THARAKA UNIVERSITY

P.O BOX 193-60215, Telephone :|+(254)-0202008549,

MARIMANTI, KENYA +(254)-02020076920
Email:[email protected]
Website: https://www.tharaka.ac.ke

COLLEGE

(A Constituent College of Chuka University)

________________________________________________________________
FACULTY OF BUSINESS
DEPARTMENT OF BUSINESS ADMINISTRATION

COURSE CODE: BUST 111

COURSE TITLE: INTRODUCTION TO BUSINESS MANAGEMENT

LECTURER: MS. CHARITY MAINA

EMAIL: [email protected]
Mobile No: 0727987988

INTRODUCTION
The course is intended for students who are undertaking Bachelor of Commerce programme.
The students are expected to complete the course in 45 hours within a period of one semester.

COURSE OBJECTIVES
The course intends to introduce learners to business management. They shall be in a position to
identify forms of business, factors affecting business establishment and markets in which
business operate.
Expected Learning Outcome
At the end of this course, the learner should be able to;
✓ Define and explain the meaning, nature and importance of business
✓ Describe the forms of Business Organization
✓ Discuss how different environments affect business operations
✓ Explain the management functions
✓ Identify functional and operational areas of management
✓ Analyze the social and ethical responsibility of business

COURSE CONTENT

1. Introduction
● Definition and nature of business
● Characteristics of business
● Forms of Business Activities
● Objectives of Business
● Classification of Commerce

2. Forms of Business Organization

● Sole Proprietorship
● Partnership
● Company
● Statutory Corporations

3. Business Environment
● Micro environment
● Macro environment
4. Economic Systems
● Capitalism economy
● Socialism economy
● Mixed economy

5. Financial System
● Definition of financial system
● Financial institutions
● Financial markets
● The Stock Exchange

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 ● Market Efficiency
6. Management
● Functions of management
➢ Planning
➢ Organizing
➢ Staffing
➢ Leading
➢ Controlling

7. Functional Areas of Management

● Operations management
● Marketing management
● Financial management
● Logistics and supplies management

8. Business and Society

● Business Ethics
● Social responsibility of Business
● Arguments for and against social responsibility

Teaching Methodology
The course will be taught using lectures, group discussions and class presentations.

Course evaluation
Continuous Assessments 30%
End of Semester Examination 70%
Total 100%

References
Dyer, B & Ian, C (2005). Introduction to Business Studies. Longman. London
Kibera, F.N (2001). Business. A Kenyan Perspective. Kenya Literatur Bureau. Nairobi
Koontz, OD, Weihrich, H & Cannice, M (2008). Business Finance. McMore Publishers. Nairobi
William , A. W (2009); Modern Business Corporations, Including The Organization And
Management; Bibliolife
Graffin R. W and Ronald (2002); Business Studies; Prentice Hall
Lomash (2008); Business Policy and Strategic Management; Vikas Publishing House Pvt Ltd

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TABLE OF CONTENTS

TITLE
COURSE CONTENT
TABLE OF CONTENTS
LIST OF FIGURES

TOPIC ONE: INTRODUCTION TO BUSINESS CONCEPTS

1.1INTRODUCTION
1.2 LECTURE OBJECTIVES
1.3. MEANING AND CONCEPT OF BUSINESS
1.3.1 Classification of Business
1.3.1.1 Industry
1.3.1.2 Commerce
1.3.2 Characteristics of Business
1.3.3 Objectives of Business
1.4 TOPIC SUMMARY
1.5 NOTE
1.6 TOPIC ACTIVITIES
1.7 FURTHER READING
1.8 SELF ASSESSMENT

TOPIC TWO: FORMS OF BUSINESS ORGANISATIONS

2.1 INTRODUCTION
2.2 LECTURE OBJECTIVES
2.3 FORMS OF BUSINESS ORGANISATIONS
2.3.1 Sole Trader or Sole Proprietorship
2.3.1.1 Features/ Characteristics of Sole Trader
2.3.1.2 Advantages of a Sole Trader
2.3.1.3 Disadvantages of Sole Proprietorship
2.3.2 Partnership
2.3.2.1 Types of Partnership
2.3.2.2 Types of Partners
2.3.2.3 Features/ Characteristics of Partnership
2.3.2.4 Rights of the Partners
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 2.3.2.5 Obligation of the Partners
2.3.2.6 Contents of Partnership Agreement/ Deed
2.3.2.7 Advantages of Partnership
2.3.2.8 Disadvantages of Partnership
2.3.2.9 Dissolution of partnership
2.3.3 Joint stock companies
2.3.3.1Features / characteristics of a company
2.3.3.2 Types of Companies
2.3.3.3 Formation of a Company
2.3.3.4 Advantages of a limited company
2.3.3.5 Disadvantages of a limited company
2.3.3.6 Key differences between Private Limited and Public Limited Companies
2.3.4 Co-operatives
2.3.4.1 Advantages of co-operatives
2.3.4.2 Disadvantages of Cooperatives
2.4 SUMMARY
2.5 NOTE
2.6 TOPIC ACTIVITIES
2.7 FURTHER READING
2.8 SELF ASSESSMENT

TOPIC THREE: BUSINESS ENVIRONMENT _

3.1 INTRODUCTION
3.2 LECTURE OBJECTIVES
3.3 BUSINESS ENVIRONMENT
3.3.1Internal Environment/ Micro Environment
3.3.2 External/Macro-Environment
3.4 SUMMARY
3.5 NOTE
3.6 TOPIC ACTIVITIES
3.7 FURTHER READING
3.8 SELF ASSESSMENT

TOPIC FOUR: ECONOMIC SYSTEMS _

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4.1 INTRODUCTION
4.2 LECTURE OBJECTIVES
4.3. Economic Systems
4.3.1 Types of Economic Systems
4.3.1.1 Capitalism Economic System
4.3.1.2 Socialism Economic Systems
4.3.1.3 Mixed Economic System
4.4 SUMMARY
4.5 NOTE
4.6 TOPIC ACTIVITIES
4.7 FURTHER READING
4.8 SELF ASSESSMENT

TOPIC FIVE: MANAGEMENT FUNCTIONS _

5.1 INTRODUCTION
5.2 LECTURE OBJECTIVES
5.3. MANAGEMENT
5.3.1 Nature of Management
5.3.2 Management Levels
5.3.3 Management Functions
5.3.3 .1 Planning
5.3.3.2 Organizing
5.3.3.3 Staffing
5.3.3.4 Leading
5.3.3.5 Controlling
5.4 SUMMARY
5.5 NOTE
5.6 TOPIC ACTIVITIES
5.7 FURTHER READING
5.8 SELF ASSESSMENT

TOPIC SIX: FUNCTIONAL AREAS OF MANAGEMENT

6.1 INTRODUCTION
6.2 LECTURE OBJECTIVES
6.3 FUNCTIONAL AREAS OF MANAGEMENT

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 6.3.1 Marketing Management
6.3.2Financial Management
6.3.3 Human Resource Management
6.3.4 Production and Operations Management
6.3.5Accounting
6.3.6 Logistics and Supply chain Management
6.3.7 Risk management
6.4 SUMMARY
6.5 NOTE
6.6 TOPIC ACTIVITIES
6.7 FURTHER READING
6.8 SELF ASSESSMENT

TOPIC SEVEN: KENYAN FINANCIAL SYSTEM

7.1 INTRODUCTION
7.2 LECTURE OBJECTIVES
7.3 FINANCIAL SYSTEM
7.3.1 Financial Markets
7.3.1.1 Capital Markets
7.3.1.2 Money Markets
7.3.1.3 Security Market (Nairobi Securities Exchange (NSE))
7.3.2 QUOTATION
7.3.2.1Advantages of a Company Quoted in the NSE
7.3.2.2 Disadvantages of a Company Quoted in the NSE
7.3.2.3 Members of the Securities Exchange
7.3.3 Financial Institutions
7.3.3.1 Types of Financial Institutions
7.3.3.2 Functions of Financial Institutions
7.3.3.3 Risks Faced by Financial Institutions
7.3.4 Capital Market Efficiency
7.3.4.1 Forms of Capital Market Efficiency
7.3.4.2 Attributes or conditions to be satisfied for a capital market to be perfect

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7.4 SUMMARY
7.5 NOTE
7.6 TOPIC ACTIVITIES
7.7 FURTHER READING
7.8 SELF ASSESSMENT

TOPIC EIGHT: BUSINESS AND THE SOCIETY

8.1 INTRODUCTION
8.2 LECTURE OBJECTIVES
8.3. CORPORATE SOCIAL RESPONSIBILITY
8.3.1 Areas of Social Responsibility
8.3.2 Arguments for Corporate Social Responsibility
8.3.4 Arguments against Corporate Social Responsibility
8.3.4 Business Ethics
8.3.4.1 Ethical Questions
8.3.4.2 Terminologies in Ethics
8.3.4.3 Ways of Improving Ethical Behavior in an Organization
8.4 SUMMARY
8.5 NOTE
8.6 TOPIC ACTIVITIES
8.7 FURTHER READING
8.8 SELF ASSESSMENT

TOPIC ONE
INTRODUCTION TO BUSINESS CONCEPTS
1.1 INTRODUCTION
The term business literally means being busy. Business can be defined in different perspectives.
Business is an economic activity concerned with production and distribution of goods and
services to satisfy human wants with the aim of earning a profit. Professor Owen in his writing
says that business is an enterprise engaged with production and distribution of goods for sale in a
market or rendering services for a price. Professor Dicksee defines business as a form of activity
pursued primarily with the object of earning profits for the benefit of those whose behalf the

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activity is conducted. Professor Francis Kibera defined business as an economic activity which is
primarily organized and directed to manufacture or produce goods and services at a profit.

1.2 LECTURE OBJECTIVES

At the end of this topic, the learner should be able to;
a) Define the term business
b) Trace the history of business
c) Explain the objectives of a business

1.3. MEANING AND CONCEPT OF BUSINESS

Work is the essential part of human life. The activities that human beings undertake are known
as human activities which are divided into two:
a) Non-economic activities- these are activities directed towards social work and charity
e.g love, sympathy, humanity
b) Economic activities- these are activities concerned with production and distribution of
goods and services for the satisfaction of human wants. Economic activities may be
classified as
❖ Employment- it is an agreement between an employer and an employee that the
employee will provide certain services on the job, and in the employer's designated
workplace, to facilitate the accomplishment of the employer organization’s goals and
mission, in return for compensation.
❖ Profession- it is concerned with personal expertise/ services e.g doctors lawyers
❖ Business-A commercial activity engaged in as a means of livelihood or profit,
1.3.1 Classification of Business
Business can be classified into two:
➢ Industry
➢ Commerce

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1.3.1.1 Industry
Industry refers to the production of wealth. It is that part of business concerned with production,
construction, conversion and extraction. The end product of the industry will be used by the final
consumer or other industries for further production. The products used by consumers are known
as consumer goods e.g. oil, cloth, paper and sugar.
The products used by other industries for further production are known as capital goods e.g.
heavy industries producing machineries used by other industries for production of other things.
Industries can be classified into four categories:
➢ Manufacturing
➢ Generic
➢ Construction
➢ Extraction
Manufacturing industries are industries engaged in converting raw materials into fully or partly
finished products e.g. soap making, iron melting industries
Construction industries are industries engaged in preparation of land and construction,
alteration, and repair of buildings, structures, and other real property e.g. construction of roads,
dams, bridges etc.
Generic industries are industries concerned with cattle and plant breeding, poultry, fishery
etc
Extraction industries are industries engaged in extracting something from nature e.g.
mining, agriculture and other related activities.

1.3.1.2 Commerce
It is a system that delivers the right goods to the right consumers at an appropriate time and place
at the most appropriate price. Professor Stevenson says that commerce is the sum total of those
processes involved in the removal of hindrance of persons, place and time in exchange of
commodities. Commerce can be divided into:
❖ Trade

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 ❖ Auxiliaries to trade
Trade
It involves the exchange of goods and services for a price; it is primarily concerned with the
purchase and sale of goods. It is the process of delivering goods from the source of
production to the doors of the consumer. Trade can be classified into:
❖ Home trade
❖ Foreign trade
Home trade is the exchange of domestic goods within the boundaries of a country. This may be
sub-divided into two categories, wholesale and retail. Wholesale trade is concerned with buying
goods from manufacturers or dealers or producers in large quantities and selling them in smaller
quantities to others who may be retailers or even consumers. Wholesale trade is undertaken by
wholesale merchants or wholesale commission agents. Retail trade is concerned with the sale of
goods in small quantities to consumers.
Foreign trade is the exchange of capital, goods and services across international borders or
territories. This may be sub-divided into two categories, import and export. Import consists of
transactions in goods and services to a resident of a jurisdiction (such as a nation) from non-
residents. Export refers to selling goods and services produced in the home country to other
markets.
Auxiliaries to trade
They are services which assist in the smooth operation of trade. Auxiliaries to trade can be
divided into:
Transport and communication- transport refers to conveyance of goods and passengers from
one place to another while communication refers to gathering information and passing the
information from one person to another.
Banking and finance- Banking refers to the remittance of money and discounting bill of trade,
making collections and payments, accepting deposits, offering long and short term loans etc.
While finance involves sourcing funds and putting the funds sourced into optimum use.

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Insurance- it is a contract between the insurer and the insured whereby the insured agrees to pay
a regular amount of money known as premiums in order to be compensated upon happening of
an insured event.
Advertising and publicity- advertising is a service which dispenses information to the potential
buyers at a cost while publicity involves the media picking a story about a product or a company
and carrying it without any compensation from the producer or company.
Warehousing- it involves storage and preservation of goods from the time of production to the
time of their consumption.

1.3.2 Characteristics of Business

➢ It is an economic activity- only economic activities are carried out with a profit motive
and the main aim of a business is to earn profit.
➢ There must be a profit motive- this is because the primary objective of a business is to
earn profit, any economic activity that does not aim at earning a profit isn’t a business.
➢ Sale or transfer of goods and services for a price- business involve sale or transfer of
goods and services for a value and these goods are made available by production.
➢ It involves regular dealing in goods and services- dealings in goods and services on a
regular basis is business, a single transaction involving purchase or sale isn’t a business.
➢ Risk- business activities always involves risk (uncertainties) taking. Profit generally
depends upon not only on the sincere efforts of the business man but a number of factors
that are beyond his or her control.
➢ Customer satisfaction- customer is the king and foundation of any business therefore
their satisfaction is paramount for business survival.

1.3.3 Objectives of Business

Objectives refer to the aims, goals and purpose for which the business exists.
i. Earning profit

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 Profit is necessary for the survival of the business and it is a measure of success and
efficiency of the business. Profits is the difference between sales revenue or income
received after selling goods and services and the costs incurred in producing and
selling those goods and services.
ii. Customer satisfaction
The customer is the king and founder of the business this is because it’s the customer
who determines what the business is and thus a business that fails to satisfy its
customer needs can’t survive in the market.
iii. Innovation
It’s the introduction of new things, ideas and ways of doing something. Innovation is
important for the growth and prosperity of any business and thus once a business has
reached its maturity it should go into innovation. In the competitive world new
products and ideas come every day to meet the demands and challenges of every day
and therefore without innovation the business cannot continue for long in the market.
iv. Prestige
The businesses do seek prestige from high quality products, from care from the
environment, from the use of latest technology or from the care of their employees.
v. Growth
This could be based on the fact that as the business grows it tends to enjoy
economies of scale. It could also recruit from the owner’s desire to grow or to limit or
eliminate competitors so that there will be more scope for greater profits e.g. equity
bank.
vi. Social responsibility
Business enterprises gets all the factors of production i.e. land, labor, capital and
entrepreneurship from the society and hence it is expected that they should make
goods and services available to the society and also create employment to the society.
vii. Development of human resources

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 Employees make up an organization and thus should be adequately developed and
any complains they make should be dealt with. Employees should also be involved in
decision making and being motivated by giving them fair wages.
viii. Achievement of national goals
Every business should work in a manner that ensures that national aspirations are
achieved. They should also ensure social justice by providing equal employment
opportunities.

1.4 TOPIC SUMMARY

This chapter has reviewed the major elements of business by first providing the different
definition of business. The definitions were followed by a discussion on the different
classification of business, the characteristics of business and the rationale for the existence of
business.

1.5 NOTE
Business is very vital in the Kenyan society and therefore learners are expected to understand the
applicability of the objectives of business to the Kenyan economy.

1.6 TOPIC ACTIVITIES

1. Discuss with your friends the different objectives that a business could be pursuing at any
given time. Is it possible for a business to pursue more than one objective at the same
time?
2. In a class discussion justify why customers are the king of the business
3. The business cannot continue for long in the market without innovation. Discuss

1.7 FURTHER READING

Dyer, B & Ian, C (2005). Introduction to Business Studies. Longman. London
Kibera, F.N (2001). Business. A Kenyan Perspective. Kenya Literature Bureau. Nairobi

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Koontz, OD, Weihrich, H & Cannice, M (2008). Business Finance. McMore Publishers. Nairobi
William , A. W (2009); Modern Business Corporations, Including The Organization And
Management; Bibliolife

Graffin R. W and Ronald (2002); Business Studies; Prentice Hall

Lomash (2008); Business Policy and Strategic Management; Vikas Publishing House Pvt Ltd

1.8 SELF ASSESSMENT

i) Clearly define the term business
ii) Giving examples distinguish between trade and (aids to trade) auxiliaries to trade
iii) Discuss the characteristics of business
iv) Critically discuss the role of business to the Kenyan economy.
v) Business can be classified into two, discuss?

TOPIC TWO
FORMS OF BUSINESS ORGANISATIONS
2.1 INTRODUCTION
Businesses are varied in terms of their legal structure, formation and ownership, with each form
having distinct features that distinguish it from other business forms. Business organizations are

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important since they provide goods and services with the aim of earning profit. There are several
forms of business organization. These are:
-sole proprietorship
- Partnership

joint stock companies and the

- Cooperatives Societies

2.2 LECTURE OBJECTIVES

At the end of this topic, the learner should be able to;
a) Describe characteristics, advantages and disadvantages of different forms of business
organization
b) Explain how a company is formed
c) Distinguish private company from public company

2.3 FORMS OF BUSINESS ORGANISATIONS

The various forms of business organization include the following:

2.3.1 Sole Trader or Sole Proprietorship

This is the simplest form of business organization owned by a single individual and controlled by
the same individual. A sole trader is a person who owns the business alone. He provides all the
necessary capital and other resources alone. He engages in business on his own account. The
business has no existence apart from the owner. It is therefore not incorporated into a legal entity
but a trading license is required.

2.3.1.1 Features/ Characteristics of Sole Trader

➢ No legal requirements to start a business
➢ No sharing of profit
➢ Borrowing of capital/ investment

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 ➢ Own management and control
➢ It does not have a separate legal existence from its owner
➢ It has a limited legal life since its operation depends on the life of the owner
➢ The owner has unlimited liability since he can be called upon to pay the debts of the
business even beyond his capital investment in the business.

2.3.1.2 Advantages of a Sole Trader

1. Being own boss the owner has the full control and this eliminates that chance for conflict or
misunderstanding during the decision making.
2. Simplicity of creating and dissolving. In most cases you only need an idea, money and a
simple license to start. When dissolving you don’t have to consult anyone all you need to do is to
simply put a sign on the door saying ‘’out of business’’.
3. Low cost of creating the business. Sole proprietorship is usually one of the least costly forms
of business to create. Because legal papers are not necessary, start-up legal expenses are
minimal. And since the owner is the boss and probably the only one there will be few labor costs.
4. Total commands over decisions and profits. Since the owner has full control over the business,
he/she can make decisions without consulting others and withdrew the money from the business
whenever the need arises. And since all the profits goes to the owner there is greater motivation
to grow the business.
5. Uncomplicated tax basis. A sole proprietorship is taxed as a person and not the business.
6. Easy formation. It is easy and simple to start because they are few legal requirements involved
as compared to other forms of business organization.
7. Direct contact with customers and employees. Personal contact can be established both with
the customers and thus can lead to better understanding of employees and customers needs and
results in provision of better services.
8. Maintenance of secrets. A sole trader is in a better position to keep his business secrets than
any other form of business ownership.

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2.3.1.3 Disadvantages of Sole Proprietorship
1. Not easy to raise capital to start one’s own business.
2. The sole trader is personally liable for all the debts of the business. If the assets of the business
are not enough to pay the liabilities, personal property can be attached by the creditors.
3. Lack of continuity. Sole proprietorship is established by initial owner, operated by the owner
and trends to die with the owner.
4. Opportunities for raising further capital are limited this can severely restrict the growth of the
business.
5. Unlimited liability. There is no limit on the debts for which the owner is liable. When the
business is sued the owner is liable for the debt.
6. Limited skills. The individual may be limited in terms of skills that they may possess, and for
this reasons they may be unable to control all parts of the business.
7. Fatigue. Sole trader can easily get tired since he or she works all by himself.
8. Lack of consultation- sole trader makes all the decisions alone thus the business is likely to
face the risk of having poor and wrong decisions being made.

2.3.2 Partnership
It is an association of two or more persons who come together, invest, combine capital, labor and
skills to form a business. Partnership act defines partnership as the relationship between persons
who have agreed to the sharing of profit of a business and the business is carried on by all
partners. It is limited to twenty persons in general business and ten in banking business. The
persons who have agreed to come together to form a business are known as partners.

2.3.2.1 Types of Partnership

1. Partnership at will- this is a kind of partnership which is created voluntarily and dissolved
at the will of partners.
2. Partnership for a specific purpose- this is the type of partnership which is created for a
particular activity and once the activity has been accomplished it comes to an end.

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 3. Partnership for a specific period- this is the type of partnership which comes to an end
when the stated period required to operate in the business elapses.

2.3.2.2 Types of Partners

▪ Active partners- they are those partners who are involved in the day to day running of the
business.
▪ Sleeping/ dormant partners- they are those partners who contribute capital but do not take
part in the day to day operations of the business
▪ Minor partners- this is a partner who is under the age of majority i.e. has not attained 18
years.
▪ Nominal partners- this is a partner who has not contributed any capital but he or she has
allowed his or her name to be used in the partnership and thus he or she is not entitled to
any profits.
▪ Secret partner- this is a partner who actively participates in the management of the firm
but he is not disclosed as a partner to the public

2.3.2.3 Features/ Characteristics of Partnership

❖ Membership- it is made up of a minimum of two members and a maximum of twenty
persons in general business and ten in banking business.
❖ Contractual relationship/ agreement- it can be formed by an agreement between partners
which can be done either orally or in writing.
❖ Valid contract- for a contract to be valid there must be agreement, consideration capacity
to contact, legal object and free consent (members should not be forced into partnership)
❖ Sharing of profit- profits and losses of the firm are shared according to the agreed ratio
and if there is no agreed ratio then profits should be shared equally.
❖ Implied authority- this is where a partner is given the authority by the other partners to
act on their behalf.

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 ❖ Unlimited liability- the liability of the partner is not limited to the amount of investment
in the business thus they are held personally liable for the debts of the business and their
personal properties may be sold to meet such debs.
❖ Transfer of interest- the individual partners cannot transfer their interest in the business
without the consent of the other partners.
❖ Contract of uberrimae fedei (utmost good faith)- partners should be trustworthy and thus
they should disclose all the monetary transactions they are involved in.
❖ Legal position- in law the partners and the firm are inseparable.

2.3.2.4 Rights of the Partners

Share in the management and operations of the business
Share in any profits the company makes
Have access to the company’s books and records
Receive a formal accounting of the business affairs of the partnership

2.3.2.5 Obligation of the Partners

Share in any losses incurred by the business
Work for the partnership without salary as necessary
Submit to majority vote or arbitration of differences that may arise among the partners
Give other partners complete information about all affairs of the partnership.

2.3.2.6 Contents of Partnership Agreement/ Deed

The name, location and address of the partnership business
A general description of the type of the business that will be conducted.
The power and duties of the partners, including any limitations or restrictions.
The financial contribution each partner will make.
How profits and losses are to be divided
How partners can leave the business and the new one is added.
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 What steps must be taken to dissolve the partnership.
The salaries to be paid to the partners who are actively involved in the management of
the business
The name, address and occupation of each partner
The duration of the partnership
Authority, if any, to act on behalf of other partners

2.3.2.7 Advantages of Partnership

There is increased capital due to the partners’ contributions
Greater access to finance unlike the sole trader
Wide range of experience and expertise brought by different partners
The business is not taxed; rather it is the individuals who are taxed.
Losses are shared among the partners according to the agreed ratio.
Formation of partnership is easy because all that is essential needed in partnership is an
agreement between partners.
Expansion can be done very easily by increasing the size of partnership, including
addition of specialist’s skills.
Partnership have a longer duration than sole proprietor because death or retirement of one
partner cannot interrupt the partnership has more than two partners.
Better decision making- in a partnership, two or more persons consult during decision-
making, resulting in better decisions being made.
sharing of work- partners share work thus keeping members from being overworked and
reducing fatigue.

2.3.2.8 Disadvantages of Partnership

Partners are personally liable in case the business incur debts.
Slow decision making due to consultation
A decision by one partner can lead the other into trouble since they are jointly liable.

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 Profit is shared.
More requirements is needed when starting in comparison with sole trader.
Lack of continuity due to death of one partner.
it is difficult for a partner to withdraw his investment. The buying out of a partner may be
difficult unless specifically arranged for in written agreement.
limited access to capital-partnerships has difficulties in obtaining large sums of capital
especially long term financing.
limited managerial skills- a partnership may not access to a variety of management skills
if the partnership cannot afford to hire relevant managers.
over-reliance on certain partners- a partnership that relies heavily on one partner for its
success may be adversely affected when such a partner retires or dies.

2.3.2.9 Dissolution of partnership

Partnership can be dissolved in the event of the following circumstances:
1. An event, which makes it unlawful for the business or the partners to carry on the partnership,
occurs
2. The partnership was entered into a fixed period and the fixed period has come to an end.
3. If the partnership was entered in to for a single venture/undertaking, and has come to an end.
4. Death of any partner
5. Agreement- partners can decide to dissolve the partnership voluntarily either in writing or
orally
6. Insolvency/ bankruptcy- If the business does not earn any profit it can be declared as bankrupt
also if the assets of the firm are less than the liabilities it will result to compulsory dissolution.
7. Court order- Partnership can be dissolved if the court decides so basing on cases such as
permanent disability of a partner or breach of contract ( going against the agreement)

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2.3.3 Joint stock companies
As a result of the short comings of sole proprietorship and partnership joint stock
companies was formed. Joint Stock Company is defined as a corporate association of a
number of people for some common object. The members of a joint stock company
contribute capital to form a common stock to carry on a business usually for profit. It is
created under the law and has an entity of its own, quite separate from members who own
it.

2.3.3.1Features / characteristics of a company

➢ Incorporated association of persons- a company is an association of several persons and
comes into existence after registration under the companies act.
➢ Artificial person- a company is created by law hence it is an artificial person since it can
enjoy all the rights and privileges of a natural person i.e. it can sue, fire hire and own
property.
➢ Legal entity-this implies that a company is separate and distinct from its members it
exists on its own.
➢ Common seal- a company has its own seal which gives the company the power and
authority to transact business.
➢ Perpetual succession- the company has a continuous existence despite the death,
bankruptcy or insolvency of a member. The life of the company is not attached to the life
of its members.
➢ Limited liability- this means that even if the company is unable to pay debts the
shareholders cannot in accordance with the law lose more than the value of their
investment in the company nor sell their personal properties to offset the debts.
➢ Transferability of shares- the shares of the company can be freely transferred without the
consent of other members or the company itself.

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2.3.3.2 Types of Companies
Companies can be grouped into two categories:
● Registered companies
● Statutory companies

2.3.3.2.1 Registered companies

These are companies that are formed, incorporated and operate under the company’s act,
1962, Cap 486 prevailing in a given country. Once a company is formed it becomes a
separate legal entity apart from its members. Registered companies can further be
classified into public, private, limited and unlimited companies.
Unlimited companies- this is a type of a company where the members i.e. shareholders
have unlimited liabilities hence they are liable to pay the debts and other obligations of
the business if the company cannot offset its debts.
Limited companies- this is a type of a company where the liability of members is limited
to a stated amount, usually to the face value of shares a member holds in the company.
Limited companies can be classified into two:
✓ Companies limited by guarantee- this is a type of a company in which each
member promises to contribute a fixed sum of money towards the liabilities of the
company as long as he or she remains a member.
✓ Company limited by shares- these are the most common type of companies in
which the liability of each shareholder is restricted to the value of shares held by
him or her.
Public limited companies- it consists o a minimum of seven members but no maximum
number. Their shares are freely transferable usually through the Nairobi stock exchange.
Shares and debentures are open for public subscription. Certificates of trading and annual
audits of accounts are compulsory. The minimum number of directors is two. They may
have limited or unlimited liability.

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 Private limited companies- it consists o a minimum of two members and a maximum of
fifty members. Their shares are not freely transferable usually through the Nairobi stock
exchange. They cannot offer shares and debentures to the public for subscription. They
must have at least one director. They commence business on receipt of certificates of
incorporation from the registrar of companies. Presentation of prospectus and audited
accounts is not compulsory. They have unlimited liability.

2.3.3.2.2 Statutory companies

These are companies that are created by an act of parliament. The powers and functions of these
companies are defined by the acts that create them. Most companies owned by the Kenya
government (commonly referred to as parastatals organizations) fall in this category. Examples
are the Agricultural Finance Corporation (AFC), the Industrial and Commercial Development
(ICDC), the Kenya National Trading Corporation (KNTC), Kenya Ports Authority (KPA) and
the Kenya Revenue Authority (KRA).

2.3.3.3 Formation of a Company

A company may be formed by any persons associating for any lawful purpose through
registration with the registrar of companies under the companies act. For a company to be
formed it has to pass through the following stages:

❖ Promotion
It refers to investigation and exploitation of profitable line of business and the resource for it.
Promoters are a set of entrepreneurs who foresee the prospect of starting a new line of
business and takes active steps for the formation of the business.

❖ Incorporation stage

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 It refers to the registration of the company under the company’s act. The promoters have to
bring along certain documents with non refundable fees. The documents required in this
stage are:
a. Memorandum of association- This should contain the following:
Name of the company, in the case of a private company the name must have limited as
the last word, in case of a public company it will be ‘public limited company’
Where its registered office is located, physical address and the building
The liability of the members i.e. the amount of capital they are responsible for providing.
The capital of the company, this set the limit on the amount of capital the company is
allowed to raise (authorized share capital)
b. Articles of Association
This is concerned with the internal administration of the company and it is those that are
setting up the company that need to decide on the rules they wish to be included in their
article. Matters that are normally dealt in the articles;
The appointment and power that the directors will have
The rules about shareholders meeting and voting
The types of shares and the shareholders’ right attached to each type.
The rules and procedures of transferring shares.
Contains details of first directors and secretary, their date of birth, occupation and details
of other directorship, they have held within the last five years. They must sign and date
the form.
This is a statutory declaration of compliance with all the legal requirements relating to
the incorporation of a company. The document must be signed by a solicitor, forming the
company or by one of people named in the form 10 as director in presence of a
commissioner for oath.
After incorporation the article may be altered, but only with 75% majority vote.
Companies have two main source of control over its affair i.e. shareholders in a general
meeting and the directors who act on behalf of the shareholders (stewardship). The most

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 matter such as the change in constitution, appointment of directors rest with its
shareholders in a G.M. most issues require a simple majority vote, although some matters
require 75% majority. Given the importance the voting power play in the company
management, the type of share that the company issue is of great significance, ordinary
share carry full voting right such as preference shares may carry no voting right at all.
The articles that the directors be responsible for the daily running of the company make
decision and act on behalf of the company. Directors can be sanctioned or dismissed in a
general meeting

c. Raising requisite capital

The law requires the company to state the authorized capital which is the maximum
amount of capital a company can be able to raise ad it cannot raise more without the
permission of the capital market authority. For the purpose of raising the capital the
public has to issue a prospectus inviting members of the public to subscribe to its shares
and debentures.

d. Certificate of commencement of business

Once all the required documents have been properly filed with the registrar of companies,
registration is effected if the registrar is satisfied with what is contained in them.
Registration brings the company into being, and the company is issued with the
certificate of incorporation. This certificate is only given when the company has met its
minimum subscription and then it can start its operation.

2.3.3.4 Advantages of a limited company

Shareholders have limited liability (can only lose what they have put in the business)
Additional capital can be raised through issuing of more shares. Right issue
More access to additional capital from external lenders
Company name is protected by law

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 Perpetual existence – the legal existence of the company is not affected by the death of
any shareholder.
Specialized management –because of its size and scope of operations, a company can
afford to hire well qualified employees who can manage the company efficiently.
Economies of scale- large sums of capital enable large scale operations which results in
reduced costs per unit produced and consequently higher profit
Easy transfer of ownership –shareholder in public companies can sell their shares to
other people whenever they wish.
Legal entity- it has a separate legal existence from its owners which ensures there is no
conflict between the company and its members.

2.3.3.5 Disadvantages of a limited company

The company is restricted to operate in accordance with its memorandum and articles of
association
Company records are open to the public e.g. annual records-financial disclosure and thus
lacks secrets
forming a company is more costly, complicated and time consuming
Decision making is complex due to the number of people involved
Affair are strongly controlled according to companies Acts
The owners do not control the company directly this is because the control is vested in
the board of directors.
Double taxation, after a company pays its corporate tax its owner will have to pay
personal taxes on any distributions of its profits they receive from the corporation in the
form of stock dividend.
Agency problem- when managers do not act as responsible agents for the shareholders
who own the business. Since managers run the business on behalf of the owners, they
may not always act in the best interest of the owners. For examples managers may take

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 an expensive trip which necessarily may not benefit the business, this bring about the
problem of agency. Company such as Enron in USA went down due to agency problem

2.3.3.6 Key differences between Private Limited and Public Limited Companies
A private company’s shares are not quoted in the stock exchange and cannot be bought on the
open market. For public limited company shares may be listed in the on application stock
exchange. Public limited company has tremendous potential for raising capital by inviting the
public to subscribe for shares. On the other hand private limited companies are curtailed from the
same and hence raising capital become limited. The capital requirement for the two is also
different, private require less authorized capital and indeed no set minimum but for plc they
require more capital. The directors of public limited company must be at least two and a private
need only one. Private company may dispense with preparing of the accounts but for public it is
mandatory.

2.3.4 Co-operatives
A co-operative organization can be defined as an organization of members who come together to
carry out economic activities and to share proceeds equitably on the basis of co-operative
principles. A cooperative is a legal entity owned and democratically controlled equally by its
members. A defining point of a cooperative is that the members have a close association with the
enterprise as producers or consumers of its products or services, or as its employees.
Cooperatives are based on the co-operative values of "self-help, self-responsibility, democracy
and equality, equity and solidarity" and the co-operative principles of “voluntary and open
membership; democratic member control; member economic participation; autonomy and
independence; education and training; co-operation among co-operatives; and concern for
community Economic benefits are distributed proportionally according to each member's level of
participation in the cooperative, for instance by a dividend on sales or purchases, rather than
divided according to capital invested.

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The co-operative society is that type of business organizations in which members make efforts to
achieve any common objective on voluntary and democratic basis. All cooperatives must adhere
to the co-operative principles. These principles are formulated by international co-operative
alliance which is a worldwide confederation of all cooperative organizations.
These principles are;
Open and voluntary membership
Democratic administration
Limited Interest on capital
Disposal of surplus
Education: the members need to be given adequate education.
Principle of competition with other co-operatives.
Service to members
Co-operation with members

2.3.4.1 Advantages of co-operatives

Low cost services- they offer services to members at low prices because of their low
operating costs
Improved welfare of members- they improve the welfare of members by enhancing their
participation in economic activities
Encourage members to save, enabling them to accumulate the necessary capital for their
economic activities.
They extend credit facilities to members at low interest rate
Limited liability- the liability of members is limited to the amount of capital they have
contributed to the society.
Flexibility in membership- members can withdraw their membership from the society
and have their shares refunded after two months notice.
Equality of members- members of co-operative have equal rights in the society
irrespective of the number of shares held

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 Large capital base- most co-operatives have a large capital base due to high membership.
Loyalty- The co-operative societies are voluntary association. Members of cooperative
societies are mostly sincere and loyal to one another.
Democratic administration- all decisions of co-operative societies are made on
democratic basis. The members cast their votes and these decisions which have greater
support of the members are implemented.
Common benefit- the main aim of a co-operative society is to provide the best services to
all members. Common benefit is taken into consideration.
It is a means to effect a re-distribution within the population.

2.3.4.2 Disadvantages of Cooperatives

Lack of business experience- members of co-operative societies does not have the
experience of business and as a result the societies fail to achieve their objectives.
Disagreement among members- sometimes members of co-operative societies do not
agree on specific duties e.g. on the mode of election. This situation may lead to collapse
of co-operative society.
Lack of sufficient capital- co-operatives rely basically on financial contribution from
members for the capital but in many developing countries the incomes are relatively low
and sometimes members are reluctant to pay high subscriptions or join societies.
Weakness in management- co-operatives has an inherent weakness in management due
to inefficient committees who lack education, experience or who have promoted the
length of service than on their ability, efficiency and qualifications.
Interference- politicians and other people in authority could interfere with the leadership
in co-operative thereby creating unrest.
Membership withdrawal- a co-operative society may experience financial problems if
many members withdraw their membership at the same time.
Slow decision making process- members of the co-operative have to be consulted first
before any decision is passed.

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 Lack of secrecy- since co-operative is run by many people, its affairs cannot be kept
secret.

2.4 SUMMARY
This chapter has shown that there are different forms of business undertakings. The commonest
of these are the various types of sole proprietorship, partnerships, limited liability companies and
cooperatives. The advantages and disadvantages of each type of business organization were also
reviewed.

2.5 NOTE
Cooperatives are different from other types of companies since they are registered by the
commissioner for cooperative development and operates in accordance with the cooperatives
society’s act unlike the companies which are registered by the registrar and operates under the
companies act.

2.6 TOPIC ACTIVITIES

1. Persons intending to form a joint stock companies are required to furnish the registrar of
companies with specific documents. What are these documents and what are their
purposes.
2. Find out which of the two forms of businesses discussed in this topic are more popular in
your local town and what are the reasons for their popularity
3. In group discussion, justify why a co-operative is a corporate body

2.7 FURTHER READING

Dyer, B & Ian, C (2005). Introduction to Business Studies. Longman. London
Kibera, F.N (2001). Introduction to Business. A Kenyan Perspective. Kenya Literature Bureau.
Nairobi

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Koontz, OD, Weihrich, H & Cannice, M (2008). Business Finance. McMore Publishers. Nairobi
William , A. W (2009); Modern Business Corporations, Including The Organization And
Management; Bibliolife
Graffin R. W and Ronald (2002); Business Studies; Prentice Hall
Lomash (2008); Business Policy and Strategic Management; Vikas Publishing House Pvt Ltd

2.8 SELF ASSESSMENT

1. Distinguish between an active partner and a nominal partner.
2. Detail the basic steps that must be taken to start a company in Kenya.
3. Explain ways in which partnership may be dissolved.
4. Distinguish between public and private limited companies
5. What are the merits and demerits of cooperatives
6. Discuss the advantages that sole trader has over partnership.

TOPIC THREE
BUSINESS ENVIRONMENT
3.1 INTRODUCTION
Business enterprises do not exist in a vacuum. They exist and operate within a context- a large
external environment that presents both opportunities and threats. Business enterprises secure
inputs (people, material, information, money) from their surrounding environment and in turn
produce goods and services that they send to the same environment. A business’ performance is
often dependent on how well the enterprise influences and is influenced by its environment. A
business is affected by both internal and external environment factors that entrepreneurs must

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understand. Each business should know about the environment elements which are dynamic,
many continually changing. Some of these elements are controllable while others are not. An
efficient business firm tries to adopt it and responds to the changing elements of the
environment.

3.2 LECTURE OBJECTIVES

At the end of this topic, the learner should be able to;
a) Identify the macro factors that affect the business
b) Describe various factors that constitute the business environment
c) Understand the relationship of the environment and the business

3.3 BUSINESS ENVIRONMENT

A business is affected by both internal and external environment factors that entrepreneurs must
understand. The environment is divided into micro and macro environment.

3.3.1Internal Environment/ Micro Environment

Internal environment is the aggregation of all factors in an organization
s immediate area of operation that affects its performance and decision making i.e. those forces
that affect business directly and include competition, employees, financial institutions, suppliers,
shareholders etc.
1. Competitors: market competition is the cornerstone of managerial capitalism. Businesses
that do not compete effectively are often confronted with the uncomfortable prospect of
either changing or being eliminated. Kenyans telephone users are benefiting greatly from
competition of Safaricom, Airtel, Orange/Telkom and the newly introduced Yu.
2. Customers: all enterprises rely on customers for existence. Consumer groups are becoming
an important force in the business. A customer could be an individual, an institution, a
government or another firm. The manager must understand his customers and find ways of
maintaining customer relationships.

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 3. Suppliers: organizations are dependent upon suppliers of materials and labor and will try
to take advantage of competition among suppliers to obtain lower prices, better-quality work
and faster deliveries. Many organizations will try to reduce suppliers to reduce costs. A
favorable supplier relationship leads to better shipping arrangements, early warning of major
changes and advanced information about technological or marketing developments.
4. Financial institutions: An enterprise depends on a variety of financial institutions such as
commercial banks, investment banks, insurance firms etc for supply of long-term and short-
term loans. Because effective working relationships with financial institutions are so vital,
establishing and maintaining these relations is the work of finance officer and CEO of the
organization. Some organizations incorporate a banker in their board of directors to enhance
the relationship.
5. Employees: all enterprises achieve their objectives through the action of their employees.
For their part, employees work to meet their own personal, social and economic needs.
Management has to design and influence leadership in a way that employees view their
contributions as supportive and consistent with their sense of personal importance. The
challenge is to create a situation in which both employer and employee achieve their goals.
Management must maintain sound relationships with the unions for effective running of their
organizations.
6. Owner/shareholder: they are technically the owners of organizations through stock
ownership. Some shareholders have ability to influence the running of their organization.
They exercise their powers through voting in general meeting, special general meetings or
even in selling their shares.
7. General public- refers to any group that has an actual or potential interest in the firm. The
general public can hurt the firm or help it to achieve its objectives.
8. Distributors- these are individuals who promote sales and makes the goods and services
of producers available to the final buyers e.g. transportation. They have a major effect on the
operation and growth of the business.

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3.3.2 External/Macro-Environment
External environment is the aggregation of external elements that exist outside of the company
that can significantly impact on its performance and ability to compete in the market place i.e.
those forces that affect business indirectly
1. Social factors: these relates to changes in society and demographics structures to which
the business is exposed. Demographics are the characteristics of the population such as
average age, birth rate, level of education. A consumer preference changes over time
given changes in the environment. The advancement in technology has seen so many
changes in consumer preferences. Kenyans are no longer buying cassette tapes with the
advent of CDs, DVDs, and USBss. (Madura 2007)
2. Legal factors: these relates to changes in laws and regulations. Business must be
careful to keep the law and anticipate ways in which change in laws will affect the way
they do business e.g. tobacco bill, media bill.
3. Political factors: these relate to ways in which changes in government and government
policies can influence business. In a country where there is political turmoil business is
threatened too, since stability is necessary for every business operations. Business may
influence the government actions through lobby groups and/illegal actions as well as in
some countries to fund their preferred candidate or party to form the next government.
4. Economic factors: this relates to changes in the wider economy. Country’s economy
goes through; decline, recession and recovery. A growing economy provides greater
opportunities for business to make profits, like banks, and cement industry in Kenya a
few years after NARC to power. (Kibera, 1998)
5. Technological factors: change in technology can have positive or devastating effects
on business. Managers need to be aware of the changes in technology that is taking place
in the environment so as to update themselves and their organization. Technological
changes provide opportunities for business to adopt new breakthroughs, innovations and
inventions to cut costs and develop new products.

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 6. Physical factors- Kenyans physical environment offers ample opportunities for
business. The rich agricultural land, water resources and rainfall allow us to grow a large
variety of crops and rear different species of fish, these crops and fish together with forest
and wildlife resources provide the necessary raw materials for food processing factories
and other types of agro- business.
7. Historical factors- it is concerned with the historical background against which the
business operates. This relates to the key development that led to the present affairs in
commerce, trade and other related activities.

3.4 SUMMARY
Business does not operate in a vacuum; there are various components that interact with the
business. There is the internal environment, which the immediate stakeholders of the business
such as the customers, employees, and suppliers among others. On the hand there are the external
forces which the businesses are exposed to include; social-cultural, legal, political, economic,
ecological, technological, physical and historical.

3.5 NOTE
An efficient business is the one that tries to adapt and respond to the changing environment. A
business that fails to respond to changing environment is likely to fail.

3.6 TOPIC ACTIVITIES

1. Explain the macro and micro factors that affect the business and explain why businesses
need to respond to the changes in the environment.
2. Come up with two examples of companies that have failed for not adopting to the
changing environment.

3.7 FURTHER READING

Dyer, B & Ian, C (2005). Introduction to Business Studies. Longman. London

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Kibera, F.N (2001). Introduction to Business. A Kenyan Perspective. Kenya Literature Bureau.
Nairobi
Koontz, OD, Weihrich, H & Cannice, M (2008). Business Finance. McMore Publishers. Nairobi
William , A. W (2009); Modern Business Corporations, Including The Organization And
Management; Bibliolife
Graffin R. W and Ronald (2002); Business Studies; Prentice Hall
Lomash (2008); Business Policy and Strategic Management; Vikas Publishing House Pvt Ltd

3.8 SELF ASSESSMENT

i) Environment presents both opportunities and threats to an organization. Discuss.
ii) Discuss the micro environment of the business
iii) Explain how the macro environment affects the business
iv) Discuss how business interacts with various elements of the internal environment

TOPIC FOUR
ECONOMIC SYSTEMS
4.1 INTRODUCTION
Governments of all countries worldwide take part in business activities within their countries in
one way or the other. Different governments participate in business in different ways and to
varying extents. The government involves itself in business activities to ensure that there is a fair
play between the business people and the consumers.

4.2 LECTURE OBJECTIVES

At the end of this topic, the learner should be able to;
a) Discuss the types of economic systems
b) Identify and describe what type of economic system is used by your own country

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4.3. Economic Systems
An economic system is an organized way in which a state or a nation allocates its resources and
apportions goods and services in the national community. it is a system of production, resource
allocation, exchange, and distribution of goods and services in a society or a given geographic
area. It includes the combination of the various institutions, agencies, entities, decision-making
processes, and patterns of consumption that comprise the economic structure of a given
community.

4.3.1 Types of Economic Systems

An economic system is a type of social system which is divided into capitalism, socialism and
mixed economy.

4.3.1.1 Capitalism Economic System

It is an economic system in which investment in and ownership of the means of production,
distribution, and exchange of wealth is made and maintained chiefly by private individuals or
corporations, who contribute labor, land, capital and also take part in the organization. In this
system the government neither decides what is produced nor how the goods and services are
distributed thus production and distribution of goods and services is determined by the needs of
the consumers and their ability to buy.

4.3.1.1.1 Characteristics of Capitalism

✓ Private property
✓ Capital accumulation
✓ Wage labor
✓ Voluntary exchange
✓ A price system
✓ Competitive markets.

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In a capitalist market economy, decision-making and investment is determined by the owners of
the factors of production in financial and capital markets, and prices and the distribution of goods
are mainly determined by competition in the market.
Capitalism, as we are aware, is an economy where resources and firms are privately owned in
free markets. Normally, this usually involves some government intervention to regulate certain
aspects of the economy and protect private property

4.3.1.1.2 Advantages of Capitalist Economy

● Foremost as Government intervention is kept at a limited level several issues that
generally arise with government intervention including corruption, lack of a self-interest
push force and poor circulation of information within the market is prevented allowing
individual incentives to work as hard as possible to achieve as much as possible.
● As the capitalist economy is dependent on the push factor of individuals, there is no limit
to the level of wealth an individual can accumulate through progression within the
economy.
● Capitalism allows individuals choice both in commodity purchase and employment
opportunities. It allows resources to be distributed according to consumer choice rearing
the market in a more productive consumer friendly range.
● Through capitalism firms are inclined to produce with greater efficiency, by cutting cost
and improving efficiency becomes an aim to prevent losses in an industry where
competition is high bettering the economy as a whole.
● In such industries company effectively respond to changes in consumer desires better the
economy and improving efficiency. In attempts to ensure the highest possible level of
productivity, financial incentives are provided to employees by companies so as to better
improve self interest in company proficiency. This is beneficial on a global level as these
countries generally become exemplary innovative fronts for improvement in technology
and implications of productive changes.

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 ● As company proficiency improves so does the ability for people to move through social
class as an increase in wealth is available. This pushes individuals to work harder in the
interest of self-preservation to achieve more. Profit increase within the economy and
personal industry, allows an expansion in wealth and company resources, resources that
will be used so as to best benefit the company and in turn the economy by promoting
foreign investment.
● Individuals possess a freedom of choice to purchase and engage in virtually any and all
economic activities with little restraint. Promoting trade among nations and individuals
that will mutually profit persons with and the economy itself.

4.3.1.1.3 Disadvantages
● As dominance within the economy is formed by the elite few, wealth is recycled in this
small percentage who has gained a monopoly through limited Government control. This
normally occurs through construction of rules that limit the flexibility of the money flow
between classes. Leading to exploitation in labor resulting in revolt and strike within the
market negatively affecting the entire economy by halting and disrupting production.
Concentration of Power
● One of the downsides of a capitalistic economic system is that private ownership of
capital allows firms to maintain monopolistic control over resources and therefore, charge
higher prices.
Wealth and Social Inequality
● Capitalism is based on a system of inherited wealth, where people pass down their
property over the generations; the wealth that is produced by capitalism is not shared
equally. By the same token, the opportunity to advance is not equal among society's
members. The differences between rich and poor in capitalism are more pronounced than
in other economic systems. Socially, these disparities give rise to discord to the members
of society.
Externalities Ignored
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 ● Capitalism tends to ignore negative externalities such as pollution, so long as the profit
motive is satisfied. At the same time, a capitalist-based system tends to downplay
positive externalities by not providing sufficient health and education
Cyclical Downturns
● For all the boom periods that capitalism is known for, major recessions, too, come with
the package. When an economic system is based on a producer-consumer culture, periods
of economic expansion tend to eventually give way to periods of contraction or recession.
With these declines comes unemployment on a large scale, which in turn takes its toll on
people's livelihood and future outlook. In socialist regimes, these business fluctuations
are curbed, because a socialist economy coordinates production to make full use of
resources, rather than discriminating between savings and investment.

4.3.1.2 Socialism Economic Systems

It is an economic system where resources are allocated by the central authority who decides what
is to be produced, consumed and at what quantity as well as how the goods and services will be
distributed among consumers. In this system the government controls and regulates production
of commodities. It exists in a country like china.

4.3.1.2.1 Characteristics
▪ Means of production are owned by the state
▪ Economic activities are planned by the central authority
▪ Absence of competition
▪ Equal opportunities for all
▪ No economic freedom to the people

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4.3.1.2.2 Advantages
✓ Efficiency is greater because the means of production are not left in the market forces
rather they are controlled and regulated by the state
✓ There is less inequality of income because of the absence of private ownership of means
of production
✓ Exploitations by the monopolist are absent since all the means of production is owned by
the state
✓ It is able to control over production and avoid general deflationary trend
✓ It promotes rapid economic growth by adopting economic planning

4.3.1.2.3 Disadvantages
✓ Lack of economic freedom since everything is controlled by the state
✓ It gives rise to inefficiency which causes the economy to suffer in the long run
✓ Consumers suffer since they do not enjoy as their freedom of choices is curtailed
✓ Economic equality is impossible and this creates a distinction between the poor and the
rich
✓ No competition between producers and consumers thus resulting in production of cheap
products
✓ There is no economic and political freedom

4.3.1.3 Mixed Economic System

A mixed economic system is an economic system that features characteristics of both capitalism
and socialism. A mixed economic system allows a level of private economic freedom in the use
of capital, but also allows for governments to interfere in economic activities in order to achieve
social aims. This type of economic system is less efficient than capitalism, but more efficient
than socialism.

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4.3.1.3.1 Features
● Resources are owned both by the government as well as private individuals. i.e. co-
existence of both public sector and private sector.
● Market forces prevail but are closely monitored by the government.
4.3.1.3.2 Advantages
● Producers and consumer have sovereignty to choose what to produce and what to
consume but production and consumption of harmful goods and services may be stopped
by the government.
● Social cost of business activities may be reduced by carrying out cost-benefit analysis by
the government.
● As compared to Market economy, a mixed economy may have less income inequality due
to the role played by the government.
● Monopolies may be existing but under close supervision of the government.
● Mixed economy helps in increasing national production in the country. Both public and
private sectors work hard to bring about more production. The problems created by free
enterprise and too much public control are solved through mixed economy.
● It provides freedom of enterprise ownership and profit earning as well as social welfare
and political freedom. And all the national recourses are utilized under mixed economy.
● It can efficiently allocate goods and services where they are needed, by allowing prices to
measure supply and demand.
● It also rewards the most efficient producers with the highest profit, ensuring that
customers are getting the best value for their dollar.
● It encourages innovation that meets customer needs more creatively, cheaply or
efficiently. Fourth, it automatically allocates capital to the most innovative and efficient
producers. They, in turn, can invest the capital in more businesses like them.

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4.3.1.3.3 Disadvantages of a Mixed Economy
✓ If it has too much free market, it can reward the competitive members of society and
leave others without any government support. Central planning might do extremely well
in mobilizing forces for defense, creating a government-subsidized monopoly or
oligarchy system. This could also put the country into debt, slowing down economic
growth in the long run. Businesses that are already successful can lobby the government
for more subsidies and tax breaks.

4.4 SUMMARY
This chapter has reviewed the major elements of economic systems by first providing the
definition of economic systems. The definitions were followed by a discussion on the various
types of economic systems, their characteristics and the pros and cons of each economic system.

4.5 NOTE
Each country has its own way of allocating resources and apportioning the goods and services to
reach the national community.

4.6 TOPIC ACTIVITIES

1. What type of economy does Kenya have? What reasons would you give for your answer?
2. In group discussion discuss why the governments should be involved in business

4.7 FURTHER READING

Dyer, B & Ian, C (2005). Introduction to Business Studies. Longman. London
Kibera, F.N (2001). Introduction to Business. A Kenyan Perspective. Kenya Literature Bureau.
Nairobi
Koontz, OD, Weihrich, H & Cannice, M (2008). Business Finance. McMore Publishers. Nairobi

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William , A. W (2009); Modern Business Corporations, Including The Organization And
Management; Bibliolife
Graffin R. W and Ronald (2002); Business Studies; Prentice Hall
Lomash (2008); Business Policy and Strategic Management; Vikas Publishing House Pvt Ltd

4.8 SELF ASSESSMENT

1. Define the term economic system
2. Discuss the various classifications of economic systems
3. Explain the mixed economic system
4. Discuss which type of economic system you would prefer and why?

TOPIC FIVE
MANAGEMENT FUNCTIONS
5.1 INTRODUCTION
Management is perhaps the most important area of human activity today. Individuals manage
their own unique daily affairs to survive. Leaders of groups also manage group affairs so that the
desired group objectives are accomplished without management it is not easy to conceive any
meaningful way of survival as an individual or more so as a group with common objectives.

5.2 LECTURE OBJECTIVES

At the end of this topic, the learner should be able to;
a) Identify the key levels of management in organizations
b) Discuss the nature of management
c) Explain the functions of management

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5.3. MANAGEMENT
Management is the process of achieving organizational goals through engaging in the four major
functions of planning, organizing, staffing, leading and controlling. Mary Parker Follet defines
management as the art of getting things done through and with people to accomplish
organizational goals. Management involves coordinating and overseeing the work activities of
others so that their activities are completed efficiently and effectively. (Coulter & Robbins 2007)
Koontz and Weihrich defines management as the process of designing and maintaining an
environment in which individuals working together in groups efficiently accomplish selected
aims. Managers are those individuals who bring together the money, manpower, materials and
machinery necessary to operate a business. They make decision and decide course of action that
the organization takes. A manager is someone who works with and through other people by
coordinating their work activities in order to accomplish organizational goals.

5.3.1 Nature of Management

➢ It is an organized activity
➢ It involves working through and with people
➢ It creates relationship among resources
➢ It is multi disciplinary since it draws knowledge and ideas from various disciplines i.e.
anthropology, history, psychology etc
➢ Management is dynamic and thus flexible since it changes with the changing
environment
➢ Principles of management are relative and not absolute this is because the principles are
applied according to the organization needs this is because a particular principle has
different strength at different conditions.
➢ Management is both an art and a science- it is an art since it is practiced by individuals
and a science since it involves empirical studies
➢ Management as a profession because it is a specialized area of knowledge that requires
skills and expertise.

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 ➢ Universality of management- it is universal since it is practiced worldwide, it is practiced
in both profit or non profit or nonprofit organization, it is practiced in private and public
companies. It is practiced by all levels of management.
➢ There is existence of objectives in management
➢ It involves decision making and decision making process is continuous

5.3.2 Management Levels

Managers’ decisions vary with their level in the organization. Each level requires different skills
too given the fact that they perform different functions.
Top management includes president, chief executive officer, chief financial officer, and vice
president (the titles may differ among organizations). The decisions that are made by managers
in this level are strategic in nature meaning they stretch over five years and cover the whole
organization. Decisions in this level are also unstructured and include answering questions such
as should we expand? How can we expand? (Is it through acquisition or merger or joint
ventures?)
Middle level management includes position such as regional manager and departmental heads.
They are responsible for business’s short-term decisions. Much of their work involves
implementing in their region or department what the top managers have deliberated. The
decision-making in this level is semi-structured since they have to conform to the top
management decisions.
First line management (supervisory) mostly oversees the employees who are engaged in day-
to-day production process. They deal with issues such as employee absenteeism and customer
complaints. (Madura 2007)

5.3.3 Management Functions

Managers achieve organizational goals through engaging in the five major functions of planning,
organizing, staffing, leading and controlling.

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5.3.3 .1 Planning
It is the function of management that involves setting objectives and determining a course of
action for achieving these objectives. Koontz defines planning as the selection of missions and
objectives and the action to achieve them. Planning helps to bridge the gap from where we are to
where we want to be. Planning requires that managers be aware of environmental conditions
facing their organization and forecast future conditions. It also requires that managers be good
decision-makers.

Characteristics of planning
❖ It is a process rather than a behavior
❖ It is primarily concerned with looking into the future
❖ It involves the selection of suitable courses of action
❖ It is undertaken at all levels of management
❖ It is flexible as future conditions are dynamic

Importance of planning
❖ It precedes all other managerial functions i.e. it is the foundation of management
❖ It offsets uncertainties and bring about change
❖ It focuses on objectives and the direction of action to achieve these objectives
❖ It helps in coordination of various activities
❖ It helps in control
❖ It increases organizational effectiveness

5.3.3.2 Organizing
It is the process of grouping closely related activities together, assigning those activities to a
competent person and finally delegating authority. The purposes of organizing include but are
not limited to determining the tasks to be performed in order to achieve objectives, dividing tasks
into specific jobs, grouping jobs into departments, specifying reporting and authority

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relationships, delegating the authority necessary for task accomplishment, and allocating and
deploying resources in a coordinated fashion. Organizing plays a central role in the management
process. Once plans are created the manager's task is to see that they are carried out. Given a
clear mission, core values, objectives, and strategy, the role of organizing is to begin the process
of implementation by clarifying jobs and working relationships. It identifies who is to do what,
who is in charge of whom, and how different people and parts of the organization relate to and
work with one another. All of this, of course, can be done in different ways. The strategic
leadership challenge is to choose the best organizational form to fit the strategy and other
situational demands.

Process of Organizing
❖ Knowing the objectives of the organization- objectives determines the various activities
which needs to be performed and the type of organization which needs to be build for
achievement of the objectives
❖ Grouping of activities into departments- this involves identifying the activities necessary
to achieve the objectives and to group the closely related activities into departments.
❖ Deciding the key departments- these are departments which are rendering the key
activities and which are essential to the fulfillment of goals
❖ Determining levels at which various types of decisions are to be made- each organization
must decide for itself as to how much decentralization of authority and responsibility it
wants to have.
❖ Determining the span of management- this is determining the number of workers who
should report directly to the superior. Span of management refers to the number of
workers that a manager can effectively manage.
❖ Setting up coordination mechanism- it is set up to enable the members of the organization
to keep sight of organization goals and to reduce inefficiency and conflict.

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5.3.3.3 Staffing
It involves manning the organization structure through proper and effective selection, appraisal
and development of the personnel to fill the roles assigned to the employers/workforce.
According to Koontz “Staffing refers to hiring of appropriate individuals to fill the vacant
positions and keeping those positions filled.

Features
▪ Staffing is an important managerial function- Staffing function is the most important
managerial act along with planning, organizing, directing and controlling. The operations
of these four functions depend upon the manpower which is available through staffing
function.
▪ Staffing is a pervasive activity- As staffing function is carried out by all mangers and in
all types of concerns where business activities are carried out.
▪ Staffing is a continuous activity- This is because staffing function continues throughout
the life of an organization due to the transfers and promotions that take place.
▪ The basis of staffing function is efficient management of personnel- Human resources
can be efficiently managed by a system or proper procedure, that is, recruitment,
selection, placement, training and development, providing remuneration, etc.
▪ Staffing helps in placing right men at the right job. It can be done effectively through
proper recruitment procedures and then finally selecting the most suitable candidate as
per the job requirements.
▪ Staffing is performed by all managers depending upon the nature of business, size of the
company, qualifications and skills of managers etc.

Steps involved in Staffing

▪ Human resource planning-it is the process of determining the right number of individuals
in the right job at the right time. It involves forecasting and determining the future
manpower needs of the concern.

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 ▪ Recruitment- it is the process of seeking and attracting a pool of people from which
qualified candidates from a job vacancy can be chosen.
▪ Selection- This involves choosing from hose available applicants the individuals who are
most likely to perform successfully in the job. Orientation and Placement- orientation is
the introduction of new employees to the organization, work unit and the job to make
familiarize with the work environment. Placement takes place by putting right man on the
right job.
▪ Training and Development- Training is a learning process that involves acquisition of
skills, concepts, rules and attributes that workers acquire in order to develop and grow
them within the concern. Development also includes giving them key and important jobs
as a test or examination in order to analyze their performances.
▪ Remuneration- It is a kind of compensation provided monetarily to the employees for
their work performances. This is given according to the nature of job- skilled or
unskilled, physical or mental, etc. Remuneration forms an important monetary incentive
for the employees.
▪ Performance Evaluation- In order to keep a track or record of the behavior, attitudes as
well as opinions of the workers towards their jobs, regular assessment is done to evaluate
and supervise different work units in a concern. It is basically concerning to know the
development cycle and growth patterns of the employees in a concern.
▪ Promotion and transfer-Promotion is said to be a non- monetary incentive in which the
worker is shifted from a higher job demanding bigger responsibilities as well as shifting
the workers and transferring them to different work units and branches of the same
organization.

5.3.3.4 Leading
It is the process of influencing people so that they will contribute to the organization and group
goals. According to Davis Keith leading is the process of persuading others to seek define
objectives.

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Characteristics of leading
➢ It is a continuous process of influencing behavior
➢ It is exercised in a particular situation
➢ It is basically a personal quality
➢ A leader tries to influence an individual to behave in a particular manner
➢ This quality motivates the individual to be a leader
➢ It is required at all levels of organization.

Importance of Leading
➢ It Initiates Actions – leading is the function which is the starting point of the work
performance of subordinates. It is from this function the action takes place.
➢ It Ingrates Efforts – Through direction, the superiors are able to guide, inspire and
instruct the subordinates to work. For this, efforts of every individual towards
accomplishment of goals are required. It is through leading the efforts of every
department can be related and integrated with others. This can be done through
persuasive leadership and effective communication. Integration of efforts brings
effectiveness and stability in a concern.
➢ Means of Motivation – it helps in achievement of goals. A manager makes use of the
element of motivation here to improve the performances of subordinates. This can be
done by providing incentives or compensation, whether monetary or non – monetary,
which serves as a “Morale booster” to the subordinates Motivation is also helpful for the
subordinates to give the best of their abilities which ultimately helps in growth.
➢ It Provides Stability – Stability and balance in concern becomes very important for long
term sun survival in the market. This can be brought upon by the managers with the help
of four tools or elements of leading Therefore a manager can use of all the four traits in
him so that performance standards can be maintained.

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 ➢ Coping up with the changes – It is a human behavior that human beings show resistance
to change. Adaptability with changing environment helps in sustaining planned growth
and becoming a market leader. Leading can be of use to meet with changes in
environment, both internal as external. Effective communication helps in coping up with
the changes. It is the role of manager here to communicate the nature and contents of
changes very clearly to the subordinates. This helps in clarifications, easy adoption and
smooth running of an organization.
➢ Efficient Utilization of Resources –Through leading, the role of subordinates become
clear as manager makes use of his supervisory, the guidance, the instructions and
motivation skill to inspire the subordinates. This helps in maximum possible utilization of
resources of men, machine, materials and money which helps in reducing costs and
increasing profits.

5.3.3.5 Controlling
Controlling consists of verifying whether everything occurs in conformities with the plans
adopted, instructions issued and principles established. Controlling ensures that there is effective
and efficient utilization of organizational resources so as to achieve the planned goals.
Controlling measures the deviation of actual performance from the standard performance,
discovers the causes of such deviations and helps in taking corrective actions According to
Koontz “Controlling is the measurement and correction of performance in order to make sure
that the enterprise objectives and the plans devised to attain them are being accomplished. It is
looking back into the past, present and taking the necessary actions into the future.

Features of Controlling
➢ Controlling is continuous process
➢ Controlling is a pervasive function- which means it is performed by managers at all levels
and in all type of concerns.
➢ Controlling is looking back- this is because we cannot control the future

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 ➢ Controlling is a dynamic process- since controlling requires taking review methods,
changes have to be made wherever possible.
➢ Controlling is related with planning- Planning and Controlling are two inseparable
functions of management. Without planning, controlling is a meaningless exercise and
without controlling, planning is useless. Planning presupposes controlling and controlling
succeeds planning.
➢ A control system is a coordinated and integrated system.

Importance of Controlling
❖ It facilitates co-ordination through unity of direction
❖ It helps to measure the progress of the organization
❖ It facilitates decision making
❖ It facilitates decentralization since executives delegate authority where there is an
effective control system
❖ It helps in control
❖ It stimulates action by correcting mistakes
❖ It enhances the morale of employees this is because employees would not like a situation
that is out of control
❖ It promotes efficiency of operation by focusing on the achievement of objectives.

5.4 SUMMARY
This topic has reviewed management functions by first providing the different definitions of
management. The definitions were followed by a discussion on the nature of management, the
different management functions, their characteristics and importance of each management
function.

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5.5 NOTE
All managers carry out managerial functions but the time spent for each function may differ e.g.
top level managers spent more time in planning as opposed to low level managers.

5.6 TOPIC ACTIVITIES

1. Explain why planning precedes all other management functions.
2. In groups discuss the debate “ controlling is looking back”
3. Management is the act of getting things done through and with people. discuss

5.7 FURTHER READING

Dyer, B & Ian, C (2005). Introduction to Business Studies. Longman. London
Kibera, F.N (2001). Introduction to Business. A Kenyan Perspective. Kenya Literature Bureau.
Nairobi
Koontz, OD, Weihrich, H & Cannice, M (2008). Business Finance. McMore Publishers. Nairobi
William , A. W (2009); Modern Business Corporations, Including The Organization And
Management; Bibliolife
Graffin R. W and Ronald (2002); Business Studies; Prentice Hall
Lomash (2008); Business Policy and Strategic Management; Vikas Publishing House Pvt Ltd

5.8 SELF ASSESSMENT

1. Define the term management
2. Discuss the different levels of management
3. Explain the functions of management
4. Discuss the importance of controlling as a function of management

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 TOPIC SIX
FUNCTIONAL AREAS OF MANAGEMENT
6.1 INTRODUCTION
An organization has different functional areas that managers need to manage, these areas
include: marketing, finance, accounting, supply and logistics, production etc. These functional
areas need to be looked into so that the goals of an organization can be realized.

6.2 LECTURE OBJECTIVES

At the end of this topic, the learner should be able to;
a) Discuss the different functional areas of management
b) Understand the relevance of functional areas of management to the organization

6.3 FUNCTIONAL AREAS OF MANAGEMENT

An organization has different functional areas which a managers needs to oversee these
functional areas include the following:

6.3.1 Marketing Management

It is an art or a science of choosing the target market and getting, keeping and growing customers
through creating, delivering and communicating superior customer value. It is concerned with

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identifying the needs and wants of the customers and satisfying them profitably. The manager
has to ensure that the goods and services provided are preferred by their target customers as the
customers would not buy any products that do not give them any value.

6.3.2Financial Management
It is a discipline concerned with generation and allocation of scarce resources (funds) to the most
efficient use (competing projects) through a market pricing system i.e. NPV, IRR, profitability
index etc. it involves sourcing of funds, proper utilization and investment of sourced funds to a
profitable project that would yield returns over a number of years in the future. Managers should
ensure that the funds are properly utilized to avoid wastage of resources
.

6.3.3 Human Resource Management

It encompasses those activities designed to provide for and coordinate the human resources of an
organization. Human resources are the employees in an organization. It is concerned with
staffing, training and development, grievance handling procedure and implementation of fair
wages thus management must maintain sound relationships with the employees for effective
running of their organizations.

6.3.4 Production and Operations Management

It is concerned with the effective management of resources that are used to provide for goods and
services. It involves determining the right sources of materials, production process and operating
procedure. This is done with the intention of producing the right quality of goods and services.

6.3.5Accounting
It is the process of identifying, summarizing, classifying, analyzing, interpreting and reporting
economic information to help users make informed judgement.

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It is carried out in order to determine the profits or losses made by an organization and to
determine its financial position in terms of its assets, liabilities and capital

6.3.6 Logistics and Supply chain Management

It involves the management of the flow of goods which includes the movement and storage of
raw materials, work in progress, inventory and finished goods from the point of production to the
point of consumption.

6.3.7 Risk management

In the world of finance, risk management refers to the practice of identifying potential risks in
advance, analyzing them and taking precautionary steps to reduce/curb the risk.
When an entity makes an investment decision, it exposes itself to a number of financial risks.
The quantum of such risks depends on the type of financial instrument. These financial risks
might be in the form of high inflation, volatility in capital markets, recession, bankruptcy, etc.
So, in order to minimize and control the exposure of investment to such risks, fund managers and
investors practice risk management. Not giving due importance to risk management while
making investment decisions might wreak havoc on investment in times of financial turmoil in
an economy. Different levels of risk come attached with different categories of asset classes.

6.4 SUMMARY
This topic has reviewed the functional areas of management by providing a discussion on the
different functional areas of management and their relevance in the organization.

6.5 NOTE
Each area in management is important since it performs certain activities which are directed at
the efficient and effective utilization of resources in pursuit of the organization objectives.

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6.6 TOPIC ACTIVITIES
1. Explain how the functional areas of management help an organization to achieve its
goals.
2. Find out the functional areas of management in your organization and their relevance.

6.7 FURTHER READING

Dyer, B & Ian, C (2005). Introduction to Business Studies. Longman. London
Kibera, F.N (2001). Introduction to Business. A Kenyan Perspective. Kenya Literature Bureau.
Nairobi
Koontz, OD, Weihrich, H & Cannice, M (2008). Business Finance. McMore Publishers. Nairobi
William , A. W (2009); Modern Business Corporations, Including The Organization And
Management; Bibliolife
Graffin R. W and Ronald (2002); Business Studies; Prentice Hall
Lomash (2008); Business Policy and Strategic Management; Vikas Publishing House Pvt Ltd

6.8 SELF ASSESSMENT

1) Distinguish between financial management and production management
2) Discuss the various functional areas of management

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TOPIC SEVEN
KENYAN FINANCIAL SYSTEM
7.1 INTRODUCTION
Financial system is one of the most important components of any economy and without it a
modern country cannot function efficiently. It comprises of the financial markets, financial
institutions and financial instruments. Financial instruments are securities issued by financial
institutions and traded in financial markets. The financial system supplies credit to support
purchases of goods and services. It also supplies a mechanism for making payments in form of
currency, cheques and other transactions media. It also provides outlet for savings since both
individuals save today in order to be able to consume more goods and services at a future date.

7.2 LECTURE OBJECTIVES

At the end of this topic, the learner should be able to;
a) Identify the members of the stock exchange
b) Explain the functions of the Stock Exchange
c) Describe the challenges facing financial institutions
d) Distinguish between capital and money markets

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7.3 FINANCIAL SYSTEM
Financial system comprises of financial markets, financial institutions and financial securities.

7.3.1 Financial Markets

It is the sum total of all capital, money and security market institutions operating in a given
economy. They can also be defined as structures through which funds flow. It consists of
individual companies, institutions and the government who buys and sells money to different
parties at a price determined by the market sources of demand and supply. Financial markets can
be divided into two;
➢ Capital markets
➢ Money markets

7.3.1.1 Capital Markets

These are markets for long term loan able funds that trade instruments with maturity of more
than one year. It consists of a number of individual companies, institutions and the government
that supplies and demand long term capital. The instruments traded in capital markets include
stock, debentures, corporate bonds, treasury bonds and mortgages.
Capital markets can be divided onto two;
➢ Security market
➢ Non security market
Security market – is a segment of capital markets that deals with shares, bonds, debentures and
options
Non security market- is a segment of capital market that deals with long term loans, leases and
mortgages.

Functions of Capital Markets

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 ➢ They offer long term finance which is necessary for acquisition of fixed assets and for
general development
➢ They provide permanent finance for a long term base of a going concern concept
➢ They provide services of investment advisory
➢ They enable companies and individuals to obtain long term finances which they can sell
in the money market
➢ They act as a channel through which foreign investment flow into the country
➢ It facilitates the liquidation status of corporations
➢ They provide incentives to the savers in form of dividends or interest

7.3.1.2 Money Markets

These are markets for short term loan able funds that trade instruments with maturity of not more
than one year. It consists of a number of individual companies, institutions and the government
that supplies and demand short term capital. The instruments traded in money markets include
bank overdraft, promissory notes, bills of exchange, trade credit, treasury bills and certificate of
deposits.

Functions of Money Markets

➢ It offers finance to solve liquidity problems of individual companies
➢ It offers a medium through which securities are discounted thus making them highly
negotiable
➢ They offer advice to concerned parties on financial matters
➢ They set prices of different finances which gauges the economic activity of a given
country at a given point in time
➢ They act as a channel through which short term investment inform of treasury bills are
effected
➢ They act as a sole source of finance for small businesses in Kenya e.g. retailers and
wholesalers

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 ➢ It acts as a medium through which transactions are effected using instruments e.g. bills of
exchange, promissory notes
➢ They bring together buyers and sellers of short term finances
➢ They act as a link between holders of short term security on one hand and discounters of
securities on the other hand hence providing an atmosphere for negotiability
➢ They provide an opportunity to banks and other institutions to use their surplus funds
profitably for a short period.

7.3.1.3 Security Market (Nairobi Securities Exchange (NSE))

NSE can be defined as a market where securities are traded (buying and selling)
It is a market where securities are bought and sold. It can also be defined as an organized capital
market for securities which may be inform of shares, debentures and stock all of which are
bought and sold through brokers who act as middlemen between sellers and buyers of securities.
Securities refer to shares, debentures, treasury bonds, treasury bills etc. Stock refers to capital
detained by a company through the issue of shares. Bonds are debt instruments used to borrow
money from the public.
Security market can be divided into two;
➢ Primary market
➢ Secondary market
Primary market –it is a market in which users of funds e.g. corporations raise funds through
new issue of financial security such as stocks and bonds. It is a market for newly issued
securities.
Secondary market- this is where the members of the public participate in buying and selling
shares of various companies. It is a market for already existing securities.

Functions of Security market (NSE)

➢ Provides a ready market for stock, shares, bonds, debentures etc.
➢ Facilitates the flow of new capital into the industry

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 ➢ Facilitates savings (encourages savings by individuals)
➢ Protects investor’s investment by reasons of the rules of the stock exchange.
➢ Companies seeking capital are advised and guided by all stages.
➢ Shows the trend of business in the stock exchange provides an important barometer for
business throughout the country.
➢ Investors are able to obtain capital from the public.
➢ It enhances the inflow of foreign capital.
➢ The title to any quoted security is transferred speedily and cheaply.
➢ Disciplines the company’s management by ensuring that the companies fulfill certain
requirements and follow certain rule before securities are listed in the stock exchange.

7.3.2 QUOTATION
Quotation is consent by the stock exchange for companies’ securities to be dealt with in the
stock market i.e. to be bought and sold in the stock market. It is the process by which a
company will have permission to have its shares bought and sold in the securities exchange.

7.3.2.1Advantages of a Company Quoted in the NSE

➢ A quoted company is able to raise finances quickly and easily and at lower floatation
cost.
➢ A quoted company is considered to be financially stable.
➢ A quoted company can easily obtain a loan.
➢ A quoted company can compare itself with other companies.
➢ There is national and international prestige associated with quoted companies.
➢ Quoted companies operates within certain ethical standards and guidelines thus
discouraging them from engaging in unethical activities
➢ They can easily obtain underwriting facilities
➢ They can raise finance from different sources i.e. debentures, bonds and shares
➢ It serves an assurance to potential shareholders who are financially sound

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 ➢ It will be able to get comparative figures and up to date information as quoted
companies must submit period reports.
➢ They are given privileges by the government e.g. when Uchumi supermarket was
almost collapsing the government intervened and pumped in finance.

7.3.2.2 Disadvantages of a Company Quoted in the NSE

➢ Loss of secrecy- means the company losses its secrecy through the publication of the
company’s shares. The secrecy is also lost by inspection of the books of accounts by
the shareholders or by the public.
➢ In case the company’s profits decline this will be revealed to the public and will
lower the share prices of such a company.
➢ There is loss of control to incoming shareholders.
➢ It is expensive because of the fee payable to the stock market.
➢ The formalities of quotation are tedious and tiresome.
➢ Immediately after quotation the prices are likely to be low.
➢ A quoted company can easily be taken over by people buying shares in the stock
exchange.
➢ Agency problems due to the divorce of management and ownership
➢ High floatation costs

7.3.2.3 Members of the Securities Exchange

1. Stock jobbers -These are members who buy and sell securities in their own names. They sell
securities at a profit called a ‘turn.’ They buy shares in wholesale and hold them for speculative
purposes
2. Stock brokers -These are middle men between the investing public and the stock exchange.
They are agents who earn a commission from the buyers and sellers. Members of the stock
exchange must pass through them for technical advice.

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Similarities between Jobbers and Brokers
i) They both operate in the stock market
ii) Both don’t hold shares for investment purposes
iii) Activities of both are regulated by the rules of stock market.

Type of jobbers
1. Bull- this is a speculator in the stock exchange who buys shares in expectations of a rise in
their prices.
2. Bear- speculator in the stock exchange who sells shares in the anticipation of a fall in their
prices.
3. Stag- a speculator in the stock market who purchases large block of new issues of shares in
anticipation in the rise of market price. They buy their shares directly from the companies selling
them.

7.3.3 Financial Institutions

It is an organization which is allowed to tap public savings inform of deposits and use those
deposits to lend to the public on long term and short term basis.

7.3.3.1 Types of Financial Institutions

● Commercial banks- these are depository institutions whose assets are loans and liabilities
are deposits
● Thrifts (cooperatives)- these are depository institutions in the form of savings
associations, saving banks and credit unions. They perform services similar to
commercial banks but they tend to concentrate their loans in one segment such as real
estate or customer loans.
● Insurance company- these are institutions that protect individuals and companies from
adverse events e.g. burglary, accidents

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 ● Security firms and investment banks- these are institutions that underwrite securities and
engage in related activities such as security brokerage, security trading and creating a
market in which securities can trade e.g. dye and blair
● Finance company- these are institutions that make loans to both individuals and
businesses but they do not accept deposit and thus rely on short and long term financing.
● Mutual funds- these are institutions that pool financial resources of individuals and
companies and invest those resources in a diversified portfolio e.g. old mutual, diamond
trust bank.
● Pension funds- they offer savings plans through which fund participants accumulate
savings during their working years before withdrawing them during their retired years.

7.3.3.2 Functions of Financial Institutions

● Credit allocation- financial institutions are often viewed as the major and sometimes the
only source of financing for particular sector of the economy e.g. farming, residential real
estate.
● Monitoring cost- aggregation of funds in financial institutions provides greater incentives
to collect a firm’s information and monitor fund users actions.
● Maturity intermediation- financial institutions can bear the risk of mismatching the
maturity of the assets and liabilities and thus act as intermediary.
● Denomination intermediation- financial institutions allows small investors to overcome
the constraints in buying asset imposed by large denomination size.
● Money supply transmission- depository institutions are a channel through which
monetary policy actions impact the rest of the economy and financial system in general.
● Intergenerational wealth transfer- financial institutions especially life insurance
companies and pension funds provide savers with the ability to transfer wealth from one
generation to another i.e. the ability to transfer wealth from their youth to old age.

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 ● Payments of services- the efficiency with which depository institutions make payment of
services directly benefit the economy. They allow large transfer of funds from one
institution to another.
● Liquidity and price risk- financial institutions provide financial claims to investors with
superior liquidity attributes and with lower price risk
7.3.3.3 Risks Faced by Financial Institutions
● Credit risk- this is the risk that promised cash flows from loans and securities held by
financial institutions may not be paid in full i.e. the borrower may default on all the
principle or interest payment
● Foreign exchange risk- this is the risk that exchange rate changes may affect the values of
financial institutions assets and liabilities located abroad.
● Country or sovereign risk- this is the risk that payment from foreign borrowers may be
interrupted because of interference from foreign government
● Liquidity risk- this is the risk that a sudden surge in liability withdrawals may require
financial institutions to liquidate their assets in a short period of time and at low prices.
● Operational risks- this is the risk that technology and support systems may malfunction or
break down.
● Interest rate risk- this is the risk that results from changes in interest rate which affect the
cost of funds and returns on assets.
● Market risk- this is the risk incurred by financial institutions when they are trading their
assets and liabilities due to changes in interest rates, exchange rates and other assets
prices.
● Insolvency risk- this is the risk that financial institutions may not have enough capital to
offset a sudden decline in the value of its assets.
● Off balance sheet risk- this is the risk incurred by financial institutions as a result of
activities related to contingencies, assets and liabilities.
● Technology risk- this is the risk incurred by financial institutions when their technology
investment do not produce anticipated cost savings.

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7.3.4 Capital Market Efficiency
Capital market facilitates buying and selling of securities such as shares and bonds or debentures.
They perform two valuable functions: liquidity and pricing securities.
Liquidity- means the convenience and speed of transforming assets into cash without loss of
value.
Pricing securities- pricing of securities in the capital markets is as a result of demand and supply
forces exerted by buyers and sellers in the market.
Capital market efficiency is the ability of securities to reflect and incorporate all relevant
information almost instantaneously in their prices.

7.3.4.1 Forms of Capital Market Efficiency

The following are the forms of market efficiency;

Weak form of efficiency

The security prices reflect all past information about the price movements in the weak form of
efficiency. It’s therefore not possible for an investor to predict future security price by analyzing
historical prices and achieve a performance (return) better than the stock market index.

Semi strong form of efficiency

The security prices reflect all publicly available information. This implies that an investor will
not be able to outperform the market by analyzing the existing company related or other relevant
information available in say the annual accounts, or financial magazines etc in fact such publicly
available is already impounded in the current security prices

Strong form of efficiency

The security prices reflect all published and unpublished, public and private information. This is
a significantly strong assertion and empirical studies have not bore out the validity of the

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efficient market hypothesis. In the strong form of efficiency people with private or insider
information have been able to outperform the market.

7.3.4.2 Attributes or conditions to be satisfied for a capital market to be perfect

❖ No entry barrier- anyone can participate in the market thus the suppliers or users of funds
can enter the market and deal with each other.
❖ Presence of large number of buyers and sellers of securities
❖ Divisibility of financial assets- financial markets are divisible and therefore affordable
investment are made by all participants.
❖ Absence of transaction cost- participants can buy and sell securities without much cost
❖ No tax differences- one set of investors should not be favored over others
❖ Free trading- there should be no government restrictions in trading and anyone is free to
trade securities.

7.4 SUMMARY
In this topic we have reviewed the Kenyan’s financial system and its composition, it also
discussed on the meaning of financial markets, its classification and the function of each market.
It also looked at the definition of financial institutions, the types, functions and the risks facing
financial institutions in Kenya. The topic ended with a discussion on the concept of capital
market efficiency.

7.5 NOTE
Financial system is one of the most important components of any economy and without it a
modern country cannot function efficiently. It functions by supplying credit which can be used
for investment purposes and it is that investments that make a country develop and thus
development of a country is not possible without an appropriate financial system.

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7.6 TOPIC ACTIVITIES
1. Explain the measures taken by financial institution to minimize the risks they face.
2. What type of market efficiency does Kenya have?
3. Find out the requirements that are needed for a company to be quoted

7.7 FURTHER READING

Dyer, B & Ian, C (2005). Introduction to Business Studies. Longman. London
Kibera, F.N (2001). Introduction to Business. A Kenyan Perspective. Kenya Literature Bureau.
Nairobi
Koontz, OD, Weihrich, H & Cannice, M (2008). Business Finance. McMore Publishers. Nairobi
William , A. W (2009); Modern Business Corporations, Including The Organization And
Management; Bibliolife
Graffin R. W and Ronald (2002); Business Studies; Prentice Hall
Lomash (2008); Business Policy and Strategic Management; Vikas Publishing House Pvt Ltd

7.8 SELF ASSESSMENT

1) Explain the advantages and disadvantages of a company quoted in the Stock Exchange
2) Explain the functions of the Stock Exchange
3) Explain the functions of money market
4) Distinguish between secondary and primary markets
5) Discuss the types of financial institutions
6) Define the term quotation
7) Differentiate between a bull and a stag
8) Explain the various forms of capital market efficiency
9) Discuss the conditions that need to be satisfied for a capital market to be efficient

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TOPIC EIGHT
BUSINESS AND THE SOCIETY
8.1 INTRODUCTION
Traditionally business basic objective was defined in terms of profit maximization. The idea of
corporate social responsibility dates back to early 20 th century. It was started by business
executives who believed that businesses had an obligation to use their resources in ways that
would be beneficial both to the owners and the society as a whole. The concept of social
responsibility of business is concerned with the obligation that business has in helping to
promote the welfare of the society. Business has therefore been experiencing an increasing

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pressure from the society to be socially responsible this is so because the society is more
enlightened and the society’s problems have become more alarming.

8.2 LECTURE OBJECTIVES

At the end of this topic, the learner should be able to;
a) Define Corporate Social Responsibility
b) Identify stakeholders to whom a business is socially responsible to.
c) Explain arguments for and against the use of social responsibility
d) Understand the concept of business ethics

8.3. CORPORATE SOCIAL RESPONSIBILITY (CSR)

It is defined as the realization that every cooperative organization is created and operates within
a society and therefore it should contribute to the development and well being of the society. It
can also be defined as the management obligation to make decisions and to take actions that will
enhance the welfare and interest of the society as well as the organization.

8.3.1 Areas of Social Responsibility

Business has an obligation to be socially responsible to various parties in the society. The parties
define the areas where the business is expected to be socially responsible. The parties include the
following:

A. Shareholders
These are the owners of the business. Business has the following responsibilities to the
shareholders:
● Increase shareholders earnings
● Pay the best dividends through the best dividend payout ratio
● Safeguarding shareholders interest

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 ● Improvement of full disclosure and other areas of business dealings and economic
activities
B. Employees
Business has the following responsibilities to the employees:
● Rewarding employees equitably
● Safeguarding employees health and safety
● Giving employees equal opportunities in things such as promotions and training
● Promoting employees welfare through provision of education, recreational,
housing and credit facilities
● Effective and efficient personnel administration and industrial relations practices
C. Consumers
Business has the following responsibilities to the consumers:
● Giving consumers good quality products
● Giving consumers safe products
● Educating consumers about products and use of products
● Being fair in the quantity and prices of products sold
● Avoiding misleading advertisements
● Making products available and affordable to the consumers
● Being fair in terms of sale to the consumers
● Proper labeling, packaging and presentation of products in a manner that the
quality, quantity, hazards of use and limitations of use are clearly set forth
● Responding to consumers complaints and adhering to warranties
● Conducting ample research before allowing a product on the market

D. Suppliers
Business has the following responsibilities to the suppliers:
● Being fair in the allocation of tenders to suppliers
● Paying the suppliers in good time

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 ● Fair and reasonable terms of purchase
E. Creditors
Business has the following responsibilities to the creditors:
● Not defaulting in payments
● Paying fair and reasonable rates of interest
● Paying interests and principal on time
F. Government
Business has the following responsibilities to the government:
● Complying with government laws and regulations
● Paying proper taxes
● Supporting the government in welfare and development programs
G. Community
Business has the following responsibilities to the community:
● Supporting or providing such things as educational, recreational, cultural, health,
transportation, welfare and housing facilities
● Active participation in community development programs
● Welfare programs for the aged, handicapped and under nourished in the
community.
H. The general public
Business has the following responsibilities to the general public:
● Creating employment opportunities
● Equal opportunities for all
● Giving due consideration to the minorities and disadvantaged groups in the
society
● Avoiding pollution of the environment

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8.3.2 Arguments for Corporate Social Responsibility
● Changing public needs and expectations-the changing public needs have led to changing
expectations of businesses thus increased business social response is necessary in order to
narrow the gap between expectations and actual response.
● Moral obligation- social responsibility is ethical thus it’s the obligation of a business to
adhere to moral principles and rules of conduct
● Limited resources- a business must act responsible not only to conserve the earths limited
resources but also to use the scarce resources wisely.
● Better social environment- a business can help in creating a better quality of life by
helping to solve difficult social problems
● Long run profit- a more socially responsible business tends to have more secure long run
profits
● Discouragement of further government regulation- a business that is socially responsible
tends to discourage the government from imposing more rules and regulations
● Balance of responsibility and power- a business should be more socially responsible as a
balance to the large amount of social power it enjoys
● Public image- business social response improves the public image of the business, its
reputation and the society views such business as business that operates with utmost
integrity.
● Social problems- many of the society’s problems have been contributed by the business
and thus corporate social responsibility tends to solve them.
● Prevention is better than cure- it would be easier and cheaper for business to act to
prevent social problems than to solve problems once they occur

8.3.4 Arguments against Corporate Social Responsibility

● Need for profit maximization- a business exists to make profit. In pursuit of profit the
business is able to reduce costs and prices which in turn benefit the society.

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 ● Cost of social responsibility-there are some costs incurred when a business is socially
responsible e.g. donations, these costs eventually are passed on to the society.
● Divided purpose and confused expectations- if business executives have also to pursue
social goals besides the economic ones, their interests may be so greatly divided that they
will become confused and ineffective
● Weakened international balance of payments- the costs of social programs eventually
makes products of a country expensive thus weakens a country’s competitive position in
international trade.
● Increase in power and influence- the business has already the social power thus their
power and influence would be too much if it is socially responsible.
● Lacks of social skills- business executives are economically oriented and unlike social
workers they lack the social skills required in the administration of social responsibility.
● Lack of accountability- business has no direct lines of social accountability to the people
thus it is unwise to allow business activities in areas where business is not accountable.
● Inability to make moral choices- only persons or individuals can make moral choices and
not organizations or business therefore it is a waste of time talking about business social
responsibility.
● Inefficiency- corporate social responsibility tends to reduce the economic efficiency of
the business

8.3.4 Business Ethics

Ethics is a major factor in the social responsibility of business. Ethics is the study of moral
judgement about the rightness or wrongness of action. Ethics is the study of how our decisions
affect other people. It is a study of people habits and their effect on others. It is a set of moral
values or principles used by the organizations to steer the conduct of both the organization itself
and its employees in all their activities whether internal or external. Business ethics can also be
defined as the application of principles to issues that arise in the conduct of business. Business or
management ethics therefore are the standards that guide managers in line with their actions and

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decisions to determine whether they are good or bad or right or wrong morally. In this case they
are generally accepted ways of behavior expected of managers and businesses. Businesses must
balance the interest of employees against the needs of the overall business objective.

8.3.4.1 Ethical Questions

1. Societal level- At this level we ask questions about basic institutions in a society. For
example, is it ethically correct to have a social system in which a group of people are
systematically denied basic rights?
2. Stakeholders level- This includes the employees, customers, shareholders and others.
The question is how a company or business organization should deal with these groups
who are affected by its decisions and how should these groups deal with the company in
question.
3. The moral discourse level- This is also known as the internal policy. Questions
addressed are about the nature of the relation of business organization and its employees
i.e. managers and others.
4. The personal level- Questions addressed at this level are about how people should treat
one another within an organization. For example, should we be honest with one another
whatever the consequences.

8.3.4.2 Terminologies in Ethics

1. Values- they are fundamental belief system that form the basis for the development or
adoption of ethical patterns of behavior e.g. I believe in a just and honest society.
2. Rights- these are claims that entitles a person to take a particular action. They entitle room
or sphere of autonomy or freedom. Rights are rarely obsolete because they are limited by the
rights of others.
3. Duties- duties are obligations to take specific steps, obey laws e.g. paying taxes.

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 4. Moral values- these are roles for behavior that often become internalized as moral values.
These roles guide management through situations where competing interest collide.
5. Attitudes- these are inclination to act in a given manner
6. Behavior- These are actualized attitudes or physical portrayal of certain attitudes.

8.3.4.3 Ways of Improving Ethical Behavior in an Organization

i) By establishing corporate codes of conduct. This guides new and existing members in
dealing with each other and the customers.
ii) Encouraging good working relationship among the workers
iii) Encouraging good working relationship between employers and employees
iv) Ensuring that the rights of the individual in the work place are protected
v) Ensuring that professional relate professionally to their clients
vi) Helping workers to protect and uphold the reputation of the organization
vii) Helping workers to develop proper skills and the right attitude towards their work

8.4 SUMMARY
This topic has reviewed the social responsibility of a business by first providing the different
definitions of corporate social responsibility. The definitions were followed by a discussion on
the areas of social responsibility and the arguments for and against a firm being socially
responsible. The topic ended with a discussion on the concept of business ethics.

8.5 NOTE
Without society, business would be non-existent since it is the society that creates and sustains
business and the relationship between the two is of fundamental not only for business managers
but also for scholars.

8.6 TOPIC ACTIVITIES

1. Explain the effects of corporate social responsibility to the business.
2. Business and ethics have no relationship. Discuss?
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 3. Shareholder argued that the main aim of the business is to earn profit while the manager
argued that it goes beyond earning profit but also improving and protecting the society’s
general welfare. Compare and contrast the views of shareholder with that of the manager?

8.7 FURTHER READING

Dyer, B & Ian, C (2005). Introduction to Business Studies. Longman. London
Kibera, F.N (2001). Introduction to Business. A Kenyan Perspective. Kenya Literature Bureau.
Nairobi
Koontz, OD, Weihrich, H & Cannice, M (2008). Business Finance. McMore Publishers. Nairobi
William , A. W (2009); Modern Business Corporations, Including The Organization And
Management; Bibliolife
Graffin R. W and Ronald (2002); Business Studies; Prentice Hall
Lomash (2008); Business Policy and Strategic Management; Vikas Publishing House Pvt Ltd

8.8 SELF ASSESSMENT

1) Define the term corporate social responsibility
2) Explain arguments for and against the use of social responsibility
3) How is the business socially responsible to customers?
4) Define business ethics
5) Explain how managers can improve ethical behavior in their organizations

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