take action to ensure that they will be successful.

· Gather the resources needed:

This ensures that the project will not fail or suffer for lack of a critical resource.

· Carry out the task in the most efficient way possible:

So that you conserve your own resources, avoid wasting ecological resources, make a fair profit
and are seen as an effective, useful person. The formal procedure of applying the planning
process helps you to:

• Take stock of your current position. Identify precisely what is to be achieved.

· Detail precisely and cost the who, what, when, where, why and how of achieving your
target.
· Assess the impact of your plan on your organization and the people within it, and on the
outside world.
· Evaluate whether the effort, costs and implications of achieving your plan are worth the
achievement.
· Consider the control mechanisms, whether reporting, quality or cost control, etc. that are
needed to achieve your plan and keep it on course. Pareto You may have heard of one
approach to the Pareto principle: that 80% of a job is completed in 20% of the time. Another
application in an non-planning environment is that 80% of the effort tends to achieve 20% of
the results. By thinking and planning we can reverse this to 20% of the effort achieving
80% of the results. We may even decide that it is more efficient not to attempt the remaining
work at all!

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How to Spot what needs to be done

Planning may be done on a routine basis or may need to be carried out as a result of new ideas,
poor performance or pressure from customers or the organization’s environment. This section
examines how you can clarify the problems and opportunities that face you.

New Ideas --- One simple approach to generating ideas is to look at what irritates you in your
life and what seems unnecessarily laborious and tedious. Often this will prompt ideas for
improvements, whether these are administrative changes in your organization or are ideas for
new consumer products or services.

SWOT Analysis - Strengths, Weaknesses, Opportunities, Threats

A more systematic method is to use SWOT Analysis to detail and examine your organization’s
Strengths and Weaknesses, and to examine the Opportunities and Threats it faces. Often
carrying out an analysis using the SWOT framework will be enough to reveal the changes which
can be usefully made. To carry out a SWOT Analysis for yourself or your organization, write
down answers to the following questions:

Strengths:
· What are your advantages?
· What do you do well?
· Consider this from your own point of view and from the point of view of your customers
or the people who rely on you. Don't be modest, be realistic. If you are having any
difficulty with this, try writing down a list of your or your organization’s characteristics.
Some of these will hopefully be strengths!

Weaknesses:
· What could be improved?
· What is done badly?
· What should be avoided?
· Again this should be considered form an internal and external basis - do your customers
perceive weaknesses that you don't see? Do your competitors do any better? Again it is
best to be realistic now, and face any unpleasant truths at this stage in the planning process.

Opportunities
· Where are the good chances facing you?
· What are the interesting trends?
· Useful opportunities can come from such things as:
· Changes in technology and markets on both a broad and industry-specific scale.
· Changes in government policy related to your field.
· Changes in social patterns, population profiles, lifestyle changes, etc.
Threats
· What obstacles do you face?
· What is your competition doing?
· Are the required specifications for your products and services changing?
· Is changing technology threatening your position?
· Do you have bad debt or cash-flow problems?
· Carrying out this analysis is will often be illuminating - both in terms of pointing out what
needs to be done, and in pointing out that problems may be smaller than initially anticipated

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Lesson 37
TOTAL QUALITY MANAGEMENT
The advice of U.S. business consultant W. Edwards Deming on quality was heeded more widely
in Japan than at home until recently. Now U.S. companies are increasingly customer-driven,
quality initiatives exist at all levels of the corporation, and more measurements are used to
document progress objective and identify areas for improvement. Rather than occasional, quality
efforts are now continuous.

Managing for Quality

Total Quality Management (TQM) (or Quality Assurance)—the sum of all

activities involved in getting high-quality products into the marketplace.
Customer focus is the starting point and includes methods of determining what
customers want, then causing all the company’s activities and people to be
directed toward fulfilling those needs and creating customer satisfaction.

i. Planning for Quality—To achieve high quality, managers must plan for
produc-
tion processes (including equipment, methods, worker skills, and materials).
1. Performance Quality—the performance features offered by a
product.
2. Quality Reliability—consistency of a product’s quality from unit
to unit.
ii. Organizing for Quality—Although everyone in a company contributes to
product quality, responsibility for specific aspects of total quality
management is often assigned to specific departments and jobs.

iii. Quality—Directing for quality means that managers must motivate

employees throughout the company to achieve quality goals.
1. Quality ownership means that quality belongs to each person
who creates it while performing a job.
iv. Controlling for Quality—Managers must establish specific quality stan-
dards and measurements.

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Lesson 38
TOTAL QUALITY MANAGEMENT (continued)

Definition --- As defined by ISO:

"TQM is a management approach for an organization, centered on quality, based on the

participation of all its members and aiming at long-term success through customer satisfaction,
and benefits to all members of the organization and to society."

In Japanese, TQM comprises four process steps, namely:

1. Kaizen – Focuses on Continuous Process Improvement, to make processes

visible, repeatable and measurable.
2. . Atarimae Hinshitsu – Focuses on intangible effects on processes and ways to optimize
and reduce their effects.
3. Kansei – Examining the way the user applies the product leads to improvement in
the product itself.

4. Miryokuteki Hinshitsu – Broadens management concern beyond the immediate

product.

TQM requires that the company maintain this quality standard in all aspects of its business. This
requires ensuring that things are done right the first time and that defects and waste are
eliminated from operations.

Origins --- Although W. Edwards Deming is largely credited with igniting the quality revolution in
Japan starting in 1946 and trying to bring it to the United States in the 1980s,

Armand V. Feigenbaum was developing a similar set of principles at General Electric in the United
States at around the same time. "Total Quality Control" was the key concept of Feigenbaum's 1951
book,

Quality Control: Principles, Practice, and Administration, a book that was subsequently re-leased
in 1961 under the title, Total Quality Control (ISBN 0-07-020353-9). Joseph Juran, Philip B.
Crosby, and Kaoru Ishikawa also contributed to the body of knowledge now known as TQM.

The American Society for Quality says that the term Total Quality Management was first used by the
U.S. Naval Air Systems Command "to describe its Japanese-style management approach to quality
improvement."

This is consistent with the story that the United States Department of the Navy Personnel
Research and Development Center began researching the use of statistical process control
(SPC); the work of Juran, Crosby, and Ishikawa; and the philosophy of Deming to make
performance improvements in 1984. This approach was first tested at the North Island Naval
Aviation Depot. In his paper, "The Making of TQM: History and Margins of the Hi (gh)-Story"
from 1994, Xu claims that "Total Quality Control" is translated incorrectly from Japanese since
there is no difference between the words "control" and "management" in Japanese.

William Golimski refers to Koji Kobayashi, former CEO of NEC, being the first to use TQM,
which he did during a speech when he got the Deming prize in 1974.

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TQM in manufacturing --- Quality assurance through statistical methods is a key component in
a manufacturing organization, where TQM generally starts by sampling a random selection of
the product. The sample can then be tested for things that matter most to the end users. The
causes of any failures are isolated, secondary measures of the production process are designed,
and then the causes of the failure are corrected. The statistical distributions of important
measurements are tracked. When parts' measures drift into a defined "error band", the process
is fixed. The error band is usually a tighter distribution than the "failure band", so that the
production process is fixed before failing parts can be produced. It is important to record not just
the measurement ranges, but what failures caused them to be chosen. In that way, cheaper
fixes can be substituted later (say, when the product is redesigned) with no loss of quality. After
TQM has been in use, it's very common for parts to be redesigned so that critical measurements
either cease to exist, or become much wider.

It took people a while to develop tests to find emergent problems. One popular test is a "life test"
in which the sample product is operated until a part fails. Another popular test is called "shake
and bake", in which the product is mounted on a vibrator in an environmental oven, and operated
at progressively more extreme vibration and temperatures until something fails. The failure is
then isolated and engineers design an improvement.

A commonly-discovered failure is for the product to disintegrate. If fasteners fail, the improvements
might be to use measured-tension nut drivers to ensure that screws don't come off, or improved ad-
hesives to ensure that parts remain glued. If a gearbox wears out first, a typical engineering design
improvement might be to substitute a brushless stepper motor for a DC motor with a gearbox. The
improvement is that a stepper motor has no brushes or gears to wear out, so it lasts ten or more
times as long. The stepper motor is more expensive than a DC motor, but cheaper than a DC motor
combined with a gearbox. The electronics are radically different, but equally expensive. One disad-
vantage might be that a stepper motor can hum or whine, and usually needs noise-isolating mounts.

Often, a "TQMed" product is cheaper to produce because of efficiency/performance

improvements and because there's no need to repair dead-on-arrival products, which represents
an immensely more desirable product.

TQM and contingency-based research --- TQM has not been independent of its environment.
In the context of management accounting systems (MCSs), Sim and Killough (1998)s how that
incentive pay enhanced the positive effects of TQM on customer and quality performance. Ittner
and Larcker (1995) demonstrated that product focused TQM was linked to timely problem
solving information and flexible revisions to reward systems. Chendall (2003) summarizes the
findings from contingency-based research concerning management control systems and TQM
by noting that “TQM is associated with broadly based MCSs including timely, flexible, externally
focused information; close interactions between advanced technologies and strategy; and non-
financial performance measurement.” (p.143)

TQM, just another --- Management fad ?

Abrahamson (1996) argued that fashionable management discourse such
as Quality Circles tends to follow a lifecycle in the form of a bell curve. Ponzi and Koenig (2002)
showed that the same can be said about TQM, which peaked between 1992 and 1996, while
rapidly losing popularity in terms of citations after these years. Dubois (2002) argued that the use
of the term TQM in management discourse created a positive utility regardless of what
managers meant by it (which showed a large variation), while in the late 1990s the usage of the
term TQM in implementation of reforms lost the positive utility attached to the mere fact of using
the term and sometimes associations with TQM became even negative. Nevertheless,
management concepts such as TQM leave their traces, as their core ideas can be very valuable.
For

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example, Dubois (2002) showed that the core ideas behind the two management fads
reengineering and TQM, without explicit usage of their names, can even work in a synergistic way.

Tools for Total Quality Management

Competitive product analysis — Process by which a company analyzes a competitor’s

products to identify desirable improvements.

Value-Added Analysis — process of evaluating all work activities, materials flows, and
paperwork to determine the value they add for customers.

Statistical Process Control — methods for gathering data to analyze variations in production
activities to see when adjustments are needed.

i. Process Variation–variation in products arising from changes in produc-

tion inputs.
ii. Control Chart–process of checking production periodically by plotting the
results, to determine when a process is beginning to depart from normal
operating conditions.

Quality/Cost Studies — studies identifying a firm’s current costs as well as the areas with the
largest cost-savings potential.

i. Internal Failures—reducible costs incurred during production and before

bad products leave a plant.
ii. External Failures—reducible costs incurred after defective products have
left a plant.

Quality Improvement Teams — TQM tool in which groups of employees work together to
improve quality by meeting regularly to define, analyze, and solve common production problems
to improve both work methods and the products they make.

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LESSON 39
TOTAL QUALITY MANAGEMENT (continued)
Benchmarking—process by which a company implements the best practices from its own past
performance and those of other companies to improve its own products.

Internal benchmarking uses the firm’s own performance to evaluate progress and set goals;
external benchmarking begins with a critical review of competitors or even companies in other
businesses to determine which have “best practices.”

Getting Closer to the Customer

i. Customers are the driving force for all business activity.

ii. The most successful businesses keep close to their customers and know
what they want in the products they consume.

Trends in Productivity and Quality Management

a. ISO 9000:2000 and ISO 14000

i. ISO 9000:2000—a certification program attesting to the fact that a factory, a
laboratory, or an office has met the rigorous quality management re-
quirements set by the International Organization for Standardization, to
ensure that a manufacturer’s product is exactly the same today, in terms of
level of quality, as it was yesterday and will be tomorrow. More than 140
countries have adopted ISO 9000 as a national standard.
ii. ISO 14000—Certification program attesting to the fact that a factory,
laboratory, or office has improved environmental performance

Process Re-engineering

Business Process Re-engineering — quality improvement process that focuses on improv-

ing both the productivity and quality of business processes.

Re-engineering — quality improvement process that entails rethinking an organization’s

approach to productivity and quality.

i. The Re-engineering Process

1. Identify the business activity that will be changed
2. Evaluate information and human resources to see if they can
meet the requirements for change
3. Diagnose the current process to identify its strengths and
weaknesses
4. Create the new process design
5. Implement the new design

Adding Value through Supply Chains

i. The Supply Chain Strategy—Flow of information, materials, and services

that starts with raw-materials suppliers and continues through other stages
in the operations process until the product reaches the end customer

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ii. Supply Chain Management—Principle of looking at the supply chain as a

whole in order to improve the overall flow through the system
iii. Reengineering Supply Chains for Better Results—By lowering costs,
speeding ser-vice, or coordinating flows of information and materials,
process improvements and reengineering often improve supply chains.

Investing in Innovation and Technology — Many U.S. firms that have continued to invest in
innovative technology have enjoyed rising productivity and rising incomes.

Adopting a Long-Run Perspective — Many quality-oriented firms are committed to longterm

efforts at continuous improvement: the ongoing commitment to improving products and processes.

Emphasizing Quality of Work Life

i. Employee Empowerment—concept that all employees are valuable

contributors to a firm’s business and should be entrusted with decisions
regarding their work.
ii. Employee Training—For employee involvement to be effective, firms are
investing in employee training programs that will enhance employee
performance.

Improving the Service Sector — in trying to offer more satisfactory services, many
companies have discovered five criteria that customers use to judge service quality:

i. reliability
ii. respnsiveness
iii. assurance
iv. empathy
v. tangibles

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Lesson 40
BUSINESS IN DIGITAL AGE

Because businesses are faced with an overwhelming amount of data and information about
customers, competitors, and their own operations, the ability to manage this input can mean the
difference between success and failure. The management of its information system is a core
activity because all a firm’s business activities are linked to it. New digital technologies have taken
an integral place among an organization’s resources for conducting everyday business.

Data communication networks --- Both public and private, carry streams of digital data (electronic
messages) back and forth quickly and economically via telecommunication systems. The largest
public communications network, the Internet, is a gigantic system of networks linking millions of
computers offering information about business around the world, The Net is the most important email
system in the world. Individuals can subscribe to the Net via an Internet service provider (ISP). The
World Wide Web is a system with universally accepted standards for storing, formatting, retrieving,
and displaying information. It provides the common language that enables users around the world to
“surf” the Net using a common format. Intranets are private networks that any company can develop
to extend Net technology internally — that is, for transmitting information throughout the firm.
Intranets are accessible only to employees, with access to outsiders prevented by hardware and
software security systems called firewalls. Information networks are leading to leaner or -ganizations
— business with fewer employees and simpler organizational structures — because networked
firms can maintain electronic, rather than human, information linkages among employees and
customers. Operations are more flexible because electronic networks allow business to offer greater
product variety and faster delivery cycles. Aided by intranets and the Internet, grater collaboration is
possible, both among internal units and with outside firms. Geographic separation of the workplace
and company headquarters is more common because electronic linkages are replacing the need for
physical proximity between the company and its workstations. Improved management processes
are feasible because managers have rapid access to more information about the current status of
company activities and easier access to electronic tools for planning and decision making.

Transaction processing systems (TPS) --- are applications for basic day-to-day business
transactions. They are useful for routine transactions, such as taking reservations and meeting
payrolls, that follow predetermined steps. Systems for knowledge workers and office applica -
tions include personal productivity tools such as word processing, document imaging, desktop
publishing, computer-aided design, and simulation modeling. Managing information systems
(MISs) support an organization’s managers by providing daily reports, schedules, plans, and
budgets. Middle managers, the largest MIS user group, need networked information to plan
upcoming activities and to track current activities. Decision support systems (DSSs) are inter -
active applications that assist the decision-making processes of middle- and top-level managers.
Artificial intelligence (AI) and expert systems are designed to imitate human behavior and
provide computer-based assistance in performing certain business activities.

Hardware is the physical devices and components, including the computers, in the information
system (IS). It consists of an input device (such as a keyboard), a central processing unit (CPU),
a main memory, disks for data storage, and output devices (such as video monitors and
printers). Software includes the computer ’s operating system, application programs (such as
word processing, spreadsheets, and Web browsers), and a graphical user interface (GUI) that
helps users select among the computer’s many possible applications.

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Control is important to ensure not only that the system operates correctly but also that data and
information are transmitted through secure channels to people who really need them. Control is
aided by the use of electronic security measures, such as firewalls, that bar entry to the system
by unauthorized outsiders. The database is the organized collection of all the data files in the
system. People are also part of the information system. IS knowledge workers include systems
analysts who design the systems and programmers who write software instructions that tell
computers what to do. System users, too, are integral to the system. Telecommunication
components include multimedia technology that incorporates sound, animation, video, and
photography along with ordinary graphics and text. Electronic discussion groups,
videoconferencing, and other forms of interactive dialog are possible with communication
devices (such as global positioning systems and personal digital assistants) and communication
channels (such as satellite communications).

Information Management: An Overview

Most business regard their information as a private resource, an asset they plan, develop, and
protect.

Information Manager — Manager responsible for designing and implementing systems to

gather, organize, and distribute information.

Information Management — internal operations for arranging a firm’s information resources to

support business performance and outcomes. Information managers oversee the task of information
management.

Data versus Information

i. Data—raw facts and figures.

ii. Information—meaningful, useful interpretation of data.

Information Systems (s) — a system for transforming data into information and transmitting it
for use in decision-making.

New Business Technologies in the Information Age

The Expanding Scope of Information Systems

i. The relationship between information systems and organizations is among

the fastest-changing aspects of business today.
ii. Information systems are crucial in planning.
iii.An increased interdependence between a company’s business strategy
and its IS is a basic change.

Electronic Business and Communications Technologies

i. Electronic Information Technologies Information-systems applications, based

on telecommunications technologies, that use networks of appliances or
devices to communicate information by electronic means;
1. Fax machine—Machine that can transmit copies of documents
(text and graphics) over telephone lines
2. Voice mail—Computer-based system for receiving and delivering
incoming telephone calls

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3. Electronic mail (e-mail)—Computer system that electronically

transmits letters, reports, and other information between
computers
4. Electronic conferencing—Computer-based system that allows
people to communicate simultaneously from different locations via
software or telephone
5. Groupware—Software that connects members of a group for
shared e-mail distribution, electronic meetings, appointments, and
group writing

ii. Data Communication Networks --- Global network (such as the Internet)
that permits users to send electronic messages and information quickly and
economically
1. Internet—global data communication network serving millions of
computers with information on a wide array of topics and providing
communication flows among certain private networks. In 2002,
more than 700 million Net users were active on links connecting
more than 180 countries. In the United States alone, more than 95
million users were on the Net every day.
2. Internet Service Provider (ISP)—commercial firm that maintains a
permanent connection to the Net and sells temporary connections to
subscribers.
3. World Wide Web (WWW, or "the Web")—subsystem of
computers providing access to the Internet and offering multimedia
and linking capabilities.
a. Web server—dedicated work station customized for
managing, maintaining, and supporting Web sites
b. Browser—software supporting the graphics and linking
capabilities necessary to navigate the World Wide Web
c. Directories—Service which organize web-pages into
directories, such as, Yahoo
d. Search Engines—Tool that searches Web pages containing
the user’s search terms and then displays pages that match
e. Intranet—private network of internal Web sites and other
sources of information available to a company’s employees.
The Ford Motor Company intranet connects 120,000 work
stations in Asia, Europe, and the United States to thousands
of Ford Web sites containing private information on
production, engineering, distribution, and marketing.
f. Firewall—hardware and software security systems that are
not accessible to outsiders
g. Extranet—application allowing outsiders limited access to
a firm’s internal information system.

New Options for Organizational Design: The Networked Enterprise

i. Leaner Organizations—Networked firms can accomplish more work with

fewer resources.
ii. More Flexible Operations—Electronic networks allow businesses to offer
customers greater variety and faster delivery cycles.
1. Mass-customization—Flexible production process that
generates customized products in high volumes at low cost

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iii. Increased Collaboration—Networked systems make it cheaper and

easier to work together.
1. Networking and the Virtual Company—Networked systems can
also improve collaboration between organizations through the so-
called virtual company
iv. Greater Independence of Company and Workplace —Employees no
longer need to work only at the office or the factory, nor are all the
company’s operations performed at one location. Geographically separate
processes can be tightly coordinated via networking.
v. Improved Management Processes—Because instantaneous information
is accessible in a convenient usable format, more upper managers use it
routinely for planning, leading, directing, and controlling operations.
1. Enterprise Resource Planning (ERP)—Large information sys-
tem for integrating all the activities of a company’s business units

Types of Information Systems

Organizations depend on quality information to make good decisions and help them accomplish
their goals. To design and develop good information systems, companies hire a top-level
manager known as a CIO. A Chief Information Officer (CIO) is a strategic-level manager who
oversees the company’s information systems. An information system is a complex of several
information systems that share information while serving different levels of the organization,
different departments, or different operations.

User Groups and System Requirements

i. Knowledge Workers—An increasingly important group of employees who

use information and knowledge as the raw materials of their work, and
who rely on technology to design new products or business systems (e.g.
engineers, scientists, computer programmers, etc.).

ii. Managers at Different Levels—First-line managers need information on the

day-to-day details of their departments or projects. Middle managers need
summaries and analyses for setting intermediate and long-range goals for
their departments or projects. And top managers need information on
broader economic and business trends, and overall company performance.

iii.Functional Areas and Business Processes—Each business area (e.g.

marketing, finance) has its own information requirements, and each
business process (e.g. strategic planning, product development) also has
specific information needs.

Major Systems by Levels

i. Transaction Processing Systems—information-processing

applications for routine, day-to-day business activities involving well-
defined processing steps.

ii. Systems for Knowledge Workers and Office Applications— These

systems provide assistant for data processing and other office activities.

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Like other departments, the IS department includes both knowledge

workers and data workers. Knowledge workers include: systems
analysts, programmers, system operations personnel
iii. Knowledge-Level and Office Systems
1. Computer-Aided Design (CAD)—computer-based electronic
technology that assists in designing products by simulating a real
product and displaying it in three-dimensional graphics.
2. Computer-Aided Manufacturing (CAM) —computer-based elec-
tronic technology used in designing manufacturing equipment, fa-
cilities, and plant layouts for better product flows and productivity.

iv. Management Information Systems—computer-based system that sup-

ports an organization’s managers by providing daily reports, schedules,
plans, and budgets. Middle managers are the largest MIS user group.
v. Decision Support Systems—interactive computer-based system that
locates and presents information needed to support decision making.
Middle and top-level managers use DSS.

vi. Executive Support Systems—quick-reference information-system appl ica-

tion designed specially for instant access by upper-level managers.
vii. Artificial Intelligence and Expert Systems
1. Robotics—combination of computers and industrial robots.
2. Expert System—AI program designed to imitate the thought
processes of human experts in a particular field.

Elements of the Information System

Computer Network — all the computer and information technology devices, which by working
together, drive the flow of digital information throughout a system.

Hardware — physical components of a computer system

i. Inputting
1. Input Device—part of the computer system that enters data into
it.
2. Central Processing Unit (CPU)—part of the computer system
where data processing takes place.
ii. Main Memory—part of the computer CPU housing memory of programs it
needs to operate.
iii. Programs
1. Program—set of instructions used by a computer to perform
specified activities.
2. Output Device—part of the computer system that presents
results, either visually or in printed form.

Software — programs that instruct a computer in what to do.

i. System program—Software that tells the computer what resources to use

and how to use them.

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ii. Application program—Software (such as Word for Windows) that

processes data according to a user’s special needs
iii. Graphical User Interface—Software that provides a visual display to
help users select applications.

Control --- ensures that the system is operating according to specific procedures and within
specific guidelines.

i. Problems of Privacy and Security

1. Privacy invasion occurs when intruders (hackers) gain
unauthorized access, either to steal information, money, or
property or to tamper with data.
2. Security measures for protection against intrusion are a
constant challenge.

Databases and Application Programs

i. Data and Databases—centralized, organized collection of related data.

ii. Application Programs

1. Word-Processing Program—applications program that allows

computers to store, edit, and print letters and numbers for
documents created by users.
2. Electronic Spreadsheet—applications program with a row-and-
column format that allows users to store, manipulate, and compare
numeric data.
3. Database Management System—applications program for creating,
storing, searching, and manipulating an organized collection of data.
4. Computer Graphics Program—applications program that converts
numeric character data into pictorial information such as graphs and
charts.
5. Presentation Graphics Software—applications that enable users
to create visual presentations that can include animation and sound.
a. Desktop publishing—process of combining word-
processing and graphics capability to produce virtually
typeset-quality text from personal computer

Telecommunications and Networks

A network organizes telecommunications components into an effective system.

Multimedia Communication Systems — system connected to networks of communication

appliances such as faxes televisions, sound equipment, cell phones, printers, and photocopiers
that may also be linked by satellites with other remote networks.

i. Communication Devices include global-positioning-systems (GPS), paging

systems and cellular telephones.
ii. Communication Channels include wired and wireless transmission.

System Architecture Wide Area Network (WAN)—network of computers and workstations

located far from one another and linked by telephone wires or by satellite.

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i. Local Area Network (LAN)—network of computers and

workstations, usually within a company, that are linked together by cable.
ii. Wireless Networks—Wireless technologies use airborne electronic
signals for linking network appliances. In addition to mobile phones,
wireless technology extends to laptops, hand-held computers, and
applications in cars (including Internet access and music players, map
terminals, and game machines).
iii. Client-server Network—Information-technology system consisting of
clients (users) that are electronically linked to share network resources
provided by a server, such as a host.

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Lesson 41
NON-VERBAL COMMUNICATION MODES

What is non-verbal communication?

Definition “nonverbal communication involves those nonverbal stimuli in a com-
munication setting that are generated by both the source [speaker] and his or her use of
the environment and that have potential message value for the source or receiver
[listener]. Basically it is sending and receiving messages in a variety of ways without the
use of verbal codes (words). It is both intentional and unintentional. Most speakers /
listeners are not conscious of this. It includes — but is not limited to:

o touch
o glance
o eye contact (gaze)
o volume
o vocal nuance
o proximity o gestures o facial
expression ? pause (silence)
o intonation
o dress
o posture
o smell
o word choice and syntax
o sounds (paralanguage)

Broadly speaking, there are two basic categories of non-verbal language: nonverbal
messages produced by the body; nonverbal messages produced by the broad setting (time,
space, silence).

Why is non-verbal communication important?

Basically, it is one of the key aspects of communication (and especially important in a

high-context culture). It has multiple functions:

o Used to repeat the verbal message (e.g. point in a direction while stating
directions.
o Often used to accent a verbal message. (e.g. verbal tone indicates the actual
meaning of the specific words).
o Often complement the verbal message but also may contradict. E.g.: a nod
reinforces a positive message (among Americans); a “wink” may contradict a
stated positive message.
o Regulate interactions (non-verbal cues covey when the other person should
speak or not speak).
o May substitute for the verbal message (especially if it is blocked by noise,
interruption, etc) — i.e. gestures (finger to lips to indicate need for quiet), facial
expressions (i.e. a nod instead of a yes).

Note the implications of the proverb: “Actions speak louder than words.” In essence, this
underscores the importance of non-verbal communication. Non-verbal communication is
especially significant in intercultural situations. Probably non-verbal differences account
for typical difficulties in communicating.

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Cultural Differences in Non-verbal Communication

General Appearance and Dress

All cultures are concerned for how they look and make judgments based on looks and
dress. Americans, for instance, appear almost obsessed with dress and personal
attractiveness. Consider differing cultural standards on what is attractive in dress and on
what constitutes modesty. Note ways dress is used as a sign of status?

Body Movement

We send information on attitude toward person (facing or leaning towards another),

emotional statue (tapping fingers, jiggling coins), and desire to control the environment
(moving towards or away from a person).

More than 700,000 possible motions we can make — so impossible to categorize them
all! But just need to be aware the body movement and position is a key ingredient in sending
messages.

Posture

Consider the following actions and note cultural differences:

o Bowing (not done, criticized, or affected in US; shows rank in Japan)

o Slouching (rude in most Northern European areas)
o Hands in pocket (disrespectful in Turkey)
o Sitting with legs crossed (offensive in Ghana, Turkey)
o Showing soles of feet. (Offensive in Thailand, Saudi Arabia)
o Even in US, there is a gender difference on acceptable posture?

Gestures

Impossible to catalog them all. But need to recognize: 1) incredible possibility and variety
and 2) that an acceptable in one’s own culture may be offensive in another. In addition,
amount of gesturing varies from culture to culture. Some cultures are animated; other
restrained. Restrained cultures often feel animated cultures lack manners and overall
restraint. Animated cultures often feel restrained cultures lack emotion or interest.

Even simple things like using hands to point and count differ.

Pointing: US with index finger; Germany with little finger; Japanese with entire hand (in
fact most Asians consider pointing with index finger to be rude)

Counting: Thumb = 1 in Germany, 5 in Japan, middle finger for 1 in Indonesia.

Facial Expressions

While some say that facial expressions are identical, meaning attached to them differs.
Majority opinion is that these do have similar meanings world-wide with respect to smiling,
crying, or showing anger, sorrow, or disgust. However, the intensity varies from culture to
culture. Note the following:

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o Many Asian cultures suppress facial expression as much as possible.

o Many Mediterranean (Latino / Arabic) cultures exaggerate grief or sadness while
most American men hide grief or sorrow.
o Some see “animated” expressions as a sign of a lack of control.
o Too much smiling is viewed in as a sign of shallowness.
o Women smile more than men.

Eye Contact and Gaze

In USA, eye contact indicates: degree of attention or interest, influences attitude change
or persuasion, regulates interaction, communicates emotion, defines power and status,
and has a central role in managing impressions of others.

o Western cultures — see direct eye to eye contact as positive (advise children to
look a person in the eyes). But within USA, African-Americans use more eye
contact when talking and less when listening with reverse true for Anglo
Americans. This is a possible cause for some sense of unease between races in
US. A prolonged gaze is often seen as a sign of sexual interest.
o Arabic cultures make prolonged eye-contact. — believe it shows interest and helps
them understand truthfulness of the other person. (A person who doesn’t
reciprocate is seen as untrustworthy)

o Japan, Africa, Latin American, Caribbean — avoid eye contact to show respect.

Touch

Question: Why do we touch, where do we touch, and what meanings do we assign

when someone else touches us?

Illustration: An African-American male goes into a convenience store recently

taken over by new Korean immigrants. He gives a $20 bill for his purchase to Mrs.
Cho who is cashier and waits for his change. He is upset when his change is put
down on the counter in front of him.

What is the problem? Traditional Korean (and many other Asian countries) don ’t
touch strangers. Especially between members of the opposite sex. But the
African-American sees this as another example of discrimination (not touching
him because he is black).

Basic answer: Touch is culturally determined! But each culture has a clear concept of
what parts of the body one may not touch. Basic message of touch is to affect or control
— protect, support, disapprove (i.e. hug, kiss, hit, kick).

o USA — handshake is common (even for strangers), hugs, kisses for those of opposite
gender or of family (usually) on an increasingly more intimate basis. Note differences
between African-Americans and Anglos in USA. Most African Americans touch on
greeting but are annoyed if touched on the head (good boy, good girl overtones).
o Islamic and Hindu: typically don’t touch with the left hand. To do so is a social
insult. Left hand is for toilet functions. Mannerly in India to break your bread only
with your right hand (sometimes difficult for non-Indians)
o Islamic cultures generally don’t approve of any touching between genders (even
hand shakes). But consider such touching (including hand holding, hugs) between
same-sex to be appropriate.

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o Many Asians don’t touch the head (Head houses the soul and a touch puts it in
jeopardy).

Basic patterns: Cultures (English, German, Scandinavian, Chinese, and Japanese) with
high emotional restraint concepts have little public touch; those which encourage emotion
(Latino, Middle-East, Jewish) accept frequent touches.

Smell

o USA — fear of offensive natural smells (billion dollar industry to mask

objectionable odors with what is perceived to be pleasant ) — again connected
with “attractiveness” concept.
o Many other cultures consider natural body odors as normal (Arabic).
o Asian cultures (Filipino, Malay, Indonesian, Thai, Indian) stress frequent bathing
— and often criticize USA of not bathing often enough!

Pa ra la n g u age

o vocal characterizers (laugh, cry, yell, moan, whine, belch, yawn). These send
different messages in different cultures (Japan — giggling indicates
embarrassment; India – belch indicates satisfaction)
o vocal qualifiers (volume, pitch, rhythm, tempo, and tone). Loudness indicates
strength in Arabic cultures and softness indicates weakness; indicates
confidence and authority to the Germans,; indicates impoliteness to the Thais;
indicates loss of control to the Japanese. (Generally, one learns not to “shout” in
Asia for nearly any reason!). Gender based as well: women tend to speak higher
and more softly than men.
o vocal segregates (un-huh, shh, uh, ooh, mmmh, humm, eh, mah, lah).
Segregates indicate formality, acceptance, assent, uncertainty.

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Lesson 42
BUSINESS ORGANIZATIONS
Basically, an organization is a group of people intentionally organized to accomplish an overall,
common goal or set of goals. Business organizations can range in size from two people to tens
of thousands.

There are several important aspects to consider about the goal of the business organization.
These features are explicit (deliberate and recognized) or implicit (operating unrecognized,
"
behind the scenes"). Ideally, these features are carefully considered and established, usually
during the strategic planning process. (Later, we'll consider dimensions and concepts that are
common to organizations.)

Vision --- Members of the organization often have some image in their minds about how the
organization should be working, how it should appear when things are going well.

Mission --- An organization operates according to an overall purpose, or mission.

Values --- All organizations operate according to overall values, or priorities in the nature of how
they carry out their activities. These values are the personality, or culture, of the organization.

Strategic Goals --- Organizations members often work to achieve several overall accom-
plishments, or goals, as they work toward their mission.

Strategies --- Organizations usually follow several overall general approaches to reach their
goals.

Systems and Processes that (Hopefully) Are Aligned With Achieving the Goals

Organizations have major subsystems, such as departments, programs, divisions, teams, etc. Each
of these subsystems has a way of doing things to, along with other subsystems; achieve the overall
goals of the organization. Often, these systems and processes are define by plans, policies and
procedures.

How you interpret each of the above major parts of an organization depends very much on your
values and your nature. People can view organizations as machines, organisms, families,
groups, etc. (We'll consider more about these metaphors later on in this topic in the library.)

Organizations as Systems (of Systems of Systems)

Organization as a System

It helps to think of organizations are systems. Simply put, a system is an organized collection of
parts that are highly integrated in order to accomplish an overall goal. The system has various
inputs which are processed to produce certain outputs that together, accomplish the overall goal
desired by the organization. There is ongoing feedback among these various parts to ensure
they remain aligned to accomplish the overall goal of the organization. There are several classes
of systems, ranging from very simple frameworks all the way to social systems, which are the
most complex. Organizations are, of course, social systems.

Systems have inputs, processes, outputs and outcomes. To explain,

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Inputs --- to the system include resources such as raw materials, money, technologies and
people. These inputs go through a

Process --- where they're aligned, moved along and carefully coordinated, ultimately to
achieve the goals set for the system.

Outputs --- are tangible results produced by processes in the system, such as products or
services for consumers. Another kind of result is outcomes, or benefits for consumers, e.g., jobs
for workers, enhanced quality of life for customers, etc. Systems can be the entire organization,
or its departments, groups, processes, etc.

Feedback comes from, e.g., employees who carry out processes in the organization, customers/
clients using the products and services, etc. Feedback also comes from the larger environment
of the organization, e.g., influences from government, society, economics, and technologies.

Each organization has numerous subsystems, as well. Each subsystem has its own boundaries of
sorts, and includes various inputs, processes, outputs and outcomes geared to accomplish an
overall goal for the subsystem. Common examples of subsystems are departments, programs,
projects, teams, processes to produce products or services, etc. Organizations are made up of
people -- who are also systems of systems of systems -- and on it goes. Subsystems are
organized in an hierarchy needed to accomplish the overall goal of the overall system.

The organizational system is defined by, e.g., its legal documents (articles of incorporation, by laws,
roles of officers, eta.), mission, goals and strategies, policies and procedures, operating manuals,
eta. The organization is depicted by its organizational charts, job descriptions, marketing materials,
eta. The organizational system is also maintained or controlled by policies and procedures, budgets,
information management systems, quality management systems, performance review systems, eta.

Standard Planning Process is Similar to Working Backwards Through the System

Remember how systems have input, processes, outputs and outcomes? One of the common
ways that people manage systems is to work backwards from what they want the system to
produce. This process is essentially the same as the overall, standard, basic planning process.
This process typically includes:

a) Establishing overall goals (it's best if goals are defined in measurable terms, so they usually are
in terms of outputs) (the overall impacts of goals are outcomes, a term increasingly used in
nonprofits)

b) Associating smaller goals or objectives (or outputs?) along the way to each goal.

c) Designing strategies/methods (or processes) to meet the goals and objectives

d) Identifying what resources (or inputs) are needed, including who will implement the methods
and by when.

Methods to the Madness: Systems Theory and Chaos Theory (Optional Reading)

NOTE: A person need not understand systems or chaos theory to start and run an
organization. A basic understanding, though, sure helps when dealing with the many kinds of

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typical issues that face members of organizations. Information at the following link is geared to
give the reader a taste of what systems theory is about, and then refer the reader to more
information if they are interested.

Thinking About Organizations as Systems --- Use functional structures when the organization is
small, geographically centralized, and provides few goods and services.

When the organization experiences bottlenecks in decision making and difficulties in coordina-
tion, it has outgrown its functional structure. Use a divisional structure when the organization is
relatively large, geographically dispersed, and/or produces wide range of goods/services. Use
lateral relations to offset coordination problems in functional and divisional structures. When the
organization needs constant coordination of its functional activities, then lateral relations do not
provide sufficient integration. Consider the matrix structure. To adopt the matrix structure
effectively, the organization should modify many traditional management practices.

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Lesson 43
ACCOUNTING
By collecting, analyzing, and communicating financial information, accountants provide business
managers and investors with an accurate picture of the firm ’s financial health. Certified public
accountants (CPAs) are licensed professionals who provide auditing, tax, and management
advisory services for other firms and individuals. Public accountants who have not yet been
certified perform similar tasks. Private accountants provide diverse specialized services for the
specific firms that employ them.

The Vision Project is a profession-wide assessment to see what the future of the accounting
profession will be like. It was initiated because of the declining number of students entering the
accounting profession and because of rapid changes in the business world. Practicing CPAs and
other industry leaders have participated in identifying key forces that are affecting the profession.
Then the developed recommendations for change, including a set of core services that the
profession should offer clients and a set of core competencies that CPAs should possess.
Overall, the new vision reflects changes in the CPA’s culture and professional lifestyle.

The accounting equation (assets = liabilities + owners’ equity) is used to balance the data in
accounting documents. Double-entry accounting acknowledged the dual effects of financial
transactions and ensures that the accounting equation always balances.

These tools enable accountants not only to enter but to track transactions. They also serve as
double checks for accounting errors. The balance sheet summarizes a company’s assets, lia-
bilities, and owners equity at a given point in time. The income statement details revenues and
expenses for a given period of time and identifies any profit or loss. The statement of cash flows
reports cash receipts and payments form operating, investing, and financing activities.

Drawing on data from financial statements, ratios can help creditors, investors, and managers
assess a firm’s finances. The liquidity ratios — current and debt-to-equity —measure solvency (a
firm’s ability to pay its debt) in both the short and the long run.. Return on equity and earnings per
share measure profitability. inventory turnover ratios show how efficiently a firm is using its funds.

Accounting for foreign transactions requires some special procedures. First, accountants must
consider the fact that the exchange rates of national currencies change. Accordingly, the value
of a foreign currency at any given time, its foreign currency exchange rate, is what buyers are
willing to pay for it.

Exchange rates affect the amount of money that a firm pays for foreign purchases and the
amount that it gains from foreign sales. U.S. accountants, therefore, must always translate
foreign currencies into the value of the U.S. dollar. Then, in recording a firm’s transactions, they
must make adjustments to reflect shifting exchange rates over time. Shifting rates may result in
either foreign currency transaction gains (a debt, for example, may be paid with fewer dollars) or
foreign currency transaction losses.

What Is Accounting and Who Uses Accounting Information?

Accounting — comprehensive system for collecting, analyzing, and communicating financial

information.

Bookkeeping — recording of accounting transactions. It is just one phase of accounting.

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Accounting Information System (AIS) — Organized means by which financial information is

identified, measured, recorded, and retained for use in accounting statements and management
reports.

Users of Accounting Information

Business Managers --- Set goals, develop plans, set budgets, and evaluate future prospects

Employees and Unions --- Get paid, plan for and receive benefits.

Investors and Creditors --- Estimate returns to stockholders, determine company’s growth
prospects, determine creditworthiness before investing or lending.

Tax Authorities --- Plan for tax inflows, determine tax liabilities, ensure proper payment

Government Regulatory Agencies --- Fulfill their duties to citizens.

Who Are Accountants and What Do They Do?

Controller — the person who manages all of firm’s accounting activities (chief accounting
officer)

Financial versus Managerial Accounting

i. Financial Accounting—field of accounting that informs external users of a

company’s financial information.
ii. Managerial Accounting—field of accounting that serves internal users of a
company’s financial information.

Certified Public Accountants --- Accountant licensed by the state and offering services to the
public
i. Professional Practice
Some CPAs work as individual practitioners, while others join with one or
more CPAs in partnerships or professional corporations.
1. Nearly one-half of accounting’s total revenues in the U.S. are
received by the Big 4 accounting firms, Deloitte & Touche, Ernst &
Young, KPMG LLP, Price Waterhouse Coopers.

ii. CPA Services

1. Audit—systematic examination of a company’s accounting system to
determine whether its financial reports fairly represent its operations.
a. Generally Accepted Accounting Principles (GAAP)—
accepted rules and procedures governing the content and
form of financial reports.
2. Tax services include assistance not only with tax return prepara-
tion but also with tax planning.

3. Management Advisory Services—specialized accounting services

to help managers resolve a variety of business problems.

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Non-certified Public Accountants may work for small businesses,

individuals, and even larger firms, performing income tax preparation,
payroll accounting, and financial planning services.

Private Accountants — salaried accountant hired by a business to carryout its day-to-day

financial activities.

The CPA Vision Project

i. Identifying Issues for the Future—CPA success will depend on public

perceptions of abilities and roles, CPAs must respond to market needs,
market demands more high-value consulting and fewer auditing and
accounting services, specialization will be vital, CPAs must be conversant
in global strategies and business practices
ii. Global Forces as Drivers of Change—Forces include political, economic,
technical, social, human resources, and regulatory
iii. Recommendations for Change—CPA profession must adopt broader
focus to include strategic thinking, provide more value to society by
expanding education and experience, revitalize itself to meet future
demands, and increase opportunities for achievement, rewards, and
lifestyle preferences.
iv. A New Direction
1. Core Services—A broader perspective is strongly recommended
that moves into areas traditionally outside the accounting realm.
2. Core Competencies Vision Project identifies unique combination
of skills, technology, and knowledge including strategic and critical
thinking skills, communication and leadership skills, focus on the
client and the market, skills in interpreting information, and
technology skills.

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Lesson 44
TOOLS OF THE ACCOUNTING TRADE

For thousands of years, businesses and governments have kept records of their transactions.
Accountants are guided by three fundamental principles: the accounting equation, double-entry
accounting, and the matching principle.

The Accounting Equation --- Accountants use the following equation to balance the data in
journals and ledgers: Assets = Liabilities + Owners’ Equity

i. Assets and Liabilities

1. Asset—any economic resource expected to benefit a firm or an
individual who owns it.
2. Liability—debt owned by a firm to an outside organization or
individual.
ii. Owners' Equity—amount of money that owners would receive if they sold all
of a firm’s assets and paid all of its liabilities. It consists of two sources of
capital: the amount the owners originally invested, and profits earned by
and reinvested in the company.

Double-Entry Accounting ----To keep the accounting equation in balance, companies use a
system developed by Fra Luca Pacioli, an Italian monk, in 1494.

i. Double-entry accounting is a way of recording financial transactions that

requires two entries for every transaction, so that the accounting equation
is always kept in balance.
ii. Every transaction—a sale, a payment, a collection—has two offsetting sides.
Any excess plowed back into the business becomes retained earnings. The
accounting equation remains in balance if the transactions are properly
recorded.
iii. Once the individual transactions are recorded and then summarized,
accountants review the summaries and adjust or correct errors, so they
can close the books, the act of transferring net revenue and expense
account balances to retained earnings for the period.
iv. Although computers do much of the tedious recording today, mastering the
fundamental principles such as double-entry bookkeeping is important be-
cause accountants must decide which accounts to increase or decrease,
and they must understand what to do if transactions are recorded improperly.

Financial Statements --- Any of several types of reports summarizing a company’s financial
status to aid in managerial decision making.

Balance Sheets — also known as a statement of financial position, is a kind of “snapshot” of

where a company is, financially speaking, at one moment in time. The balance sheet includes all
the elements in the accounting equation, showing the balance between assets on one side and
liabilities and owners’ equity on the other.

Every company prepares a balance sheet at least once a year, most often at the end of the
calendar year, January 1 to December 31. The fiscal year, any 12 consecutive months, is used by
many business and government bodies.

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i. Assets
There are three types:
1. Current Asset—asset that can or will be converted into cash with-in
the following year.
a. Liquidity—ease with which an asset can be converted
into cash.
b. Non-liquid Assets—Includes marketable securities which
vary in liquidity and three other forms:
i. accounts receivable—amount due from a customer
who has purchased goods on credit
ii. merchandise inventory—cost of merchandise that
has been acquired for sale to customers and is still
on hand
iii. prepaid expense—expense that is paid before the
upcoming period in which it is due
2. Fixed Asset—asset with long-term use or value
a. depreciation—process of distributing the cost of an asset
over its life
3. Intangible Asset—nonphysical asset that has economic value in
the form of expected benefits.
a. goodwill—amount paid for an existing business above the
value of its other assets

ii. Liabilities are the debts that a business has incurred and appear after
assets because they are claims against the assets as shown in the
accounting equation: Assets = Liabilities + Owners’ Equity
1. Current Liability—debt that must be paid within the year.
2. Account Payable—current liabilities consisting of bills owed to
suppliers, plus wages and taxes due within the upcoming year.
3. Long-Term Liability—debt that is not due for more than one year.
iii. Owners' Equity is the owners’ investment in a business. This is also the
section that shows a corporation’s retained earnings, the portion of
shareholders’ equity earned by the company, but not distributed to its
owners in the form of dividends.
1. Common Stock
2. Paid-In Capital—additional money, above proceeds from stock
sale, paid directly to a firm by its owners.
3. Retained Earnings—earnings retained by a firm for its use rather
than paid as dividends.

Income Statements — financial statement listing a firm’s annual revenues and expenses so that
a bottom line shows annual profit or loss. If the balance sheet is a “snapshot,” the income
statement is a “movie.”

i. Revenues—funds that flow into a business from the sale of goods or

services.
ii. Cost of Goods Sold—total cost of obtaining materials for making the
products sold by a firm during the year.
iii. Gross Profit (or Gross Margin)—revenues obtained from goods sold
minus cost of goods sold.
iv. Operating Expenses—costs, other than the cost of goods sold, incurred in
producing a good or service.
v. Operating Income—gross profit minus operating expenses.

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1. net income (or net profit or net earnings)—gross profit minus

operating expenses and income taxes

Statement of Cash Flows — financial statement describing a firm ’s yearly cash receipts and
cash payments.

i. cash flows from operations

ii. cash flows from investing
iii.cash flows from financing

The Budget: An Internal Financial Statement

A detailed statement of estimated receipts and expenditures for a period of time in the future. The
budget is probably the most crucial internal financial report. Most companies use their budgets for
internal planning, controlling, and decision-making. Although the accounting staff coordinates the
budget process, many different employees contribute to creating and updating the budget.

Reporting Standards and Practices

The common language dictated by standard practices is designed to give external users
confidence in the accuracy and meaning of the information in any financial statement.

i. Revenue Recognition—formal recording and reporting revenues in the fi-

nancial statements. This principle states that revenue is not formally record-
ed and reported until 1) The sale is complete and the product has been
delivered, and 2) The sale price is collected or is collectable (part of accounts
receivable).
ii. Matching principle requires that expenses incurred in producing revenues
be deducted from the revenue they generated during the same accounting
period in order to accurately present the profitability of a business.
1. Accountants match revenue to expenses by adopting the accrual
basis of accounting, which states that revenue is recognized when
you make a sale and expense is recorded when it is incurred.
2. If a business runs on a cash basis, the company records revenue
only when money from the sale is actually received and expense
is recorded when cash is paid.
3. Depreciation is the accounting procedure for systematically
spreading the cost of a tangible asset over its estimated useful life.
iii. Full Disclosure means that financial statements should include not just num
-bers, but also interpretations and explanations by management so that ex-
ternal users can better understand information contained in the statements.

Analyzing Financial Statements

Organizations and individuals use financial statements to spot problems and opportunities.
Managers and outsiders use them to evaluate a company’s performance in relation to the
economy, the competition, and past performance. To perform this analysis, most users look at

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historical trends and key ratios. Three major classifications of ratios: solvency,
profitability, activity.

Short-Term Solvency Ratios

Liquidity Ratio — solvency ratio measuring a firm’s ability to pay its immediate debts.

i. current ratio—solvency ratio that determines a firm’s credit worthiness by

measuring its ability to pay current liabilities, calculated by dividing current
assets by current liabilities.
ii. working capital—the difference between the firm’s current assets and current
liabilities, which indicates the firm’s ability to pay off short-term debts to
outsiders.

Long-Term Solvency Ratios

Debt Ratio — solvency ratio measuring a firm’s ability to meet its long-term debts.

i. debt-to-owners’ equity ratio (or debt-to-equity ratio)—solvency ratio

describing the extent to which a firm is financed through borrowing,
calculated by dividing debt by owners’ equity.
ii. leverage—ability to finance an investment through borrowed funds

Profitability Ratios

i. Return on Equity—profitability ratio measuring income earned for each dollar

invested, calculated by dividing net income by total owners’ equity.
ii. Earnings per Share—profitability ratio measuring the size of the dividend
that a firm can pay shareholders, calculated by dividing net income by the
number of shares of common stock outstanding.

Activity Ratios --- may be used to analyze how well a company is managing its assets.

i. Inventory Turnover Ratio—activity ratio measuring the average number of

times that inventory is sold and restocked during the year, calculated as
cost of goods sold divided by average inventory.

International Accounting

a. Foreign Currency Exchange Rate—value of a nation’s currency as determined by

market forces.

International Transactions --- International purchases, sales on credit, and accounting for
foreign subsidiaries all involve accounting transactions that include currency exchange rates.

International Accounting Standards --- Bankers, investors, and managers would like to see finan-
cial reporting that is comparable from country-to-country and across all firms regardless of home
nation.

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Lesson 45
FINANCIAL MANAGEMENT
3) INCOME STATEMENT
It is a financial statement listing a firm’s annual revenues and expenses so that a bottom line shows
annual profit or loss. If the balance sheet is a “snapshot,” the income statement is a movie.”

a) Revenues: Funds that flow into a business from the sale of goods or services.

b) Cost of Goods Sold: Total cost of obtaining materials for making the products sold by a firm
during the year.

c) Gross Profit (or Gross Margin): Revenues obtained from goods sold minus cost of goods sold.

d) Operating Expenses: Costs, other than the cost of goods sold, incurred in producing a good or
service.

e) Operating Income: Gross profit minus operating expenses.

f) Net income (or net profit or net earnings)—gross profit minus operating expenses and income
taxes.

Revenue Vs. Profit

􀂄Revenue is income.

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􀂄Profit is obtained after deducting expenses from revenue.

Trading Concern
An organization which buys goods for reselling is called trading concern. The difference between
buying price & selling price is called revenue.
FINANCE IN AN ORGANIZATION
Thinking and considering for long term investments of the firm, Generating revenues to pay back
these investments and to perform day to day activities of an organization is called finance.
The Role of the financial people in organization management
Corporate finance typically entails four responsibilities: determining a firm's long‐term investments,
obtaining funds to pay for those investments, conducting the firm's everyday financial activities, and
helping to manage the risks the firm takes.
Responsibilities of the Financial Manager include planning and controlling the acquisition and
dispersal of a firm's financial resources.

i. Cash‐Flow Management: Management of cash inflows and outflows to ensure

adequate funds for purchases and the productive use of excess funds.

ii. Financial Control: Process of checking actual performance against plans to

ensure that desired financial results occur.

iii. Financial Planning: A financial plan shows the funds a firm will need for a
period of time, as well as the sources and uses of those funds. A strategy for
reaching some future financial position.

iv. Dealing with Banks: Deal with almost every bank for debiting & crediting the
funds, Manage foreign trade & short term loans.

Ratio Analysis

a. Ratios tell us relationship among financial figures.

b. These can be: Relationship between current assets and current liabilities.

THE BUDGET: AN INTERNAL FINANCIAL STATEMENT

Budget is a detailed statement of estimated receipts and expenditures for a period of time in the
future. The budget is probably the most crucial internal financial report. Most companies use their
budgets for internal planning, controlling, and decision‐making. Although the accounting staff
coordinates the budget process, many different employees contribute to creating and updating the
budget.