CBM 521: BUSINESS STUDIES AND ETHICS
KENYA INSTITUTE OF MANAGEMENT
Topic Contents
1. Introduction to business studies
 Definition
 Importance of business studies
 Needs and wants
Forms of Business Ownership
 Formation, Ownership and Capital Management
 Private /Public ownership ;
o Sole Proprietorship
o General and Limited Partnership
o Private companies
o Public companies
 Features/xteristic of Public and Private
 Merits and Demerits of Public and Private
Location and Size of Business Enterprises
 Factors affecting location of business
 Effect of localization and delocalization of industries
2. Production
 Definition of production
 Factors of production
 Concept of direct and indirect production
 Primary and secondary production
 Specialization and its significance
 Types of specialization – territorial, occupational, product, others
 Advantages and disadvantages of specialization
 Types of Occupations;
 Extractive
 Manufacturing
 Constructive
 Tertiary
3. Trade Chain and Distribution
 Definition of trade
 Home trade
 Distinction between retail and wholesale trade
 Function of retail and wholesale trade
 Retail trade
 Small scale – types and features of small-scale retail trades
 Large-scale retailers
1
 Documents used in home trade
 Disadvantages of home trade
Terms of Payment
 Cash
 Credit
 Hire purchase – instalment payment
 Discounts- cash and trade discounts
 Abbreviation of ToP – COD, CWO, LOCO, FOR, ONO etc.
Government Involvement and Participation
 Reason and ways of involvement – licensing trade promotions etc.
 Parastatals and public corporations
4. Aids to Trade
 Warehousing
 Insurance
 Transport
 Banking
 Communication
 Advertising
5. Introduction to Ethics in Business
 Definition of terms in ethics – morals, values, virtues etc.
 Importance of ethics on society
 The role of professional ethics
 The role of legal framework in promoting ethics
 Chapter 6 of the constitution on ethics
 Other important structure on ethic; - religious institutions, PBO, welfare associations
Code of ethics
 Definition
 Purpose of code of ethics
 Example of code of ethics – medical doctors, lawyers, accountants
6. The Role of Ethics in Decision Making
 The role of organization structure – chain of command
 Role of rules and regulations in decision making at both personal and professional levels
 Advantage s of ethical behaviour at work places
 Building customer loyalty
 Retention of good employees
 Positive work environment
 Avoidance of legal problems
2

Steps in Ethical Decision-Making;
 Establish ethical dimensions
 Establish stakeholders affected
 Generate alternative ethical choices
 Choose best option
7. Corporate Social Responsibility (CSR)
 Definition of CSR
 Importance of CSR
 Factors affecting choice of CSR activities
o Stakeholders’ interest
o Market completion
o Public policy
o Nature of business
 Discuss examples of organization CSR activities – Safaricom, Kenya Airways
 Misuse of CSR activities;
 As a disposal method of about to expire goods to the needy in the society
 Expired goods put on sales promotion
 Cover up malpractices
 Clean up bad money or as illegal activities money
8. The role of Professional Bodies in Promoting Ethics
 Definition of professional bodies
 Importance of professional bodies
 The role of professional bodies
 Members’ registration
 Members’ education
 Disciplinary concerns for members
 Regulate who practices/qualify to practice
 Set up the operating standards
 Create new knowledge through research
 Champion the philosophy of the profession
 The impact of ICT on ethics in the society
 Quick flow of inaccurate information products /services
 E-marketing and frauds
 Unethical use of social media
 Hacking of database/ unauthorized access to data
9. Emerging issues
 Emerging issues in commerce
o E-commerce
o Globalization
o Glocalization
3
TOPIC 1 INTRODUCTION TO BUSINESS STUDIES
Definition of terms
Business Studies is a broad subject in the Social Sciences, allowing the in-depth study of a range
of specialties such as accountancy, finance, organisation, human resources management and
marketing. Other terms involved include;
i)
ii)
iii)
iv)
v)
vi)
vii)
Business: Any activity that is carried out by an individual or an organization
concerning provision of goods and services with a view to making profit.
Business studies: Is the study/examination of the business activities in society. These
activities are related to the production of goods and provision of services. -It can also
be defined as the study of activities that are carried out in and around production,
distribution and consumption of goods and services.
Goods: These items are tangible .i.e. they can be touched and felt.
Services: These are efforts or acts/actions or activities that may be sold and are
intangible (cannot be touched nor felt).
Production: Refers to the creation of goods and services or increasing their usefulness
through activities such as transporting them to where they are required. People who are
involved in production of goods and services are referred to as producers.
Distribution: Refers to the movement of goods and services from producers to the
users. Some activities that take place as goods and services all moved include
transportation, storage, insurance, communication, advertising. Etc.
Consumption: Refers to the act of using the goods or services produced consumption
is the ultimate goal of production. The persons who uses a good or a service is referred
to as a consumer.
Business studies, as a subject is composed of topics drawn from various disciplines such as:





Commerce
Accounting
Economics
Office practice
Entrepreneurship
Importance of Business Studies
Business Studies helps you to make more informed decisions in the everyday business of living.
It gives you a better understanding of the world of work. It encourages you to think about how and
why people start up in business and why you too might also consider starting a business. As well
as developing the essential transferable or ‘soft’ skills that employers demand, the following
strengths are also cultivated through business studies:
 critical thinking and analytical skills, alongside familiarity with evaluative techniques;
 numeracy and the ability to research, interpret and use business and financial data and
information;
 self-reliance, initiative and the ability to manage time, projects and resources;
4




appreciation of the causes and effects of economic and other external changes,
a creative problem-solving approach and sound, logical decision-making skills;
effective and persuasive written and oral communication skills;
Understanding organisational behaviour and structure.
These attributes are much sought after by employers, since they build commercial awareness and
allow new employees to start contributing to the organisation quickly.
Some other benefits of learning business studies include:
 Studying business involves not only involves studying individuals, communities, and
organizations, it involves assessing their needs and problems, as well as generating
solutions
 Business studies also provides students with a new, practical context for many of the
subjects they have studied, including mathematics, science and technology, language,
and social studies. It will help students to recognise the relevance of these subjects as
they are applied in the world of business – for example, in helping people with their
needs, challenges, and problems; and in creating products and services that help to
improve the quality of life.
 Business studies demonstrates how a variety of areas of study can be combined in
productive activity.
 It provides an increased understanding of mutual dependence through business system,
as people becoming increasingly dependent on others
 Assists the learners/members of the society to acquire knowledge and awareness of
business terminologies, which are necessary when discussing business issues such as
profit and loss.
 Assists the individuals in appreciating the role of business in society/in provision of
goods and services.
 It enables the learners to acquire basic knowledge, skills and attitudes necessary for the
development of self and the nation by starting and operating business comfortably.
 Makes the members of society to appreciate the need for good business management
practices
 Assists individual to acquire self-discipline and positive attitude towards work
 Equips individual with abilities to promote co-operation in society through trade
 Enables the individual to understand the role of government in business activities
 Equips individuals with abilities to understand the role of communication and
information technology in modern business management
 Helps the individuals to develop positive attitudes towards the environment
 Equips the individual with knowledge and skills required to evaluate business
performance
 It helps individual to develop various intellectual abilities such as inquiry, critical
thinking, analysis, interpretation, rational judgement, innovation and creativity.
 It enables learners to acquire skills for wise buying and selling.
 It creates a firm foundation for further education and training in business and other
related fields.
5

It enables one to understand and appreciate the basic economic issues that affect the
society such as increase in prices of goods and services.
Needs and Wants
Understanding Needs vs. Wants
WANTS
Wants are defined as something that a person would like to possess, either immediately or at a
later time. Simply put, wants are the desires that cause business activities to produce such products
and services that are demanded by the economy. They are optional, i.e. an individual is going to
survive, even if not satisfied. Further, wants may vary from person to person and time to time.
NEEDS
Needs are those requirements which are extremely necessary for a human being to live a healthy
life. They are personal, psychological, cultural, social, etc. that are important for an organism to
survive.
Needs are the necessity, You need a place to live, clothes to wear, and enough food and water to
maintain your health—these are the elemental things that you need to survive. They're
indispensable. We make many of our purchasing decisions subjectively rather than objectively.
For instance, some people consider healthcare to be a necessity. For others, benefits are a luxury.
Some purchases can technically be categorized as a need, even though most would consider them
a want. Does eating an expensive meal at a high-end restaurant qualify as a need? Or what about
clothes? Do you have to stick with generic sneakers or can you splurge on a pair of expensive
Yeezy Boost shoes by Adidas? Ultimately, it's all about perspective and how you choose to manage
your money. Figuring out how to divide your income and prioritize your expenses can be as simple
as putting everything down on paper.
Boston Consulting Group developed Growth-Share Matrix 2x2 grid in the early '70s. The practice
calls for listing your wants and needs individually in four different categories. The visualization
technique allows you to see where your expenses fit clearly.
6
Comparison of Needs and Wants using Growth-Share 2x2 grid Matrix
BASIS
FOR
COMPARISON
NEEDS
WANTS
Meaning
Needs refers to an individual's
basic requirement that must be
fulfilled, in order to survive.
Wants are described as the goods
and services, which an individual
like to have, as a part of his
caprices.
Nature
Limited
Unlimited
What is it?
Something you must have.
Something you wish to have.
Represents
Necessity
Desire
Survival
Essential
Inessential
Change
May remain constant over time.
May change over time.
Non-fulfillment
May result in onset of disease or
even death.
May result in disappointment.
Forms of Business Ownership
Business Units
A business unit is an organization formed by one or more people to produce goods and services
with an aim of making profit. Examples of business units are sole proprietorships, partnerships,
co-operatives, companies, public corporations and parastatals
Formation of business
7
Business formation is an umbrella term for several different ways of legally structuring a business.
They include becoming a limited liability company (LLC), partnership, C corporation, S
corporation, cooperative, or nonprofit.
When setting up a new business you will need to decide what legal format you want to operate
under. This is one of the most important decisions you need to take at an early stage as this will
determine how you will operate your business in the future.
To determine what legal format is best for you, you need, first of all, to understand some of the
basic differences. The most common legal formats for businesses are:




Sole Trader
Partnerships
Private Limited Liability Companies
Cooperatives
Ownership of business
A key first step for any entrepreneur is setting up an organization that will be used to formally
embark on the business journey, but many new business owners struggle to identify the best way
to move forward. These are the most common ways to organize a business, from the simplest
through the most complex
Capital management
An accounting strategy that strives to maintain sufficient and equal levels of working capital,
current assets, and current liabilities. This helps a company to meet its expense obligations while
also maintaining sufficient cash flow and is primarily related to short term financial decisions.
Sole Proprietorships
A Sole proprietorship is formed through an application and acquisition of trading licence from a
local authority.
The vast majority of small business start out as sole proprietorships. These firms are owned by one
person, usually the individual who has day-to-day responsibility for running the business. Sole
proprietors own all the assets of the business and the profits generated by it. They also assume
complete responsibility for any of its liabilities or debts. In the eyes of the law and the public, you
are one in the same with the business.
Advantages of a Sole Proprietorship
–
–
–
Easiest and least expensive form of ownership to organize and to start because only a
trading licence is required.
Sole proprietors are in complete control, and within the parameters of the law, may
make decisions as they see fit.
Sole proprietors receive all income generated by the business to keep or reinvest.
8
–
–
–
–
Profits from the business flow-through directly to the owner’s personal tax return.
The business is easy to dissolve, if desired.
Quick decision making since there is no consultation with any other person.
Has control of all business secrets
Disadvantages of a Sole Proprietorship
Sole proprietors have unlimited liability and are legally responsible for all debts against the
business. Their business and personal assets are at risk.
–
–
–
–
–
–
–
–
May be at a disadvantage in raising funds and are often limited to using funds from
personal savings or consumer loans.
May have a hard time attracting high-caliber employees, or those that are motivated by
the opportunity to own a part of the business.
Some employee benefits such as owner’s medical insurance premiums are not directly
deductible from business income (only partially deductible as an adjustment to
income).
Suffers losses alone
Has unlimited liabilities
Has limited sources of capital
May suffer fatigue due to long working hours
Lack of continuity due to death, insanity or bankruptcy of owner.
Sources of capital for Sole proprietorship
Sources of capital for sole proprietorships include:
–
–
–
–
Personal savings
Borrowing from banks
Donations from friends and relatives
Trade credit
Management
Sole proprietorships are managed by the owner who is sometimes assisted by family members.
This fruit seller manages the business with the daughter (standing by)
Characteristics
Characteristics of sole proprietorships include:
–
–
–
–
Unlimited liability
Profits not shared
Few legal requirements during formation
Owner makes decision alone.
Dissolution
Sole proprietorship may be dissolved due to the following reasons:
9
–
–
–
–
Due to continuous losses.
Through a court order.
As a result of death of the owner.
After transfer of business to another person.
.
Partnerships
In a Partnership, two or more people share ownership of a single business. Like proprietorships,
the law does not distinguish between the business and its owners. The Partners should have a legal
agreement that sets forth how decisions will be made, profits will be shared, disputes will be
resolved, how future partners will be admitted to the partnership, how partners can be bought out,
or what steps will be taken to dissolve the partnership when needed; Yes, its hard to think about a
“break-up” when the business is just getting started, but many partnerships split up at crisis times
and unless there is a defined process, there will be even greater problems. They also must decide
up front how much time and capital each will contribute, etc.
A general partnership is the most common type of partnership. It refers to a relationship in which
all partners contribute to the day-to-day management of the business. Each partner will have the
authority to make business decisions and even legally bind the company in contracts.
The liabilities, contributions, and responsibilities of the partners are often equal unless stated
otherwise. Typically, a partnership agreement will describe which partners have certain authorities
and responsibilities
A limited partnership is a relationship where one or more partners are not involved in the day-today management of the business. Often, a limited partner, sometimes known as a “silent partner,”
will serve solely as an investor in the business, with the funds that they contribute being the extent
of their liability. However, since the limited partner does not have decision-making power in the
company, withdrawing funds – even just the amount they’ve already contributed – cannot be done
without the approval of a general partner.
Limited partnerships will still have at least one general partner to man the day-to-day operations
of the business. A general partner may invest money into the company. However, a general partner
may also be personally liable for the debts of the company, while the limited partner is not. Only
a general partner’s personal assets (in addition to the business assets) can come into play when it
comes to paying off the company’s debts. A common purpose of a limited partnership is for real
estate. There may be several limited partners for the purpose of raising additional funds to purchase
the real estate, as long as there is at least one general partner. The benefit of being a limited partner
is so your liability is limited, while the downside is that a limited partner will not have the decisionmaking powers that a general partner would.
Ownership
10
A Partnership is owned by;
i) 2-20 members for ordinary partnerships.
ii) 2-50 members for professional partnerships.
Many authors of textbooks write in partnerships.
Formation
Formation of a partnership business involves the following process:
–
–
–
Preparation of partnership deed.
Adoption of the Partnership Act.
Application for a trading licence or registration.
Sources of capital
Sources of capital for partnerships include:
–
–
–
–
–
–
–
partners contribution
loans from financial institutions.
trade credits
hire purchase
leasing
renting
retained profits.
Management
Management of partnerships is by partners and hired managers.
Sometimes partners meet over a cup of tea to discuss their business.
Characteristics
The characteristics of partnerships include:
–
–
–
–
Profits and losses are shared.
Unlimited liability
Decision made by partners
Minimum membership of 2 to 20 for ordinary partnerships and 2 to50 for professional
partnerships.
Dissolution
Partnership may be dissolved due to the following reasons:
–
–
–
–
Due to continuous losses
As a result of continuous disagreements among members
Court order
After completion of the intended purpose of the partnership
Advantages of a Partnership
11

Partnerships are relatively easy to establish; however time should be invested in developing
the partnership agreement.

With more than one owner, the ability to raise funds may be increased.

The profits from the business flow directly through to the partners’ personal tax returns.

Prospective employees may be attracted to the business if given the incentive to become a
partner.

The business usually will benefit from partners who have complementary skills.
Disadvantages of a Partnership

Partners are jointly and individually liable for the actions of the other partners.

Profits must be shared with others.

Since decisions are shared, disagreements can occur.

Some employee benefits are not deductible from business income on tax returns.

The partnership may have a limited life; it may end upon the withdrawal or death of a
partner
Private companies
A private company is a firm held under private ownership. Private companies may issue stock and
have shareholders, but their shares do not trade on public exchanges and are not issued through an
initial public offering (IPO). As a result, private firms do not need to meet the Securities and
Exchange Commission's (SEC) strict filing requirements for public companies. In general, the
shares of these businesses are less liquid, and their valuations are more difficult to determine.
Private companies are sometimes referred to as privately held companies. There are four main
types of private companies: sole proprietorships, limited liability corporations, S corporations and
C corporations—all of which have different rules for shareholders, members and taxation.
Types of Private Companies
Sole proprietorships put company ownership in the hands of one person. A sole proprietorship is
not its own legal entity; its assets, liabilities and all financial obligations fall completely onto the
individual owner. While this gives the individual total control over decisions, it also raises risk and
makes it harder to raise money. Partnerships are another type of ownership structure for private
companies; they share the unlimited liability aspect of sole proprietorships but include at least two
owners.
Limited liability companies (LLCs) often have multiple owners who share ownership and
liability. This ownership structure merges some of the benefits of partnerships and corporations,
including pass-through income taxation and limited liability without having to incorporate.
12
S Corporations and C corporations are similar to public companies with shareholders. However,
these types of companies can remain private and do not need to submit quarterly or annual financial
reports. S corporations can have no more than 100 shareholders and are not taxed on their profits
while C corporations can have an unlimited number of shareholders but are subject to double
taxation.
Reasons Why Companies Stay Private
The high costs of undertaking an IPO is one reason why many smaller companies stay private.
Public companies also require more disclosure and must publicly release financial statements and
other filings on a regular schedule. These filings include annual reports (10-K), quarterly reports
(10-Q), major events (8-K) and proxy statements.
Another reason why companies stay private is to maintain family ownership. Many of the largest
private companies today have been owned by the same families for multiple generations, such as
the aforementioned Koch Industries, which has remained in the Koch family since its founding in
1940. Staying private means a company does not have to answer to its public shareholders or
choose different members for the board of directors. Some family-owned companies have gone
public, and many maintain family ownership and control through a dual-class share structure,
meaning family-owned shares can have more voting rights.
Going public is a final step for private companies. An IPO costs money and takes time for the
company to set up. Fees associated with going public include an SEC registration fee, Financial
Industry Regulatory Authority (FINRA) filing fee, a stock exchange listing fee and money paid to
the underwriters of the offering.
Advantages and Disadvantages of Private Limited Companies (LTD)
Advantages

Member's liability is restricted to the
amount of shares they own. They have
limited liability

Additional capital can easily be raised
by selling shares

The company can continue to trade
even if one of its members dies

Shares can be bought and sold with
director's approval

The private company has a separate
legal existence from that of its owners.
It can own property and sue and be
sued
Disadvantages
13

Audited annual returns and accounts have to
be made to the Registrar of Companies. All
these documents are available for public
inspection

A private limited company id more expensive
and time consuming to set up than a sole
trader or partnership

Professional help will be needed to set up a
private limited company

There is separation of ownership and control
which means that the owners no longer make
all the decisions


This type of organisation has a much
higher business status than a sole
trader
There are limited
economies of scale
opportunities
Public Companies
A public company (sometimes called a publicly held company) is usually a corporation that issues
shares of stock (a stock corporation). In a public company, the shares are made available to the
public. The shares are traded on the open market through a stock exchange.
Public limited company advantages
As a limited company, a plc shares the advantages of a limited company with its private
counterpart. But there are also specific features of a public limited company, many of which
reinforce one another, that give it some unique advantages:
Advantages and Disadvantages
1. Raising capital through public issue of shares
The most obvious advantage of being a public limited company is the ability to raise share capital,
particularly where the company is listed on a recognised exchange. Since it can sell its shares to
the public and anyone is able to invest their money, the capital that can be raised is typically much
larger than a private limited company. It’s also possible that having stock listed on an exchange
could attract investment from hedge funds, mutual funds and other institutional traders.
2. Widening the shareholder base and spreading risk
Offering shares to the public gives the opportunity to spread the risk of company ownership among
a large number of shareholders. This may allow early investors in the company to sell some of
their own shares at a profit while still retaining a substantial stake in the company.
Obtaining capital from a wide range of investors has some advantages over relying on one or two
“angel investors”, as many private companies will choose to do to facilitate growth. While an angel
investor may provide a large amount of capital and expertise, the founders may not be comfortable
with the level of influence over the company’s direction that the angel will often expect.
3. Other finance opportunities
As well as share capital, a public limited company will often find itself in a better position when
looking at other potential sources of finance. The demands of being a public limited company and
maintaining a stock exchange listing, for example, can help to improve a company’s
creditworthiness when issuing corporate debt (and therefore reduces the return the company needs
to offer investors).
Banks and other financial institutions may be more willing to extend finance to a public limited
company, particularly one that is listed. The company could also be in a better position to negotiate
favourable interest rates and repayment terms on loans.
14
for
4. Growth and expansion opportunities
The value of being able to raise finance is in how it can be employed to serve the business. By
having more finance potentially more readily available and on better terms than a private company,
the public limited company can be in an advantaged position to:






Pursue new projects, new products or new markets
Make capital expenditure to support and enhance the business
Make acquisitions (whether in cash or by offering shares to the shareholders of the target
business)
Fund research and development
Pay off existing debt (or replace existing debt with new debt on better terms)
Grow organically
5. Prestigious profile and confidence
Whether deserved or not, having ‘plc’ at the end of a company name can add standing and prestige.
There is a sense of status about a public limited company that its private company counterpart just
doesn’t quite have, which can affect how the business is viewed. While often more imagined than
real, this perception of being more established, larger or more powerful can affect the behaviour
of customers, suppliers and employees.
More people are likely to be aware of the company if it is public, particularly if it’s listed on a
stock exchange. In that case, it’s more likely to receive attention from the media and investment
professionals. This is effectively free publicity, meaning more people will recognise the company
and its products or services. Better brand recognition can lead to more sales. It may also make you
more visible to valuable potential business partners. Credibility and confidence are reinforced by:





Operating under a stricter legal regime than private companies in many areas
Higher share capital requirements
Greater transparency (for example, in the required form of accounts)
For listed companies, the indirect endorsement of having their shares listed on a recognised
exchange
Again, these factors can affect the behaviour of (potential) shareholders, customers and
business partners.
6. Transferability of shares
The shares of a public limited company are more easily transferable than those in the private
equivalent, meaning shareholders benefit from liquidity. If shares are quoted on a stock exchange,
shareholders and potential shareholders will generally find it easier to transfer shares in the
company – although the market still relies on willing purchasers and sellers being available.
15
The fact the shareholders are less bound to remain with the company can give them comfort – and
may help the company by making people more willing to invest.
Without restrictions on transferability of shares that often apply in private companies, it’s also
easier to deal with situations like a shareholder’s death, allowing shares to be transmitted in line
with the terms of any will.
7. Exit Strategy
Going public can enhance the options for the founders to exit the business at some point in the
future, if they wish to do so. Both higher transferability of shares and the increased visibility of
the business and its performance may increase the chances of bid interest from potential suitors.
Public limited company disadvantages
There are some important disadvantages of a public limited company, compared to a private
limited company. These public limited company disadvantages include:
1. More regulatory requirements
To help protect shareholders, the legal and regulatory requirements for a public limited company
are more onerous than for private limited companies. For example, additional restrictions include:








A trading certificate must be obtained from Companies House before the company can
trade (there is no such requirement for a private company)
The need to have at least two directors (only one is required in a private company)
More onerous rules apply concerning loans to directors
A suitably qualified company secretary must be appointed (not required for a private
company)
As well as higher transparency around accounts, they must be produced within 6 months
of the end of the financial year (9 months for private companies)
AGMs must be held, whereas in a private company decisions can more often be made by
resolution
There are various additional restrictions on the company’s share capital and limits on preemption rights and dividends
If the company’s shares are listed, the company will also need to follow the rules of the
market. These rules, particularly those to be listed on the London Stock Exchange, are
demanding.
Understanding and applying these additional rules will consume time and effort that cannot then
be dedicated to growing the business. Appointing staff or advisers – including the required
company secretary – will help but come at a cost.
2. Higher levels of transparency required
16
Limited companies, whether public or private, have more of their details in the public domain,
available via Companies House, than other business types. But the required level of transparency
is much higher for public companies.
As well as needing to have its accounts audited, public limited companies are generally unable to
file abbreviated accounts, whereas smaller private companies can often do so. The fuller form of
accounts means a public limited company has to disclose more detailed data about the business
and its performance, information which is then available to anyone who wishes to access it.
The accounts of public limited companies are often scrutinised more by analysts and receive more
media commentary.
3. Ownership and control issues
With a private limited company, the shareholders will typically be people known to the directors
or founders. A private company will often be selective over who to admit as a shareholder, ensuring
they support the vision and plans for the business. The use of pre-emption rights can allow existing
shareholders to maintain control over the company when a new share issue is undertaken, a
shareholder dies or wants to transfer their shares.
With a public limited company, it’s much harder to control who is a shareholder of the company,
and who the directors are ultimately accountable to. There is therefore a possibility that the original
owners or directors can lose control of the direction of the company, face disputes or just spend a
lot more time managing shareholder expectations. Institutional shareholders can wield particularly
high levels of influence, often expecting consultation and adoption of particular policies or
standards in return for their investment.
4. More vulnerable to takeovers
At worst, a company can become vulnerable to a hostile takeover if a majority of shareholders
agree to a bid. With shares being freely transferable, a potential bidder can build up a shareholding
in advance of launching a bid attempt.
5. Short-termism
Where a public limited company is listed, there can be added pressure imposed by the market. The
company’s share price represents the value of the company as viewed by the market, and
(potential) investors will usually expect a healthy return. As well as dividends paid from profits,
there will be a desire for the share price to increase.
This level of emphasis on the share price, usually not so immediate a demand in a private company,
can cause the directors to focus almost exclusively on short-term results. They may therefore miss
strategic opportunities or threats, thereby not achieving the best for the business in the long-term.
6. Initial financial commitment is higher
The minimum financial commitment is higher for a public limited company than for a private
limited company. In order to trade, the plc must start with at least £50,000 of nominal share capital,
at least 25% of which is paid up. That means at least £12,500 must be committed to the business,
17
whereas in a private company a single share of (say) £0.01 could be allotted – and not even paid
for on issue!
Associated costs of company formation may also be higher, especially if the company’s
requirements are complex. If the company’s shares are to be listed on an exchange, it will typically
pay legal and investment professionals to advise and manage the listing process. There will be
other costs associated with obtaining a listing.
Both Private companies and Public companies are required to have a board of directors, an annual
meeting, to keep meeting records, and to keep a list of shareholders and their holdings. But there
are some big differences between how a public company and a private company operate.
Private companies can be corporations, LLC's, or partnerships, but if you want to take your private
company public, you will almost certainly need it to be a corporation. Many states have restrictions
on ownership of LLCs, so it's very difficult to take an LLC public.
A private company can decide to become a public company, but it's not as easy for a public
company to become private. "Going dark," as it's called, requires that the shares be repurchased
and that regulatory processes be followed.
Because public companies are selling to the public, these companies are subject to many
regulations and reporting requirements to protect investors, including the Securities and Exchange
Commission (SEC) regulations. Annual reports must be made public and financial statements must
be made quarterly. Holding companies, which are set up to hold and control other companies, are
almost always public companies.
Public companies also are, by definition, under public scrutiny. That is, their activities and the
price of the stock are analyzed, and the activities of executives and board members are scrutinized.
Annual meetings may be attended by the press, and anyone with just one share of stock can attend.
Private companies enjoy a measure of anonymity. The board may be small and well-known to each
other. Sometimes all the shareholders are on the board. Decisions can be made relatively quickly,
and the board can adjust quickly to changing conditions.
The value of each share in a public company is known, so it's easier to buy and sell shares. The
value of shares in a private company is not as simple, and it may be difficult for a private company
shareholder to sell shares. The valuation of the company, in general, is easier to determine for
public companies.
The big advantage to having a public company is that equity investment is shared by a large
number of people. That is, there are many shareholders, not just a few. The debts of a corporation
must be paid, but the shareholders don't have to be paid in case of bankruptcy.
Location and Size of Business Enterprises
18
Factors influencing location
There are many things to consider when choosing a location for your business venture, whether
setting up an office or a shop for the first time, or looking to expand into new areas. UK,
entrepreneur Jake Fox reveals the key factors a business needs to consider when selecting a new
location.
1. Accessibility
Does your business rely on frequent deliveries? If so, it’s important to consider local transport
links, particularly main roads and motorways. Property rental and purchase prices are often steeper
in higher density, more commercialised areas, so there are certainly cost benefits to seeking a more
out of town location, providing your daily business operations won’t be hampered by poor
transport links. Equally, if you rely on high customer footfall, then ensuring your location is
accessible by car, bus and even train will all be important considerations. Don’t forget your
employees too, as a good location is often a critical factor in recruiting the right people into your
business, particularly if they have been offered several jobs and need to evaluate the pros and cons
of each.
2. Security
Believe it or not, your location can increase your odds of being affected by crime, which in turn
can influence your insurance premiums, as well as the additional security measures you made need
to take to keep your premises safe. It’s fair to say that in business, we all make decisions based on
information, intuition and probability mixed in with a little luck. But knowing the chances of crime
in the areas you are considering is an important part of the decision making process. We recently
analysed released statistics from the UK government crime report and compared this to population
data to help businesses make an informed decision about where to set up a new shop, office or
warehouse. This report conveniently provides a quick snapshot of how safe a particular area is simply enter your postcode here for your stats summary. Knowing the risks of potential criminal
activity can help you better prepare and take adequate precautions.
3. Competition
Your proximity to other competing businesses could be crucial to your success. Could they provide
a benefit to your business or cause a hindrance? Establishing which competitors are in your area
and their offering could help guarantee you choose the right location for your business. If there is
too much competition then it may be a warning sign to expand your horizons to a new location.
There are exceptions to this such as car dealerships who want to be near each other as customers
compare and choose the best car deal, hence their close proximity. Likewise, if you have an
element of your offering that is unique or offers some kind of new innovation, then choosing an
area that already has a ripe market could be the ideal way to pick up customers very quickly and
establish a presence in a new area in a relatively short time frame.
4. Business Rates
19
Cash flow is critical as it determines the viable ability for a business to survive and pay its bills.
Therefore, it is important to research the average Business Rates including rent, utility bills and
taxes in the area to ensure you can afford the premises. Simple hidden costs such as deposits and
whether you need to pay to park need to be snuffed out before committing to a location. Estimating
the living cost of the location will prevent a commitment outside your means.
5. Skill base in the area
Find out the skill base in the area - can it fulfill your needs? Take into account employment rates
as well. If you rely on skilled workers it is best to go to where there is a healthy bank of talent.
Employees are often a business’s biggest asset thus choosing a location that’s lacking in required
talent may be the start of your business’s downfall. Some recruitment agencies will happily send
you CVs on spec to gauge the market, only charging if you subsequently decide to interview and
hire someone. Alternatively, posting a free job via an online jobsite will quickly show you the
calibre of employees in a particular area.
6. Potential for growth
Will the premises be able to accommodate business growth or a spike in demand? Moving
premises is a big upheaval and can be time consuming and costly. A decision needs to be made as
to whether the premise you are choosing is a short-term location or if you would like to stay there
for the long haul. Consequently, a location’s flexibility could be a very important factor regarding
the premises’ suitability for your business needs. Whilst a perfect business location is different for
every business, covering these crucial areas will certainly give you the best chance of beating the
odds and keeping your business on track for future success.
Summary
There are several reasons why an organisation might decide to open new branches or relocate its
existing operations. A business might also want to restructure or modernise its operations. It might do
this by bringing together some existing departments into new purpose built premises. It might decide
to shut its less profitable operations and open branches in locations that offer more business potential.
A business will have to consider many factors when determining where to locate a new branch or
operation. Usually, it will have to balance several factors in making a decision.
20
Sometimes one factor may sway the decision: It may choose a site with the cheapest land or buildings.
It might decide on a location that is convenient for key employees. A business needs to be able to
recruit staff with the right skills base. It might choose a site that has easy access to raw materials. For
example, many frozen food factories are located near fishing ports to reduce transport time taken and
to keep fish fresh. The key factor could be the transport and service infrastructure. Many businesses
require easy access to good road and railway links and modern telecommunication services. These
ensure that they can meet service or delivery deadlines.
TOPIC 2: PRODUCTION
Definition of production
Production is an activity of utter importance for any economy. In fact, a nation with a high level
of productive activities spearheads the prosperity charts. This is because raw goods, surely are
valuable, but production done upon these raw goods adds up to their value or their want-satisfying
power.
According to Bates and Parkinson (1999): Production is the organised activity of transforming
resources into finished products in the form of goods and services; the objective of production is
to satisfy the demand for such transformed resources.
Production is any activity directed to the satisfaction of other peoples’ wants through exchange,
(J. R. Hicks 2009)
Processes in Production
There are various processes through which we can achieve the aim of utility creation or addition
to ultimately satisfy human wants. These processes are as follows:
21
Utility of Form
The manufacturing processes that take physical inputs and produce physical outputs, eventually
increasing the utility of the resource being manufactures, are integral branches in the production
tree. These processes are the most obvious forms of production. They change the form of the goods
under concern, in order to satisfy a greater human want.
For example, changing a log of wood into a table or chair is a manufacturing process. Further, such
processes add to the utility of form of the raw materials.
Personal Utility
Unlike the manufacturing processes which are tangible, there are various intangible services that
contribute towards the utility of the goods. For instance, apples have to be sold by merchants to
consumers. The services of labor are also a part of this category. Such services are intangible but
are as important as other processes of production. This imparts personal utility to the materials.
Utility of Place
Another process involves changing the place of the resources, to a place where they experience a
greater demand and use.

This includes the extraction of natural resources from earth e.g. mining of ores, gold, coal,
metal ores, etc. These are further transported to markets where they can be sold.

Transportation service from a place where the resource gives little satisfaction to a place
where it provides a lot of satisfaction also adds up to the utility. For example, once
extracted, the metal ore needs to be taken to an industrial site where it can be further
processed. This concept is also known as the utility of place. This includes all the additional
utility conferred through the efforts of transportation services or transport agents for the
movement and marketing of goods.
Utility of Time
Lastly, storage and manipulating availability drastically change the utility of products. For
example, seasonal fruits are canned and various preservation techniques are used for their storage
so that they can be sold for higher prices during off-seasons.
Example: The demand for umbrellas touches the sky during monsoons. In such a case, production
of umbrellas takes place generally during the off-season and stored until the monsoon. At the
advent of monsoon, the producers release their stocks of umbrellas to meet the increasing the
demand. In this way, we add the utility of time through the process of production.
The addition of all the above-mentioned utilities takes place through production. First, the raw
wool is sent to a mill for spinning and weaving (utility of form). Next, transportation of finished
wool to potential market takes place (utility of place). Further, the demand for woolen clothes
increases in winter, hence producers hold a majority of their stocks until winters (utility of time).
Lastly personal services of transport agents, merchants, labors, etc. form an integral part of the
whole process of production (personal utility).
22
Factors of Production:
Production of a commodity or service requires the use of certain resources or factors of production.
Since most of the resources necessary to carry on production are scarce relative to demand for
them they are called economic resources.
Resources, which we shall call factors of production, are combined in various ways, by firms or
enterprises, to produce an annual flow of goods and services.
Table 5.1: A Classification of Factors of Production:
Each factor gets a reward on the basis of its contribution to the production process, as shown in
the table.
In fact, the resources of any community, referred to as its factors of production, can be classified
in a number of ways, but it is common to group them according to certain characteristics which
they possess. If we keep in mind that the production of goods and services is the result of people
working with natural resources and with equipment such as tools, machinery and buildings, a
23
generally acceptable classification can readily be derived. The traditional division of factors of
production distinguishes labour, land and capital, with a fourth factor, enterprise, some-times
separated from the rest.
The people involved in production use their skills and efforts to make things and do things that are
wanted. This human effort is known as labour. In other words, labour represents all human
resources. The natural resources people use are called land. And the equipment they use is called
capital, which refers to all man-made resources
Concept of Direct and Indirect Production
A Direct Production is the creation of an end product like those in farming producing foods. While
Indirect Production people produce goods and services with the aim of trading. People depend on
each other for goods and services. It is the production of items like a device, an equipment that in
turn can be used to produce another product. A good example of indirect production of an
equipment or a tool like an oven, or a stove for cooking foods.
Direct Production
1.
2.
3.
4.
5.
6.
7.
Goods and services are produced for own consumption.
No surpluses are realised
No trading or exchange of goods and services is practiced
Goods produced are of small quantities.
Goods are tailored and made according to one's own taste.
Direct production does not leads to specialization, standardization and simplification
There is lack of variety in direct production.
Characteristic Indirect Production
1. It’s a mode of production whose main aim is to trade the produce
2. There is specialization and division of labour
3. There is surplus of goods and services
4. It results in interdependence of individuals or firms involved in the production
5. There is utilization of improved technology
6. Goods and services for produced for exchange.
7. Indirect production leads to specialization, standardization and simplification.
8. Goods are produced large quantities.
9. Variety of goods are produced.
10. Goods produced are of high quality.
`
Types of Production:
24
For general purposes, it is necessary to classify production into three main groups:
1. Primary Production:
Primary production is carried out by ‘extractive’ industries like agriculture, forestry, fishing,
mining and oil extraction. These industries are engaged in such activities as extracting the gifts of
Nature from the earth’s surface, from beneath the earth’s surface and from the oceans.
2. Secondary Production:
This includes production in manufacturing industry, viz., turning out semi-finished and finished
goods from raw materials and intermediate goods— conversion of flour into bread or iron ore into
finished steel. They are generally described as manufacturing and construction industries, such as
the manufacture of cars, furnishing, clothing and chemicals, as also engineering and building.
3. Tertiary Production:
Industries in the tertiary sector produce all those services, which enable the finished goods to be
put in the hands of consumers. In fact, these services are supplied to the firms in all types of
industry and directly to consumers. Examples cover distributive traders, banking, insurance,
transport and communications. Government services, such as law, administration, education,
health and defense, are also included.
Specialization and its Significance
Specialization is a method of production whereby an entity focuses on the production of a limited
scope of goods to gain a greater degree of efficiency. It also refers to individuals and organizations
focusing on the limited range of production tasks they perform best. This specialization requires
workers to give up performing other tasks at which they are not as skilled, leaving those jobs to
others who are better suited for them. Many countries, for example, specialize in producing the
goods and services that are native to their part of the world, and they trade for other goods and
services
Types of Specialization
The system of distributing a particular type of job(s) to a particular type of worker is known as
specialization. Division of labour is defined as a system wherein the operations necessary to make
a finished product are so minutely divided that each worker performs only one or at the most only
a few simple operations. Three types of specialization include;
Territorial specialization
This is also known as “Localisation of industries”. Under this when a particular place or region is
specialised in a particular industry or in the production of a particular commodity, it is called
territorial or geographical Division of Labour. For example—Hosiery at Ludhiana, Cotton Textiles
in Ahmedabad and Bombay, Jute Industry in Kolkata etc.
25
Sometimes due to diverse reasons, the production of goods is focused at a state or nation. This
specific type of division of labour comes into being when the workers or factories having expert
in the production of specific article are found at a specific place. That place may be the most
appropriate geographically for the production of that article.
Occupational specialization
This means division of people in society according to occupations or trades. In this each individual
takes a particular type of occupation for which he is best suited. Thus, in a community some are
teachers, some are doctors, some are merchants, brokers and soon. When the whole work of a
particular production is carried on by the same worker, it is called a Simple Division of Labour
The people around us can be divided into farmers, traders, doctors, teachers, weavers, etc.,
according to their respective occupations. This type of division is called simple or occupational
division of labour in which people are specialized in one type of occupation. When manufacture
is split into diverse parts and many workers come mutually to finish the work, but the input of each
worker cannot be known is simple division of labour. In case of more complex works further
divisions are made. A specialization in the medical field is a very good example of occupational
division of labour. There are specialists of skin disease, heart specialists, eye specialists, dentists,
etc. This type of division is also known as personal division of labour because each individual
takes up only one specific job depending on his ability and aptitude.
Product specialization
When the entire work in production of a commodity is divided into different processes and each
process is allotted to different persons it is called “Process Specialisation”. Under process
specialisation there is division and each division or process is undertaken by one person, the
Division of Labour so implied is termed as “Complex Division of Labour”
When the complete processes are divided into sub-processes and then the work is completed then
it is called Division of Labour of sub-processes. Here one process is incomplete without the help
and co-operation of other process. This is also called “Personal Division of Labour.
Modern Mass Production is based on such Complex Division of Labour. For example—Shoemaking in a modern shoe factory involves Complex Division of Labour, where the upper portion
of the shoe are prepared by one group of workers, while bottom portion are prepared by another
group, stitching work by a third group and polishing, finishing etc. by a fourth group of workers.
Advantages of specialization
1. Greater efficiency: Countries specialize in areas that they are naturally good at and also
benefit from increasing returns to scale for the production of these goods. They benefit
from economies of scale, which means that the average cost of producing the good falls (to
a certain point) because more goods are being produced . Similarly, countries can benefit
from increased learning. They simply are more skilled at making the product because they
have specialized in it. These effects both contribute to increased overall efficiency for
countries. Countries become better at making the product they specialize in.
26
2. Consumer benefits: Specialization means that the opportunity cost of production is lower,
which means that globally more goods are produced and prices are lower. Consumers
benefit from these lower prices and greater quantity of goods.
3. Opportunities for competitive sectors: Firms gain access to the whole world market,
which allows them to grow bigger and to benefit further from economies of scale.
4. Gains from trade: Suppose that Britain and Portugal each produce wine and cloth. Britain
has a comparative advantage in cloth and Portugal in wine. By specializing and then
trading, Britain can get a unit of wine for only 100 units of labor by trading cloth for labor
instead of taking 110 units of labor to produce the wine itself (assuming the price of Cloth
to Wine is 1). Similarly, Portugal can specialize in wine and get a unit of cloth for only 80
units of labor by trading, instead of the 90 units of labor it would take to produce the cloth
domestically. Each country will continue to trade until the price equals the opportunity
cost, at which point it will decide to just produce the other good domestically instead of
trading. Thus (in this example with no trade costs) both countries benefit from specializing
and then trading.
5. Saves Money: Training one person to do a particular job saves money and time in training.
Transferring or moving employees from a task they are skilled in to a task they are not
means potentially wasting a lot of resources. The advantage of specialization in a task is
that there is a virtual guarantee of not having to expend money to perform the same task
over again because the specialist knows it very well.
6. Accurate Time Management: Time wasted is money wasted. Training multiple people to
do many tasks can result in all of them being at least okay at doing it, whereas a few people
specializing in the task means it will be done more quickly and with greater ease.
7. Risk Reduction: An employee who performs the same task repeatedly by specializing in
it is less likely to make a mistake. They are familiar with the pitfalls and issues that a
nonspecialist performing that task would not know. For instance, someone who makes
deliveries to the same places every day will know the roads and potential traffic issues
better than someone who doesn’t drive that route all the time.
8. Solidarity: A big advantage of specialization is that employees feel a certain camaraderie
with others in their department or skill set. It allows for a feeling of “we’re all in this
together!” that bolsters morale and, in turn, improves performance. Even if an employee is
a lone specialist in what they do, it still brings a feeling of immense pride.
Disadvantages of Specialization
1. Monotonous work is the biggest drawback of specialization because if you do same work
for 1 week you will not fell anything, however if you do same work for 1 month then you
will treat as routine however if you do the same work for 1 year then you will frustrated
with the work which in turn will result in inefficiency creeping in the work.
2. Specialization also makes workers complacent because due to repetitive nature of work
they do not push themselves and monotony together with complacency is a deadly
combination because both the factors reduces the efficiency of the workers which in turn
results in the loss for the company.
27
3. Another disadvantage of specialization is that company loses flexibility because if worker
knows only one thing than the company in case of emergency cannot shift the worker to
do some other task as worker does not know how to do work and also if specialist worker
is on leave than nobody else can take his or her position leading to disruption of work.
Hence due to specialization worker is not able to develop multi-tasking trait leading loss
of flexibility by the company in managing the day to day operations
4. Its monotonous nature leads to boredom;
5. Specialization may make a country dependent on other countries;
6. Specialization makes a worker dependent on one trade risking his employment in case
his/her skills or product lose demand in the market;
7. It hinders creativity since people work mechanically like machines;
8. Interruption of the work of a few people derails the entire process;
9. Specialization and division of labour brings people together bringing about congestion
causing social crimes like prostitution and robbery.
10. Lack of motivating pride in the final product by any of the individual worker.
Types of Occupations
Extractive occupations
These occupations extract or draw out products from natural sources. They are related to the
primary stage of production, they involve extraction of materials from the earth or the soil, and
they form the basic supply of extractive industries. Manufacturing industries transform these
products into many other useful goods. They include; mining, quarrying fishing farming plumbing,
lumbering, hunting & fishing operation etc.
Manufacturing and Constructive occupations
These are related occupations to secondary stages of production; they involve turning raw
materials into other products. The raw materials are transformed into finished or semi-finished
products. These industries create the utility by changing the form of raw materials into finished
products. They include; textile and clothing, food processing and paper milling etc. Constructive
occupation are concerned with the construction of buildings, dams, roads etc. they use the products
of manufacturing industries such as cement, iron & steel, lime etc.
Tertiary occupations
These are also called Commerce and Transport occupations. They are concerned with providing
those services which facilitate a flow of goods & services. This industry helps in the activities of
the primary & secondary industry. they are related to tertiary levels of production as they offer
services to consumers. They include; wholesalers and retailers
28
TOPIC 3: TRADE CHAIN AND DISTRIBUTION
Definition of Trade
This is the buying and selling of goods and services with the aim of making a profit.
Importance of Trade
1. Trade plays a vital role in any economy. The various roles played by trade in the
economy include:
2. Helps people to acquire what they cannot produce
3. Avails a variety of goods and services thereby improving the peoples living standards
4. Creates an outlet for goods thereby enabling the producers to dispose of their surplus
produce
5. Creates employment opportunities
6. Encourages specialization and division of labour
7. Promotes peace, social relations and understanding the parties involved since they
depend on one another
29
8. Provides revenue to the business and the government in form of taxes and fees charged
on the various trading activities
9. Ensures steady supply of goods and services
10. Exploitation of local resources as traders create goods and services using locally
available resources
11. Encourages economic growth and development
CLASSIFICATION OF TRADE
Trade is classified on the basis of geographical location of the portion involved, these are:
1. Home trade - Also called Internal, - It refers to the buying and selling of goods and services
within the boundaries of a given country.
2. Local or Domestic trade. - It is further divided into retail trade and wholesale trade.
3. International trade (foreign trade) - trade that is carried out beyond the boundaries of a
country
International trade (foreign trade)
This is trade that is carried out beyond the boundaries of a country

This is trade carried out between individuals or government of different countries e.g. trade
between a citizen of Kenya and a citizen of Tanzania, or trade between the government of
Kenya and the government of Southern Sudan

International trade carried out between two countries is referred to as bilateral trade and
international trade carried out among many countries (more than two countries) is referred
to as multilateral trade.
International trade is classified into the following;
1. Export Trade - Which is the sale of goods and services by a country to another country
or individuals in one country to another country or individuals in one country to
individuals in another country.
2. Import Trade - Which is the buying of goods and services by one country from another
country or by individuals in one country from individuals in another country.
HOME TRADE
FORMS OF HOME TRADE
30
Retail Trade - Retail trade involves the buying of goods and selling them to the final consumer. A
retailer is the trader who buys goods with a view of selling them to the final consumer.
Classification of Retail Traders
Retailers are classified/categorized according to the amount of capital they need to start and operate
their businesses and their sales volume. Thus retailers can be classified as; Small scale retailers
Large scale retailers
Small-Scale Retail Businesses/Small Scale Retailers
These are retailers whose capital requirement is low and their sales volume also low. They form
the majority of retail traders and all found in all parts of the country. Small scale businesses are
easy to start and in most cases they are operated as one-man’s business. A small scale trader serves
the needs of people in the immediate neighborhood and deal mainly in fast moving goods such as
foodstuffs, detergents, kerosene etc.
Categories and Types of small scale
These are two main categories of small-scale traders as shown below;
1. Small scale Traders without shops
 Itinerant Traders (Hawkers and peddlers)
 Roadside sellers
 Open air market Traders
2. Small scale retailers with shops Single shops
 Tied shops Kiosks
 Mobile shops
 Market stalls
 Canteens
 Mail order stores
Small scale Retailers without shops
Itinerant Traders
These are retailers who move from place to place selling their goods on foot, either by bicycles or
motor cycles
-They move from town to town, door to door and from village to village selling their goods. Their
goods may include clothes, utensils and foodstuffs. Customers can buy goods without having to
travel to look for them
-Examples of itinerant traders are hawkers and peddlers (Hawkers move around on bicycles,
handcarts or motorcycles while peddlers walk around)
-The itinerant traders require a licence from the local authorities in order to sell their goods.
Characteristics of itinerant Traders
31
–
–
–
–
Are found mainly in densely populated areas
Move from place to place in search of customers
They are very persuasive
Their prices are not controlled.
Advantages of itinerant Traders
–
–
–
–
–
–
They require little capital to start
They are convenient because they bring goods closer to the people
The business is flexible in that they can move from place to place.
They can also change from line of business to another
Few legal formalities are required
They usually do not suffer bad debts because they sell in cash.
Disadvantages of itinerant Traders
–
–
–
–
–
The traders get tired because of moving from one place to another while carrying goods.
The business is affected by bad weather conditions
The traders sale a limited range of goods It is difficult to transport goods from one place
to another.
Do not offer guarantee, in case items are to be found defective
They are constantly in conflict with the local government.
Roadside sellers
These are traders who sell their goods at places where other people pass by and at busy places such
as along busy roads, bus stages, road junctions and entrances to public buildings. They place their
goods on trays, cardboards, empty sacks and mails They sell items such as fruits, utensils, sweets,
clothing and some hardware.
Open-air market Traders
Open air markets are places set aside by the government through the local authorities where people
meet to buy and sell goods. Traders selling similar commodities are allocated a special area. Such
markets are open on particular days of the week. The variety of goods sold here is wide and include
agricultural produce, clothing, household items, animals, foodstuffs and even furniture. The traders
move from one market to another depending on the various market days.
Advantages of small-scale retailers without shops
–
–
–
–
–
–
–
They require a small amount of capital to start and operate their businesses.
They are convenient since they take goods to the customers within their reach.
They incur low costs of doing business
Most of their goods are low-priced and hence more affordable to customers.
The business is flexible.
It is easy to change from one business to another
They require few legal requirements
32
–
–
–
The financial risks involved in these businesses are minimal
They do not suffer bad debts since they sell on cash bases
They interact at personal level with the customers and can convince them to buy their
goods.
Disadvantages of small-scale retailers without shops
–
–
–
–
–
–
–
It is tiring for traders to move from place to place especially if the goods are heavy and
the distance covered are long
The traders face stiff competition from other traders with more resources
They offer a limited variety of goods
They are affected by unfavorable weather condition
Lack of permanent operating premises denies them a chance to develop permanent
customers
They face a lot of certainty, especially in terms of a steady flow of income
They sometimes sell defective or low quality goods because customers expect to pay
little money for them.
Small scale Retailers with shops
These are small-scale retailers with permanent locations to operate from. They include;
i) Kiosks - These are small shops or structures found mostly in residential areas, busy streets,
highly populated areas or inside building where people pass by or work
They deal in fast-moving items and groceries such as; sodas, cakes, sweets, cigarettes, and
newspapers etc. some kiosks also sell food
ii) Market stalls - These are permanent stands found in market places, especially those
operated by the various local authorities. They are of different designs depending on the
goods they sell or services they offer. They are rented or leased by individuals from local
authorities
They deal in fast moving household goods though some may specialize in other products such as
clothing and shoes. Examples are stalls at Muthurwa markets, Kariokor, and most municipal
markets.
Advantages of kiosks and market stalls
–
–
–
–
–
–
–
They are small, hence easy to start and operate
They are conveniently located close to their customers
They require little capital to start
They tend to have a loyal group of customers since they have permanent premises
They incur relatively low running costs
They give personal attention to their customers
They are flexible since the owner can change from one business to another easily.
33
Disadvantages of kiosks and market stalls
–
–
–
–
–
–
They provide a limited range of products
They usually do not have adequate higher capital for expansion
They charge relatively higher prices than the retailers without shops
They face stiff competition from more established retail businesses
They sometimes suffer from bad debts Due to their size, they do not enjoy economies
of scale
For market stalls the hours for operation are controlled by the local authority concerned
iii) Single shops (unit shops) – Single shops are mostly located in the trading or market
centres in rural areas or in the residential areas of high towns
–
–
–
They are operated from fixed premises
They are usually run by one person who may get assistance from him/her family or
employ attendance
Some deal in one line of commodity such as houses, clothing, groceries or electronics
Advantages of single shops
–
–
–
–
–
–
–
–
Minimal capital is required
Running costs are usually low as the owner may use the services of family members
They may offer credit facilities to some customers
They are easy to start because only a licence is required
They usually have a loyal group of customers The owner can change his or her line of
business at will
They are easy to start since the owner does not have to meet any manufactures
requirements Products prices are fixed by the shop owners
The owner has the freedom of creativity and independence
They are convenient since they ensure goods are within easy reach of their customers.
Disadvantages of single shops
–
–
–
–
–
Expansion is difficult due to limited funds
They face stiff competition from large businesses
The absence of the owner may result in closure and loss of business
May suffer bad debts Provide limited variety of goods
The operations of the business are affected by the owner’s commitment.
iv) Tied shops
–
These are shops that mainly sell the products of one particular manufacture or are
owned by a specific supplier of certain goods.
34
–
–
–
–
The shops are owned or controlled by the manufacturer, and are thus tied to the
manufacture.
The manufacture/supplier designs the organization of the shop and its appearance e.g.
painting hence they look alike.
The supply closely supervises the shops.
Examples of tide shops include; Bata shops which sell shoes made by Bata Company,
petrol station like National, Kobil, and total etc.
Advantages of Tied shops
–
–
–
–
–
–
–
–
–
–
Availability of goods is assured at all times
The supplier carries out promotion for the goods
The manufacturer/supplier can easily give credit to the shops
Customers can return or change faulty goods at any of the shops
The shops are easily identifiable due to their similarity
Traders are financed by the manufacture
They get loyal customers who keep buying their branded products
Advertisement expenses are met by the manufacture
They get technical advice from the manufacture
Some operate from permanent premises owned by the manufacture.
Disadvantages of Tied shops
–
–
–
–
–
Decision making is slow because the manufacturer must be consulted
The variety of goods is limited
The shops cannot sell goods from any other manufactures even if customers require
them Prices are fixed by the manufacture and sometimes profit margins may be low
They inhibit the retailers creativity and innovations
There is a likelihood of disagreements between the manufacture and the tied shop
owners. Differences/Distinction between a tied shop and single shop
Tied shop Single shop –
–
–
–
–
–
–
–
–
–
–
–
–
Owner is free to stock whatever he/she wishes
Dealership can be withdrawn if operators stock competing products
Owned by individual or a group of people
The owner is normally the manufacturer
Sells products from different manufacturers
Sells products from a single manufacturer
Design of shop according to owners wish
Shops usually have the same design
Prices of goods determined by shop owner or different manufactures
Prices of goods set by the manufacturer
Operators not trained by manufacturers
Operators are usually trained by manufacturer
35
v) Canteens:
These are retail shops found in institutions such as schools, colleges, hospitals and army barracks.
-They stock a variety of consumable goods such as sodas, bread, tea, groceries and other things
used by the people in that institution.
–
–
–
They are run by the institutions management or by individuals on retail business
Most of them operate without a license as they are considered to be part of the institution.
Their hours of operation are sometimes regulated by the institution
Advantages of canteens
–
–
–
–
–
Some do not pay any rent, thus they incur low overhead costs
They often require low capital to start
Some offer credit facilities to their customers
They are situated at ideal location which is convenient for their customers
They are assured of a market as they cater for people in particular institution.
Disadvantages of canteens
– The market is limited to people in a particular institution
– They do not open throughout/they open for limited hours e.g. after classes in schools
– They close down when the targeted customers are not available e.g. during school holidays.
– They may suffer from bad debts
– They are difficult to expand due to insufficient funds
vi) Automatic vending machines;
These are coin or card operated machines used to sell commodities like drinks, stamps, and snacks
etc. Examples are coffee shops, ATM’s etc.
Features
–
–
–
They dispense goods or services once a coin or a card is inserted and instructions keyed in.
They operate without an attendant
-They are usually placed at strategic places such as busy streets, office buildings, shopping
centres and hospitals.
Advantages of vending machines
–
–
–
–
–
Commodities can be bought anytime because no attendant is required
They save the owner the cost of employing a shop attendant
They can be put strategically to boost sales e.g at institutions
They are fast and accurate They are not affected by weather changes
They provide goods and services on cash basis protecting the owner from the burden of
bad debts.
Disadvantages of vending machines
–
They provide a limited range of products
36
–
–
–
–
–
–
Break-downs or stock-outs may discourage customers
Maintenance costs are high due to regular servicing, repairs and sometimes vandalism
The owner may incur losses through fraud and use of inappropriate coins and cards by
consumers.
Customers are forced to carry coins and cards in order to obtain goods or services
Their use is limited to customers who are familiar with how the machine works
They are mainly found in urban areas, thereby locking out the people in rural areas.
vii) Mobile shops
 Mobile shops, like itinerant traders move from town to town or village to village selling
their goods.
 -They have vehicles that they have converted into a shop from which customers can buy
their goods
 -They visit different towns at regular intervals.
Advantages of small scale Retailers
–
–
–
–
–
–
–
Easy to raise capital to start
Retailers are in close contact with the consumers and may give credit to credit worthy
customers.
Are able to use free or cheap labour from family members
The risks involved in their businesses are small
The business is simple to start and manage
Few legal formalities required to start and run the business
The trader can easily change from one form of business to another i.e. the business is
flexible
Disadvantages of small-scale retailers
–
–
–
–
–
Traders have limited access to loan facilities
They may not afford to hire specialists or technical staff
May suffer bad debts if they give credit to customers without proper assessment
Do not enjoy economies of scale
Have a low turnover because of the little capital invested
LARGE SCALE RETAILERS
Large-scale retailers have the following features/characteristics;
–
–
–
–
–
–
Require large amounts of capital to start and maintain
They operate from larger fixed premises
They operate mainly in urban areas
They have a large labour force
Buy goods in large quantities from wholesalers or directly from producers and are therefore
allowed large trade and quantity discounts and other favourable credit facilities
Require the services of specialists such as salespersons and accountants
37
–
–
May occupy one large premise or several premises in the same town or in different towns
They have large stocks and large sales volumes
TYPES OF LARGE SCALE RETAILERS
a) Supermarkets:
A supermarket is a large-scale self-selection/self-service store that deals mainly with household
goods such as utensils, foodstuffs and clothes. It has the following features;
Features of supermarkets
–
–
–
–
–
–
–
–
–
–
–
Requires large capital to start
They stock a wide variety of goods
Offers self service facilities
Goods have price tags or bar codes
Prices of goods are fixed
No credit facilities are offered
Sell at comparatively low prices
Goods are systematically arranged for easy selection
Shoppers are provided with baskets or trolleys for convenience
There is minimal interaction between buyer and seller
There are employees who pack goods for customers at the pay points.
Advantages of supermarkets
–
–
–
–
–
–
–
Prices may be relatively low because they buy their goods in bulk and are given discounts
Saves time as customers are able to get most goods they require under one roof
Self-service saves the customers time
Few attendants are employed thereby reducing the monthly wage bill
Impulse buying leads to more sales, hence high profits
Bad debts are avoided because there are no credit sales.
The price tags on goods help customers to monitor their spending.
Disadvantages of supermarkets
– Do not offer credit facilities to customers
– Do not deliver goods to the customer’s premises
– Are found mainly in urban areas
– May incur losses due to pilferage of goods
– Impulse buying may lead the customers to buying goods they may not need.
– They are expensive to start and operate due to the large amount of capital required
– Prices are fixed and bargaining is not accepted, which discourages some customers
– Minimal personal interaction limits chances for making more sales
b) Hypermarkets
38
A hypermarket is a large shopping complex/centre comprising a variety of businesses managed by
different people all housed in one building Examples; village market, sarit centre, TuskeysKisumu, Nakumatt mega city-Kisumu e.t.c
Features/Characteristics of Hypermarkets
–
–
–
–
–
–
Are served with good access roads
They have ample parking space
Many businesses in one building
Located in the outskirts of town
Offer a variety of goods and services
Occupy a large space.
Advantages of Hypermarkets
–
–
–
–
–
–
–
Offer ample and secure parking space to customers
Customers can do all their shopping in one building
They are usually open for long hours
They may provide credit facilities by accepting credit cards
There is less traffic congestion as hypermarkets are located away from urban centres
Provide a wide variety of goods and services to customers under one roof.
They have fair prices that are customer friendly.
Disadvantages of Hypermarkets
–
–
–
–
–
–
Are only convenient to customers who have cars because they are situated away from city
centres
They serve limited number of people due to their location
They require large amount of capital to establish
They can easily exploit their customers since their prices are not controlled
Require large amount of space which are not available in central business district (CBD)
They spend a lot of security to safeguard properties
c) Chain stores (Multiple shops);
Are large scale businesses with separate branches which are managed and organized centrally. The
branch managers are accountable to the head office. Examples; African Retail Traders (ART),
White Rose dry cleaners, Nakumatt, Tuskys, Uchumi e.t.c
Characteristics/features of chain stores
–
–
–
–
Are managed centrally from a head office
Prices are standard for all their products in all their branches
All branches deal in the same type of products
Sales are decentralized i.e. the various shops situated in different places act as selling points
or branches
39
–
–
–
Purchases of stock are centralized i.e. buy stock buy stock in bulk centrally and distributed
to the different branches
Goods can be transferred from one shop to another where the need for them is higher
The shops operate under one name and are similar in appearance and interior layout
Advantages of chain stores/multiple shops
–
–
–
–
–
–
–
–
–
They enjoy large trade discounts since they buy their goods in bulk centrally and is passed
to consumers in form of low prices
Common costs such as those of advertising are shared.
Goods that do not have a high demand in one branch can be transferred to another where
their demand is high.
They are easily identified by their colour and design
They have low operational costs because of the centralized buying, storage, advertising
and accounting
They serve a large number of customers because they are spread in many towns and cities
The similarity of the shops in appearance and services serves as an advertising tool
Risks such as losses are spread among many shops
It is possible to pay for goods in one branch and pick them up in another.
Disadvantages of chain stores/multiple shops
–
–
–
–
Large amount of capital is required to start and maintain the business
They cater mainly for the urban areas as they are situated in those places
Organizational problems may occur due to their large size
No credit facilities are offered except those operating exclusively on hire purchase schemes
Response to market changes is slow due to the slow decision making
– Decision making is slow as the head office must be consulted
– Lack of personal touch with customers
– Absence of personal touch between employer and employee may reduce incentives for hard
work among staff
– People tend to shy away from buying similar products such as clothes and this may reduce
sales.
d) Departmental stores
This is a group of single shops operating under one roof with a centralized management Each
shop/department specializes in a particular line of products and is headed by its own department
manager.
Characteristics of departmental stores
–
–
–
–
–
Each department has its own manager
Each department sells only one line of products
All departmental managers are answerable to a general manger
They offer a wide variety of goods at relatively low prices
They sell goods strictly on cash basis
40
–
–
They are usually in town centres
Goods are not transferable from one department to another as each has its own variety of
goods.
Advantages of departmental stores
–
–
–
–
–
–
–
Customers can buy/access a wide variety of goods at fair prices under one roof.
They can afford to hire trained qualified experienced staff who provide quality services
They buy goods in large trade discounts.
This enables them to sell at low prices.
Each department is able to make independent and quick decisions that affect its operations.
The independence of departments ensures that the weakness of one department does not
affect each other.
Savings can be made on some activities such as product promotion by centralizing them.
Disadvantages of Departmental stores
–
–
–
–
–
–
–
–
A large amount of capital is required to start and maintain the stores
They require a large number of customers to operate profitably
It is difficult to give personal attention to customers
They cater mainly for the urban communities in which they are located
They strictly sell their goods on cash basis
Operational costs are high due to the wide variety of services offered
Their large size could encourage theft and pilferage of goods
The independence of departments can make central control difficult.
e) Mail order stores
This is a type of retail business where business is carried out through the post office, telephone or
email.
1. Ordering of the goods is done through the post office telephone or email and delivering of
goods is done by post or courier
2. -There is no personal contact between the seller and the buyer and buyers get information
from advertisements.
3. -Goods are dispatched on the basis of cash with order (CWD) or cash on delivery (COD).
Characteristics/features of Mail order stores –
–
–
–
–
–
–
They sell the goods through the post office –
They operate on cash with order (CWO) or cash on delivery (COD) terms –
Heavy advertisement are involved
-Customers do not visit the selling premises. –
There is no personal contact between the buyer or the seller –
All transactions are done through the post office –
41
–
–
They deal with goods that are less bulky, have high value, and are durable and not too
fragile –
May have large warehouses
Advantages of Mail order stores
–
–
–
–
–
–
–
–
They reach customers who are far for away from the shopping centres
Do not require the services of sales personnel or shop attendants for skilled labour since
selling is routine
Total control of distribution is possible
Payments is made with order or delivery so there is little chance of bad debts
Eliminates the loss associated with shop space, thus saving on rent
Supply of goods is based on order thus a trader requires little working capital
The method eliminates trips to congested stores and lengthy waits queues
Do not require large storage space for goods.
Disadvantages of Mail order stores
–
–
–
–
–
–
–
–
–
Advertising and postage costs may increases the price of goods
There is lack of personal contact between the seller and the buyer
There is limited variety of goods on offer
Customers do not have the opportunity of inspecting goods before buying
There are no credit facilities
The method is only suitable for those who can read and write
Should there be a problem with the post office. e.g. industrial action like strikes, the
business may be affected
Difficult to operate in places where post office services are poor or unavailable
Chances of being defrauded are high.
FUNCTIONS OF RETAILERS
These can be discussed as services rendered to consumers, wholesalers and producers
Services Rendered to consumers
–
–
–
–
–
Offers credit facilities: Retailers are in close contact with the consumers and some may
give them credit facilities
After-sales services: Retailers who sell technical goods e.g. cars, electronics e.t.c may
offer after sale services to consumers e.g. transport, installation repair e.t.c
Provision of variety of goods: Retailers stock a wide variety of goods from different
wholesalers and manufactures enabling the consumers to have a wide choice.
Advising consumers: Retailers may offer advice to consumers on choice and use of
products
Availing needed goods: Retailers make goods available to consumers at the right time
and place
42
–
–
Breaking bulk: Retailers sell goods to consumers in convenient quantities
Accumulating bulk
Stabilizing prices: By ensuring that goods are continuously available to consumers
Services Rendered to wholesalers
–
–
–
–
–
–
–
Retailers store goods and relieve the wholesalers the burden of storing goods and the
storage costs
They relieve the wholesalers the burden of transportation
Retailers advice wholesalers on market trends(on consumers demand)and give valuable
information
They help in distribution of goods to the consumers
They help in breaking bulk on behalf of the wholesaler
They finance wholesalers to continue with their operations through paying for the goods
They relieve the wholesaler of some risks that arise from the storage of goods such as theft,
fire and accidents.
Services Rendered to producers
–
–
–
–
–
–
–
Through wholesalers retailers provide very vital information to manufactures about market
demand
They advertise goods on behalf of producers
They sell and market goods to consumers.
This relieves the manufactures the task and risk of retailing
They store goods on behalf of the producers
They break bulk on behalf of producers to consumers
They finance producers by buying and paying cash
WHOLESALE TRADE
Wholesaling involves selling goods in large quantities to traders for resale. A wholesaler is a trader
who buys goods in bulk from producers/manufactures for resale to retailers at a profit. -There are
wholesalers who carry out retailing but that do not make them retailers.
Classification of wholesalers/Types of wholesalers
Wholesalers may be classified depending on a number of factors. These factors include;
i) According to the range of goods they handle
ii) According to the geographical area in which they operate
iii) According to their method of operation.
i) According to the range of goods they handle
43
Under this classification, wholesalers may be any of the following;
– General merchandise wholesalers
– General line wholesalers
– Specialized wholesalers
a) General merchandise wholesalers - The word merchandise means goods. - The general
merchandise wholesalers stock and sell a wide variety of goods e.g. hardware, clothes,
cosmetics and foodstuffs. The retailers who buy from these wholesalers are thus able to get
a wide variety of goods for resale. -They are also called general wholesalers or full-line
wholesalers
b) General line wholesalers - These are wholesalers who deal in a wide variety of goods within
the same line e.g. textbooks, duplicating papers and other types of stationary.
c) Specialized wholesalers - These are wholesalers who deal in a particular good from a
given line e.g. in the line of grains, they may specialize in maize only.
ii) According to the geographical area in which they operate.
Under this category wholesalers may be; Nationwide wholesalers Regional wholesalers.
a) Nationwide wholesalers - These are wholesalers who supply goods to traders in all parts
of the country. -They establish warehouses or depots in different areas from Kenya National
Trading Corporation (KNTC)
b) Regional Wholesalers - These are wholesalers who supply goods to certain parts of the
country only. They may cover a county, District, division etc.
iii) According to their method of operation
Under this classification, wholesalers can be: Cash and carry wholesalers Mobile wholesalers Rack
jobbers Drop shippers
a) Cash and carry wholesalers - These wholesalers sell goods on cash and self-service basis
like supermarkets -They neither offer transport nor credit facilities to their customers.
b) Mobile wholesalers/Track distributors - These are wholesalers who use vehicles to
move from place to place supplying goods to retailers e.g. soda distributors, bread
distributors, beer distributors etc.
c) Rack jobbers - These wholesalers specialize in selling certain/particular products to other
specialized wholesalers. They buy goods from producers or from other countries for
reselling. E.g., some wholesalers buy horticultural products from producers and sell to other
wholesalers in urban areas -Rack jobbers usually stock their goods in shelves or racks from
which customers select the goods to buy. Customers may be allowed to pay for the goods
after they have sold them.
d) Drop shippers - These are wholesalers who make orders for goods from
manufactures/producers but do not take them from the producers premises. They then look
for the buyers for the goods and supply the goods directly from the producers
44
Alternate classification of wholesalers
An alternative classification of wholesalers is given below: Those who buy goods store them in
warehouses and sell them to traders without having added anything to them. Wholesalers who act
as wholesaler’s agents or brokers. These are middlemen who are paid a commission for their work
e.g. commission agents Those who after buying the goods and storing them prepare them for sale.
They break bulk, pack, brand,sort,grade and blend the goods These terms are explained as below:
–
–
–
–
–
Breaking bulk - Reducing a commodity into smaller quantities for the convenience of the
buyer e.g. buying sugar from the producer in sacks and selling it in packets.
Packing - Putting goods in packets and boxes ready for sale.
Branding - Giving a product a name by which it will be sold Sorting-Selecting goods to
desired sizes, weight, colour and qualities
Grading - Putting goods in groups of similar qualities to make it easier to price them
Blending-It involves mixing different grades of a product to achieve qualities like taste
and colour.
FUNCTIONS OF A WHOLESALER
These can be discussed as services rendered to producers, retailers and to consumers.
Services of wholesalers to the producers
–
–
–
–
–
–
–
They relieve the producers the problem of distribution by buying goods from them and
selling to retailers
They relieve the producers of some risks they would experience e.g. damage,theft,fall in
demand etc.
Save the producers from the problem of storage by buying goods and keeping in their
warehouses
They prepare goods for sale on behalf of the producers
They get feedback from consumers on behalf of producers
They promote products through advertising, displays, trade fairs and exhibitions
They finance producers by buying goods from them and paying in cash.
Services of wholesalers to the Retailers
–
–
–
–
–
–
–
–
They stock a wide variety of goods in large quantities relieving the retailer from buying
from different producers
They avail goods at places convenient to retailers
They break bulk for the benefit of retailers
They offer transport facilities to retailers
They offer advisory services to retailers regarding market trends
They offer credit facilities to retailers
They engage in product promotion on behalf of retailers
They sort, blend, pack and brand goods saving retailers from having to do it.
45
Services of wholesalers to consumers
–
–
–
–
–
–
They ensure a steady supply of goods to retailers hence consumers are not faced with
shortages
They ensure a stable supply of goods hence there will be stability in market prices
They enable consumers to enjoy a wide variety of goods
They break the bulk of goods thus enabling the consumer through the retailer to get the
goods in convenient quantities
They prepare goods for sale e.g. branding, blending and packaging
Pass information to consumers through retailers about the goods e.g. new products, new
prices and their use.
DOCUMENTS USED IN HOME TRADE
A business document is a written record which gives evidence to a stage in the transfer of goods
or provision of services from one party or it is written record which gives evidence that trader or
a business transaction has taken place. A business transaction is a deal between two or more people
involving exchange of goods and services in terms of money. Business transaction may take place
on cash basis; in which case goods are paid for before or on delivery or a short while after delivery
Business transaction may also take place on credit basis; which means payment is made after a
specified period from the date of delivery of the goods or the provision of the services
There are various business documents that are used in various stages of business transactions as
discussed below;
1) Documents used at the inquiry stage
This is the first stage in transaction. An inquiry is a request by a prospective buyer for information
on available goods and services. It is aimed at establishing the following;
–
–
–
–
Whether the goods or services required are available for sale
The quality or nature of the products available
The prices at which the goods or services are being sold
The terms of sale in respect to payment and delivery of goods or services
Some of the documents used at this stage include;
a) Letter of inquiry; - This is a letter written by a potential buyer to the seller to find out the goods
and services offered by the seller. A letter of inquiry can be general or specific. A specific letter of
inquiry seeks for information about a particular product.
b) Reply to an inquiry - The seller may reply to the letter of inquiry by sending any of the
following documents;
–
–
Price list
A catalogue
46
–
–
Quotation
A tender
i) A price list - This is a list of items sold by the trader together with their prices. The information
contained in a price list is usually brief and not illustrated and may include;
–
–
–
–
-Name and address of the seller
-List of the goods and services
-The recommended unit prices of the products
-Any discounts offered
Price list show the prices of the commodities at that time.
ii) A catalogue; - A catalogue is a basket which briefly describes the goods a seller stocks. It is
normally sent by the seller to the buyer when the buyer sends a general letter of inquiry. It usually
carries illustrations on the goods stocked, and could be in the form of attractive and colorful
pictures. The content of a catalogue includes the following;
–
–
–
–
–
–
Name and address of the seller
Details of the products to be sold; inform of pictures and illustrations
The prices of the products
After-sales services offered by the seller
Packaging and posting expenses to be incurred
Delivery services to be used Terms of sale
Catalogues carry more information than the price list and they are more expensive to print.
iii) Quotation; - This is a document sent by a seller to a buyer in response to a specific letter of
inquiry. It specifies the conditions and terms under which the seller is willing to supply the
specified goods and services to the buyer. The content of a quotation includes the following;
–
–
–
–
–
–
Name and address of seller
Name and address of the buyer
Description of goods to be supplied
Prices of the commodities
Terms of sale i.e. discounts, time of supply, delivery
Total of the goods to be supplied
Quotations are normally in form of letters, but many large-scale businesses have pre-printed
quotations forms, which they readily send to the potential customers.
iv) A Tender - This is a document of offer to sell sent by a seller to a buyer in response to an
advertised request Tenders contain the following;
–
–
–
–
Date when the tender advertisement was made
Mode of payment
Date of making document
Discounts given
47
–
–
–
–
Name and address of prospective seller called the tenderer
The prices at which the goods can be provided
Period of delivery
Mode of delivery
Tenders are delivered in sealed envelopes which are opened by the buyer on a specified date - The
winning tender is usually awarded on the of the lowest quoted price although the buyer is not
obliged to accept this especially if quality is likely to be low Tenders are not binding unless
accepted by the buyer.
2) Documents used at the order stage
After receiving replies to inquiry in form of price list, catalogue or Quotation, a prospective buyer
will study the terms and conditions stated in them, and then may decide to buy products or not.
i) An Order - If a prospective buyer decides to purchase an item(s), he or she then places an
order An order is a document sent by a potential buyer to a seller requesting to be provided
with specified products under specified terms and conditions
An order issued for goods is called a Local Purchase Order (LPO) An order issued for
services is called a Local Service Order (LSO) Ways of making an order Filling an order
form. This is a pre-printed document that is used for making orders. Writing an order letter
Sending an e-mail, faxing or sending a short text message Giving a verbal order.
Verbal orders have the disadvantage in that they can be misunderstood and there would be
no record of items ordered -Where written orders are made, the potential buyer keeps a
copy of the order for use in verifying the goods ordered when they are delivered.
A written order may contain the following;
–
–
–
–
–
–
Name and address of the buyer
Name and address of the seller
The number of the order
Quantities ordered and total amount to be paid
Description of the goods ordered Price per item
Special instructions on such matters as packaging and delivery
ii) Acknowledgement note - On receiving the order, the seller sends the buyer an
acknowledgement note An acknowledgement note is a document sent by the seller to the
prospective buyer to inform him/her that the order has been received and it is being acted
upon.
After sending the acknowledgement note, the seller has to decide whether to extend credit
to the buyer or not. At this stage, the seller has the following options;
– If the seller is convinced that the buyer is credit worthy, arrangements are made to
deliver the ordered goods or services to the buyer.
48
–
If the seller is not sure of credit worthiness of the buyer, a credit status inquiry can be
issued to the buyer’s bankers or to other suppliers who deal with the buyer to ascertain
the credit worthiness.
– If the buyer is not credit worthy then a polite note or a pro forma invoice can be sent
to him/her
iii) A proforma invoice - This is a document sent by the seller to the buyer requesting the
buyer to make payment for goods or services before they are delivered. It indicates that the
seller is not willing to grant the buyer credit
Functions of a proforma invoice
– A polite way of asking for payment before the goods are delivered
– Sent when the seller does not want to give credit
– Used by importers to get customers clearance before goods are delivered
– Issued to an agent who sells goods on behalf of the seller
– Show what the buyer would have to pay if the order is approved
– Can be used to serve as a quotation
Circumstances under which a pro-forma invoice may be used
– If the seller does not want to give credit
– If the seller wants to sell goods through an agent
– If the seller wants to get clearance for imported goods
– If the seller wants it to function as a quotation
– If the seller wants to inform the buyer what he/she pay if the order is approved etc.
3) Documents used at the Delivery stage
After the seller has accepted the order sent an acknowledgement note and where necessary the proforma invoice, the seller then prepares the goods for delivery to the buyer. This can be done in the
following ways;
–
–
–
–
The seller can ask the buyer to collect the goods
The seller can deliver the goods to the buyer using his/her own means of transport
The goods can be delivered to the buyer through public transport
The services(s) can be rendered to the buyer at the sellers or the buyer’s premises or at any
convenient place.
The main documents that are used at this stage are;
i) Packing note; Before delivery goods are packed for dispatch. This is a document prepared by
the seller showing the goods contained/packed in every container, box or carton being
delivered to the buyer - A copy of the packing note is packed with the goods to make/help the
buyer have a spot check. The contents of a packing note include;
– Description of goods packed
– Quantities of goods packed
– The means of delivery NOTE:
49
A packing not does not contain prices of goods. This ensures that those people involved in
checking and transporting goods do not know the value of goods. This is done as a precaution
against theft.
ii) Advice note; This is a document sent by the seller to the buyer to inform the buyer that the
ordered goods have been dispatched. It is usually sent through the fastest means possible. -It
contains the following;
– -The means of delivery
– -A description of the goods
– -The quantity dispatched
– -Date -Name and address of buyer and seller
Functions of an advice note
– Informing the buyer that the goods are on the way so that in case of any delay in delivery,
the buyer can make inquiries
– Alerting the buyer so that necessary arrangements can be made for payments when the
goods arrive
– Can serve as an acknowledgement note, where one is not sent/
iii) Delivery note; This is a document sent by the seller to the buyer to accompany the goods being
delivered. - A delivery note is always made in triplicate (3), one copy remains with the seller
and two sent to the buyer.
When the goods reach the buyer, he/she confirms that the goods are the ones ordered for and
that they are in the right condition by comparing the delivery note, the order and the goods. If
the buyer is satisfied with the goods, he/she signs the two copies, retains the original and send
the copy back to the seller.
This serves as evidence that the goods have been received in the right condition and in the right
quantities. - Some businesses keep delivery books in which the buyer signs to indicate that
goods have been received in good condition.
A delivery book is used by the seller if he/she delivers goods by himself/herself as an
alternative to a delivery note The content of a delivery note includes the following;
– Name and address of the seller Name and address of the buyer
– Date of delivery
– Delivery note number
– Description of the goods delivered
– Quantities of the goods delivered
– Space for the buyer to sign and comment on the condition of the goods received.
iv) Consignment note; This is a document prepared by a transporter to show that he/she has been
hired to deliver specified goods to a particular buyer. This document is used when goods are
delivered to the buyer by public means of transport e.g. by trains. -The seller is the consignor,
the buyer is the consignee and the goods the consignment.
50
The transporting company prepares the consignment note and gives the seller to complete and
sign. The seller then returns the note to the transporter (carrier) who takes it together with the
goods to the buyer. - On receiving the goods, the buyer signs the consignment note as evidence
that the goods were actually transported.
The content of a consignment note includes the following;
–
–
–
–
–
–
–
Details of the goods to the transported
Name address of seller (consignor)
Name and address of buyer (consignee)
Terms of carriage and conditions of transporting the goods
The transportation cost
Handling information
Destination of goods
v) Goods Received note; This is a document sent by the buyer to the seller to inform him/her
that goods sent have been received. It usually prepared in duplicate, the original is sent to the
seller and the copy retained by the buyer.
The contents of the goods received note include;
– Date of the document
– Name and address of the buyer
– Name and address of the seller
– Corresponding purchase order
– Details of goods received
– Date the goods were received.
vi) Returned goods note/Damaged goods note; If goods are damaged on the way, the buyer may
return them to the seller. The buyer may also return goods for other reasons e.g. Wrong type
of goods Excess goods Wrong quality goods -When the goods are returned, the buyer informs
the seller of the return by sending a goods returned note.
–A goods returned note is a document sent by a buyer to a seller to inform him/her that certain
goods are being returned to the seller. -Where the goods are returned because of damage, the
note may be referred to as the damaged goods note.
The contents of the goods returned note include;
– Details of goods that have been returned to the seller
– Date goods are returned
– The number of (GRN)
– Order number
– Delivery number
– Name and address of both buyer and seller
When the seller receives the note together with the goods, he issues a credit note
4) Documents used at the invoicing stage
51
This stage involves the seller requesting or demanding for payment from the buyer for the goods
or services delivered. Some of the documents used at this stage include:
i) Invoice - This is a document sent to the buyer by the seller to demand for payment for goods
delivered or services rendered. There are two types of invoices namely:
a. Cash invoice -This is sent when payment is expected immediately after delivery
thus acting as a cash sale receipt
b. A credit invoice -This is sent when a buyer is allowed to pay at a later date.
Functions of an invoice
It shows the details of goods sold i.e. quantity delivered, unit price, total value of the goods and
terms and conditions of sale.
It is a request to the buyer to make payment
It serves as an evidence that the buyer owes the seller a certain amount of money
It is used as a source document in recording the transaction in the book of accounts.
The contents of an invoice include the following:
–
–
–
–
–
–
–
–
Invoice number
Name and address of the seller
Name and address of the buyer
Date document is prepared
Details of goods repaired
Unit prices of goods delivered
Total value of goods
Discounts offered E and O.E printed at the bottom
The letters E and O.E (Errors and Omissions Excepted) means the seller reserves the right to
correct any errors and omissions made in the invoice. -On receiving the invoice, the buyer verifies
the contents using the local purchase order and the delivery note. If the invoice is in order, the
buyer makes arrangements to pay the amount stated. Businesses, which offer services, issue a
document called a bill, which serves the purpose of an invoice.
Differences Between the invoice and pro-forma invoice
No
1
2
3
4
The invoice
It is issued after goods and services have
been delivered
It shows the total value of the goods or
services on credit
It is used to demand payment for products
sold on credit
Used as a basis for making payment for
products already bought
52
The pro-forma invoice
It is issued before goods and services have
been delivered
Shows the total value of goods and services to
be bought
It is used to demand for payment in advance
for products to be bought
Used as a basis for preparing payment for
products not yet bought
5
Serves as a notice of payment for products Serves as a Quotation for products to be
bought on credit
bought.
Credit note - This is a document sent by the seller to the buyer (credit buyer) to correct an
overcharge. It is used to inform the buyer that the amount payable by him/her has been reduced
An overcharge is an excess amount charged beyond the right price. Causes of overcharge may
include;
–
–
–
–
–
–
–
Arithmetical errors like wrong addition
Price overcharges
Inclusion of wrong or unordered items in the invoice
Failure to deduct the allowable discounts
Return of goods (damaged goods)
Failure to note the return by the buyer of packing cases or containers used to deliver goods
to him/her
Use of wrong price list.
The purpose of the credit note is to reduce the total invoice amount by the amount of the
overcharge. -A credit note is usually printed in red to distinguish it from other documents. –
Contents of a credit note include;
–
–
–
–
–
Name and address of the seller and the buyer
Credit note number
Date document is prepared
Description and value of goods returned by buyer (in case that was done)
Total overcharge
Reasons why a seller would send a credit note to a buyer/circumstances under which a credit note
is sent to a buyer.
–
–
–
–
–
-When there is an overcharge in an invoice
-When the original invoice had indicated items that were not supplied
-When the buyer returns empty cases/crates that had been charged in the invoice.
-When the buyer returns some goods to the seller
-If the buyer was entitled to a discount which was not given or taken care of in the invoice.
Debit note - This is a document sent by the seller to the buyer to correct an undercharge on the
original invoice. It is used to inform the buyer that the amount payable by him has been increased.
-A debit note acts as an additional invoice. An undercharge arises when amount charged on
products is less than their right price.
Causes of undercharge include:
–
–
–
Price undercharges on items
Arithmetic errors/mistaken in calculation
Omission of items in the invoice
53
–
–
Retention of crates and containers that were not involved by the buyer
Deductions of more discount than what was give/intended
Circumstances under which a debit note will be sent to the buyer
–
–
–
When there is an undercharge in the invoice If the buyer had been given a discount that
was not due to him.
If some items had been omitted in the original invoice
If the buyer decides to retain some empty containers or crates
Differences Between a debit note and a credit note
No
debit note
1
Issued to correct an undercharge on the Issued to correct an overcharge on the
invoice.
invoice.
2
Written on blue or black.
3
Issued when containers have not been Issued when containers have been returned.
returned
credit note
Usually written in red
5) Documents used at the payment stage
This is the final stage of a credit business transaction. It takes place after the invoice has been
received and ascertained to be correct or where necessary, corrections made. The documents used
at the payment stage include;
i) Receipt - This is a document issued to the buyer by the seller as proof that payment has been
made. -Payment can be done in cash, cheque, other forms of money or in kind. -The receipt also
serves as a source document for making entries in books of accounts.
Contents of the receipt include;
–
–
–
–
–
–
–
Date of payment
Name of the person making payment
Name of person/institution receiving payment
Amount paid in words and figures
Means of payment
Receipt number
Signature of person issuing the receipt.
The issuance of a receipt by the seller to the buyer after receiving payment marks the end of the
credit transaction between the seller and the buyer (where payment has been done in full) -A
receipt serves the same purpose as the cash sale slip
54
ii) Statement of Account - This is a document prepared by the seller and sent to the buyer, giving
a summary of all the dealings/transactions between them during a particular period of time, usually
a month.
It has the following details;
–
–
–
–
Date when it was prepared Name and address of the seller
Name and address of the buyer Account number
Date column-where the date of each transaction is recorded
Particulars (Details)column-where the explanation of each transaction is shown
Money column - Debit column -increases in the amounts payable due to credit sales or under
charge correction. -Credit column -Decrease in the amounts payable due to overcharges corrected
or payments recorded.
Balance column - Amount owing after each transaction (Balance outstanding) Any discounts
allowed to the buyer Date when the buyer is expected to clear the balance Terms of credit etc.
-The statement of account enables the buyer to ascertain the correctness of the transactions which
have taken place with the seller over the stated period.
iii) IOU - An IOU (I owe you) is a document written by the buyer and sent to the seller to
acknowledge a debt. -It does not specify date when settlement will be made. -It acts as evidence
that a debt exists.
Summary of documents used in home trade
No Document sent by buyer
Document sent by seller
1
-Letter of inquiry
–Price list
2
–Order
–Catalogue
3
–Goods received note
–Quotation
4
–Goods returned note
-Tender
5
–IOU
-Acknowledgement
6
-Advice note
–Packaging note
7
–Delivery note
–Consignment note
8
–Invoice
–Pro forma invoice
9
–Credit note
–Debit note
10
–Receipt
–Statement of account
55
Terms of Payment
These are the conditions under which the seller will complete the sale if they are satisfied. The
terms include the specific period within which the buyer needs to pay off the amount dues,
demands related to cash in advance, cash on delivery, 30 days or more deferred payment and
similar other provisions. It is the conditions under which the vendor completes the sale. The
objectives covered within it are:
2. Expected Date of Payment
3. Conditions that are stated for the payment receive
4. Discounts that are entitled to the buyer
Terms of payment can be entitled to any one in the process of sales, from the wholesaler to the end
customer.
Examples of common Invoice payment terms:
–
–
–
–
–
–
–
–
–
–
PIA-Payment in Advance for the prepaid products
COD- Cash on delivery, Cash payment after receiving the good
CBS- Cash being paid before the product is shipped
Net 30 -The payment will be issued 30-days from the date of the suppliers invoice
Net 10 - Payment 10 days after invoice date
EOM – Payment at the end of the month
Cash account- No credit, only cash based account
Bill of exchange – Supported by a bank, when a promise is made to pay after due date
Letter of credit – Often used in export, it is a documentary credit confirmed by a bank
2MD- credit payment done monthly of a full month's supply plus an extra calendar month
Discount payment terms:
–
–
–
–
–
–
–
Coupons: Terms are mentioned under which certain quantity can be purchased at a
redeemed price
Discount cards: A discount card that gives certain customers or any customer holding it a
discount
Disability discount – Discount given to the disable people
Student discount: Discount given to the students
Military discount: Discount given to the military and to their families
Rebates: Refund given to the buyer after purchase
Seasonal discount: Discount which is given when the sales are down.
Thus we can say from these examples that a wide variety of terms that can be offered by the
vendors.
Hence, this concludes the definition of Terms of Payment along with its overview.
Cash
56
Credit
Hire purchase – instalment payment
A hire purchase (HP) known as installment plan is an arrangement whereby a customer agrees to
a contract to acquire an asset by paying an initial installment (e.g. 40% of the total) and repays the
balance of the price of the asset plus interest over a period of time. Other analogous practices are
described as closed-end leasing or rent to own.
Standard provisions
To be valid, HP agreements must be in writing and signed by both parties. They must clearly lay
out the following information in a print that all can read without effort:
1.
2.
3.
4.
5.
a clear description of the goods
the cash price for the goods
the HP price, i.e., the total sum that must be paid to hire and then purchase the goods
the deposit
the monthly instalments (most states require that the applicable interest rate is disclosed
and regulate the rates and charges that can be applied in HP transactions) and
6. a reasonably comprehensive statement of the parties' rights (sometimes including the right
to cancel the agreement during a "cooling-off" period).
7. The right of the hirer to terminate the contract when he feels like doing so with a valid
reason.
Implied warranties and conditions to protect the hirer
The extent to which buyers are protected varies from jurisdiction to jurisdiction, but the following
are usually present:
1. the hirer will be allowed to enjoy quiet possession of the goods, i.e. no-one will interfere
with the hirer's possession during the term of this contract
2. the owner will be able to pass title to, or ownership of, the goods when the contract requires
it
3. that the goods are of merchantable quality and fit for their purpose, save that exclusion
clauses may, to a greater or lesser extent, limit the Finance Company's liability
4. where the goods are let by reference to a description or to a sample, what is actually
supplied must correspond with the description and the sample.
The hirer's rights
The hirer usually has the following rights:
57
1. To buy the goods at any time by giving notice to the owner and paying the balance of the
HP price less a rebate (each jurisdiction has a different formula for calculating the amount
of this rebate)
2. To return the goods to the owner - this is subject to the payment of a penalty to reflect the
owner's loss of profit but subject to a maximum specified in each jurisdiction's law to strike
a balance between the need for the buyer to minimize liability and the fact that the owner
now has possession of an obsolescent asset of reduced value
3. With the consent of the owner, to assign both the benefit and the burden of the contract to
a third person. The owner cannot unreasonably refuse consent where the nominated third
party has good credit rating
4. Where the owner wrongfully repossesses the goods, either to recover the goods plus
damages for loss of quiet possession or to damages representing the value of the goods lost.
The hirer's obligations
The hirer usually has the following obligations:
1. to pay the hire installment
2. to take reasonable care of the goods (if the hirer damages the goods by using them in a nonstandard way, he or she must continue to pay the installments and, if appropriate,
recompense the owner for any loss in asset value)
3. to inform the owner where the goods will be kept.
4. A hirer can sell the products if, and only if, he/she has purchased the goods finally or else
not to any other third party.
it is pretty much similar to installment but the main difference is of ownership.
The owner's rights
The owner usually has the right to terminate the agreement where the hirer defaults in paying the
installments or breaches any of the other terms in the agreement. This entitles the owner:
1. to forfeit the deposit
2. to retain the installments already paid and recover the balance due
3. to repossess the goods (which may have to be by application to a Court depending on the
nature of the goods and the percentage of the total price paid)
4. to claim damages for any loss suffered
Discounts- cash and trade discounts
Abbreviation of Terms of payment –
58
COD, - Cash On Delivery - cash paid for goods at delivery, which may include cost of shipping
CWO, - Cash With Order- a method of payment of goods where cash is paid at the time of order
and the transaction becomes binding on both the buyer and the seller
LOCO, FOR, - Free On Rail, or Freight On Receipt
ONO - Or Nearest Offer
GOVERNMENT INVOLVEMENT AND PARTICIPATION
The government owns some businesses .This is one way in which it participates in business
activities in the country. Government gets involved in business activities in various ways such as
ownership, regulation, training and provision of enabling environment for example construction
of roads
Government is involved in business in various ways. Government training institutes for example
offer business courses that help train business people. The Kenya Institute of Business Training
(KIBT) is a purely business training institute.
How the government gets involved in business

/Regulation
The government sets rules and restrictions to govern business activities for example licensing,
setting standards and formulating policies.
5. Training
The government trains business people in order to improve their skills of performance. It has
set up training institute such as Kenya Institute of Business Training (KIBT),Kenya Industrial
Training Institute (KITI),Kenya Institute of Management(KIM)and Government Training
Institutes (GTIs
6. Trade promotion
Refers to government initiatives meant to increase the volume of sales of Kenyan products in
both local and foreign markets .The ministry concerned with trade does this through the
following departments;
c) Trade development, licensing and extension services for local trade
d) Kenya External Trade Authority (KETA)
e) Trade policy and external relations which deals with regional trade blocks for example
Common Market of Eastern and Southern Africa(COMESA), European Union (EU) and
others, Provision of public utilities (services)
59
The government provides essential services to the members of public either free of charge or
at minimal costs. for example education heath, transport and water
7. Enabling environment.
This refers to conditions which enable business people to freely engage in their business
activities for example provision of security, infrastructure and credit facilities.
8. Appointment of Commercial Attachees
The government appoints commercial attachees in all their embassies where their business
interests are taken care of. This includes both import and export businesses.
Consumer protection
Consumer protection is a deliberate effort undertaken by various bodies to safeguard the rights and
interest of consumers.
–
Need For Consumer Protection
Methods of consumer protection
Government initiated methods
–
–
–
Through Kenya Bureau of Standards ( KEBS) which sets standards to ensure quality of
products.
Through weights and measures act which ensures correct quantity and size of products.
Through the public health act which ensures proper construction of business premises and
hygienic standards .
Consumer initiated methods
–
–
–
Formation of consumer organizations for example Kenya Consumer Organization(KCO)
and Kenya Residents Association.
Reporting of major complaints by consumers to the relevant authorities incase of
malpractice by traders.
Boycott: Consumers may refuse to buy from exploitative traders
Traders initiated methods
–
–
–
–
Some manufacturers ensure that their products are sold at set prices for example Bata shoe
company and publishers
Formation of traders organizations such as Kenya association of manufacturers (KAM)
Most traders are coming up with service charters to ensure quality services to their
customers.
Reason and ways of involvement – licensing trade promotions etc.
Question
60
Explain ways in which government gets involved in business
i.
The government may regulate business activities through licensing/ensuring
standards/Legislations which help to control the business activities in the economy.
ii.
The government takes keen interest in training people to understand the business
activities through Kenya Business Training Institute(KBTI)
iii.
The government can engage in business activities by the government
initiating/supporting policy to encourage business people to enter into business which
help to increase volume/variety/services traded in.
iv.
The government engages in business activities involving provision of public utilities
which are essential services such as water/sewage/power/transport/communication
provided by local authorities/central government.
v.
The government can create a conducive environment in which business people are able
to start sustain their business.
2. Explain five reasons why credit cards are not a common means of payment in Kenya.
Cooperatives, Parastatals and public corporations
Co-operatives
A Co-operative is an association of people with common interest in undertaking an activity for
their own welfare. Dairy farmers from Githunguri formed a co-operative society which produces
Fresha Dairy Products.
Ownership
A Co-operative is owned by people with a common interest who become its members.The
members come together and form a co-operative to persue their common interest. Dairy farmers
from Githunguri in Kiambu formed a co-operative society.
Formation
A co-operative is formed by a minimum of 10 people and no maximum. The process of formation
involves:
–
–
–
–
Preparation of by-laws
Adoption of the by-laws prepared by the commissioner of co-operatives
Registration of the co-operative
Acquisition of a certificate to operate.
Sources of capital
Sources of capital for cooperatives include:
–
–
–
–
Members contribution
Financial institutions
Government agencies
Retained surplus
61
–
–
Hire purchase
Leasing and renting
Management
A Co-operative is managed by:
–
–
An elected committee
Hired professionals
Characteristics
The characteristics of Co-operatives include:
–
–
–
–
–
Membership of 10 and no maximum
There is perpetual existence of the business
There is mutual interest
There is limited liability
membership is voluntary
Dissolution
Co-operatives can be dissolved due to the following reasons:
–
–
–
–
–
–
Insolvency or bankruptcy-If it is unable to meet its financial obligations
Voluntary dissolution
If membership fall below 10 members
Through a court order
After completion of the intended purpose
If commissioner of co-operatives deems it fit to dissolve.
Advantages and Disadvantages
The following are the advantages and the disadvantages of Co-operatives:
Advantages
–
–
–
–
–
Separate legal entity
Enjoys government support
Free withdrawal of members
Democratic administration
Enjoys large capital base
Disadvantages
–
–
–
–
–
Lack of full time commitment by the committee members
Limited capital.
May suffer political interference
Lack of secrecy
Very large hence have control problems
62
Public Corporation
Public Corporation is a business unit in which the government owns majority of shares. Postal
Corporation of Kenya is a public corporation.
Ownership
A Public Corporation is owned by: Government and by Shareholders
Formation
A Public Corporation is formed through an Act of parliament.
Sources of capital
Sources of Capital for Public Corporations include:
–
–
–
Government shares
Loans from financial institutions
Grants
Management
A Public Corporation is managed by Board of directors appointed by the government and the
shareholders.The main staff that manage a company involve:
–
–
–
–
Board of Directors
Chief Executive/Managing Director
Professional Managers
Shareholders/Government
Characteristics
The following are characteristics of Public Corporation:
–
–
–
–
–
Provide essential services.
Formed by an Act of parliament.
Separate legal entity
Limited liability
Government owns majority of shares
Dissolution of Public Corporation
A Public Corporation may be dissolved through:
–
–
–
–
The act of parliament
Due to perpetual losses
Court order
Action of creditors.
63
Advantages and disadvantages
Advantages
The following are the advantages of public corporations:
–
–
–
–
–
They provide essential goods and services to the public.
They improve the standards of living of members of public
They enjoy large capital from the government
They provide revenue to the government
They sometimes enjoy monopoly power.
Disadvantages
The following are the disadvantages of public corporations:
–
–
–
–
–
Their nature limits competition
They are prone to corruption and political influence
They are sometimes affected by government changes.
There is limited profit motivation
They sometimes operate on losses.
Parastatal
A parastatal is a business unit which is fully owned and managed by the government. Kenya
Railway was fully owned by government.
Ownership
A parastatal is a business unit owned by government. Kenya Commercial Bank was a parastatal
formed by government to provide capital to businesses.
Formation of a parastatal
A parastatal is formed through an Act of parliament.
Sources of capital for parastatals
Sources of Capital for parastatal include:
–
–
–
–
–
government
Loans from financial institutions
Grants
Trade credit
Leasing and renting of property
Management of parastatals
Parastatals are managed by board of directors appointed by the government.
Mombasa Beach Hotel is a parastatal run by government appointed directors.
64
Characteristics of parastatals
The following are characteristics of Parastatals:
–
–
–
–
–
–
Fully owned by the government
Formed by an Act of parliament
Provide essential goods and services
Have a limited liability
Its a separate legal entity
Usually operates as a monopoly
Dissolution of parastatals
Parastatals may be dissolved through the following ways:
–
–
–
–
–
Nullification through Act of parliament.
Creditors action
Court order.
Outright Insolvency
Perpetual operation at a loss
Advantages and Disadvantages of Parastatals
Advantages
The following are the advantages of parastatals:
–
–
–
–
–
–
They provide essential goods and services to public.
They improve the standards of living of members of the public
They enjoy large capital sources from government
They provide revenue to the government
There is limited liability
Most are large hence enjoy economies of scale.
Disadvantages
The following are the disadvantages of parastatals
–
–
–
–
–
Their nature limits competition
They are sometimes affected by government change
There is limited profit motivationes.
They suffer from political interference
Slow decision making
Stock Exchange Market
A Stock Exchange is a market where large and small investors buy and sell shares and securities.It
provides trading facilities for stock brokers and traders to trade in stocks and other securities.It is
also referred to as a bourse.
65
Terminologies
The following are some terminologies used in the stock exchange:
Share - A Share is a unit of capital or ownership for quoted (listed) companies
Quoted company - A quoted company is an organization which is registered with the stock
exchange market thus obtaining permission to buy and sell securities through it.
Security - A security is a transferable instrument representing financial value for example shares
and bonds.
Bond - A bond is a unit of loan traded in the stock exchange. It has a maturity date and carries
fixed interest rate.
Role of stock exchange
The role of stock exchange include
–
–
–
–
–
Facilitates buying and selling of securities.
Provide opportunities for people to invest
It gauges the economic performance of a country.
Provide an opportunity for a company to sell new shares to the members of public.
Provide information which can be used to measure the performance of specific sectors
of companies.
TOPIC 4: AIDS TO TRADE
Introduction
Aids to trade are the activities which help in the smooth flow of trade. These activities make buying
& selling of goods easier. These help in removing various hindrances of trade, which arises in
production, & distribution of goods. The common aids to trade are; warehousing, insurance
transport, banking, communication and advertising.
Warehousing
Warehousing is one of the aids to trade. A warehouse is a large building where raw materials or
manufactured goods are stored. Goods have to be stored until they are required and
a warehouse provides storage facilities according to the type of products
Warehousing; This is the process of receiving goods into a warehouse, protecting such goods
against all types of hazards and releasing them to users when need arises for them
66
Warehouse: This is a building or a part of a building where goods are received and stored until
need arises for them. -Other terms used to refer to a warehouse are depot, a godown or a silo.
There are three distinct stages in warehousing process namely:



Receiving goods into a warehouse
Storing them
Releasing them to users
Importance of warehousing to Business












Steady/continuous flow of goods: Producers can produce and store goods awaiting demand
through warehousing e.g. agricultural products that are produced seasonally are made
available throughout the year
Stability in prices: Warehousing ensures that there is no surplus or shortage of goods. It
ensures that goods are stored when in plenty and released to the market as their need arises.
This helps to keep their prices fairly stable
Security: Warehousing ensures that goods are protected against physical damage and
adverse weather conditions. This also ensures that the quality of the goods is maintained
until they are demanded. Goods are also protected from loss through pilferage and theft.
Bridging the time lay/difference between production and consumption: many goods are
produced in anticipation of demand. Such goods must be stored until their demand arises
e.g. gumboots, umbrellas and sports equipment are needed seasonally but are manufactured
in advance and stored in a warehouse so as to be released to the users when need arises for
them.
Continuous/uninterrupted production schedules: Manufactures are able to buy raw
materials in large quantities and store them awaiting their need to arise. This prevents
interruption of the production process because of lack of raw materials Preparation of
goods for sale: While in the warehouse, goods can be prepared for sale e.g. they can be
blended, packed, graded or sorted out.
Sale of goods: Goods may be sold while still in the warehouse. If sold while still in a
bonded warehouse, duty passes to the buyer
Specialisation: Warehousing encourages specialization in production and distribution.
Producers concentrate on producing while distributors store the goods for sale to the
customers.
Unexpected demand can be met: The government collects agricultural goods e.g. cereals
and stores them as buffer stocks to be used in times of disaster or serious shortages.
Clearance of goods: Warehousing helps in clearance of goods i.e. goods entering the
country can be inspected by the customs officials.
Warehousing helps to improve the quality of goods e.g. goods like tobacco and wine
mature with time.
Warehousing enables buyers to inspect the goods before they buy them.
Wholesale warehouses may also operate as showrooms for traders.
Essentials of a warehouse
67
These are the features and resources a warehouse should have in order for it to function effectively.
These include:









Ideal location: A warehouse should be located at a suitable place to facilitate receipt and
issue of goods e.g. a manufactures warehouse should be located near his/her factory.
Proper building: A warehouse should have proper buildings which are suitable for
different types of goods to be stored.
Equipment: A warehouse should be equipped with appropriate facilities for handling
goods such as fork-lifts conveyer belts etc. It should also be well equipped with necessary
storage facilities e.g. provision of refrigerated or cold storage for perishable goods such as
meat and fruits.
Accessibility: A warehouse should be accessible to its users. It should therefore be linked
with good and appropriate transport system to facilitate movement of goods in and out of
the warehouse.
Safety and security: It should have/be fitted with safety equipment or facilities necessary
for protection of goods against damaged caused by such things like water, fire or sunshine
as well as for the protection of the personnel.
Communication: A warehouse should have a good communication network or system for
easy contact with its clients and suppliers
Qualified personnel: A warehouse should have well trained and efficient staff/personnel
for proper management and efficient functioning of the warehouse.
Recording system: There should be a proper recording system in a warehouse to ensure
that all movement of goods is properly monitored.
A warehouse should be spacious enough to allow easy movement and accumulation of
goods and personnel.
Types of warehouses
Warehouses can be broadly classified into three namely:
1. Private warehouses
2. Public warehouses
3. Bonded warehoused
Private warehouses- These are warehouses that are owned by private individuals/organizations
for the purpose of storing their own goods only. They include: Wholesalers warehouses, Producers
warehouses Retailers warehouses.
Public warehouses - These are warehouses owned by individuals or organizations who do
business by renting space. To those traders who are in need of storage facilities to store goods
temporarily. They have the following characteristics;


Are owned and operated by individuals or companies who do not use them for storing their
own goods.
Are open to any member of the public who wish to rent storing space for their goods
68





The customers pay on the basis of space rented and the period of time required to store the
goods.
They are often situated near terminals as airports, sea-ports and railway station and
industrial areas. This facilitates the movement of goods in and out of the warehouse.
The rent paid includes charges for insurance and other services i.e. goods are insured
against loss or damage as a result of fire or theft while they are still in the warehouse.
They provide other services apart from storing the goods e.g. grading,packaging,preparing
export samples, preparing market reports and clerical documents
Imported goods can be sold while they are still in the public warehouse. If such a
transaction takes place the goods may change ownership without being physically moved
out of the warehouse. This becomes possible if the importer has signed a document called
‘a warehouse-warrant’ (which is a negotiable instrument out of order), it is issued by the
new owner after the transaction has taken place.
Bonded warehouses - These are public warehouses for keeping imported goods until customs
duties have been paid against them.






They are mainly located at the points through which goods enter a country –
Imported goods are kept in this type of warehouses if the owner has not paid customs
duties. Such goods are said to be “goods under bond”or “goods in bond” –
Bonded warehouses are so called because the owners of such warehouses give a ‘bond’ to
the customs authorities i.e. a sum of money as guarantee that they will not release goods
from the warehouses until customs duties have been paid. –
The importer may withdraw the goods either in part or in full after the customs duties have
been paid for the goods he/she intends to collect. -If the goods are sold while still in a
bonded warehouse, the new owner of the goods pays the duty before taking them out of
the warehouse. –
If the goods re-exported to another country while still in a bonded warehouse, the importer
does not have to pay the customs duties e.g. an importer may import some goods and further
prepare them for sale inside a bonded warehouse and can then re-export them without
having paid the customs duties –
When the importer pays the duties to the customs officials, a “release warrant” is issued.
This is a document that enables the importer to have his/her goods released from a bonded
warehouse -Bonded warehouses have resident customs officials who monitor the
movement of goods in and out of a bonded warehouse.
Free warehouses - These are warehouses in which tax-free goods are kept awaiting sale or
collection by owners -Goods stored in these warehouses can be either locally produced, requiring
no taxation or imported goods for which customs duties have already been paid.
NOTE:
i) All warehouses apart from bonded warehouses are free warehouses since goods held in them
are not subject to control by customs authorities. This includes all private and public
warehouses
69
ii) Locally produced goods are stored in free warehouses since no custom duties are paid for
them.
Current Trends and emerging issues in warehousing
Warehousing technology is undergoing important changes in both building design and handling in
storage equipment. These may include;
i)
ii)
iii)
iv)
Warehousing design -In modern times, there is an increasing emphasis on high ceiling
warehouses to permit storage of more goods and to make it possible for the movement
of fork lift trucks and stuck-cranes
Handling of goods -Handling includes the steps involved in moving of goods to and
from storage. There is widespread use of modern machines in most warehouses such
as conveyer belts, tracks, forklifts and stuck cranes. The use of automated stucker
cranes which more by remote control in a fixed path on guide rails, is a new
development in warehousing –Computerization has also greatly helped in monitoring
the movement of stock in and out of storage. This has eased the handling, especially in
loading and unloading of goods.
Storage of goods -Storage is the condition of the goods at rest in their assigned areas
of the warehouse. Most warehouses are currently using storage racks that permit
replacement or retrieval of goods without disturbing neighbouring goods.
Environmental pollution -Goods that expired or spoilt while in the warehouse are
sometimes discarded in a manner or in areas that may cause pollution to the
environment e.g. expired chemicals are sometimes thrown into rivers and oceans
thereby endangering the marine life. -Other times they are burned causing air pollution
with toxic gases. Some goods when thrown on land are dangerous to human life -To
avoid the effects of improper disposal of expired or spoilt goods the warehouse owners
should come up with methods that are environmentally friendly such as recycling of
these goods. They should also be socially responsible for whatever goes out from their
warehouses.
Insurance
Insurance is contract between two parties (one the insurer and second the insured) whereby the
insurer agrees to undertake the risk of the insured in consideration of some amount known as
premium and in return promises to compensate a fixed sum of money to the insured party on
happening of an uncertain event like DEATH.
In case of survival the insurer has to pay after the expiry of a certain period in case of life insurance
or to indemnify the insured party on happening of an uncertain event in case of general insurance.
In simple words insurance is sharing collective responsibility by a large number of people to
compensate few people in case of crises Managing the collective responsibility (pooling persons)
the insurance companies work as trustee to take care of such collective responsibility and the
70
insurance regulations provide specific guidelines to ensure the insurance functions due serve the
society as per the expectations of pooling members.
Nature of Insurance:
1. By nature insurance is a devise of sharing risk by large number of people among the few who
are exposed to risk by one or the other reason.
2. If a large number of subscribers to insurance serve the purpose of compensation to few among
them exposed to uncertain risks appears as a co-operative look.
3. Valuation of risk is determined as per predefined terms and conditions of the insurance policies.
4. Insurance provides facility of financial help in case of contingency.
5. However it depends on the value of insurance for which payment is made in case of contingency.
This provides basis of the amount to be paid.
6. Insurance is a policy regulated under laws and therefore the amount of insurance can neither be
paid as gambling nor as charity.
Basic Types of Insurance:
1. Credit Insurance:
Credit insurance means of insuring the payment of commercial debts against the risk of nonpayment by the borrower because of his insolvency or for some other reason.
2. Group Insurance:
Group Insurance is insurance or life insurance obtained by a person as a member of a group, such
as a professional organization, rather than as an individual, because in this way better terms can
often be obtained. This is because there is an administrative saving for the company, and
sometimes also because a particular group has a better life expectancy than people in general.
3. Life Insurance:
Life Insurance/Assurance is a contract by which the insurer/assuror undertakes to pay the person
for whose benefit the cover is effected, or to his personal representative, a certain sum of money
on the happening of a given event, or on the death of the person whose life is assured.
4. Marine Insurance:
It is contract by which underwriters engage to indemnify the owner of a ship, cargo or fright against
losses from certain perils or sea risks to which their ship or cargo may be exposed. In case of
marine insurance another type of insurance is prevalent known as Mutual Insurance.
This type of insurance is provided by ship-owners throughout the world who have clubbed together
in various mutual protection and indemnity associations to cover hazards which are not covered
by marine policies, which have standard clauses leaving a number of contingencies un-provided
71
for, or only partially provided for. The liabilities of mutual insurance company are periodically
divided amongst the subscribers in proportion to the tonnage they have entered with the company.
5. Fire Insurance:
Is a contract of indemnity by which an insurance company undertakes to make good any damage
or loss by fire to buildings or property during a specific time.
Need of Insurance:
Life of everyone is full uncertainties. Nobody knows what is going to happen in next moment.
This element of unknown situation always hounds around the mind of a person and keeps him
worried to think as to what will happen in future in case of any mishappening. This worry is to
think about the future of the person and his family. Among a number of worries the main and very
important is economic uncertainty of himself or his family.
If anyone is satisfied with his present earnings, he also thinks whether or not his present day
capacity of earning will last for long. Perhaps there remains an iota of fear that it may not last for
the long. On this very point everyone thinks about to secure his future.
Under the impression of securing future one thinks about the adoption of saving and investment
plans. . He not only thinks about himself but also about his family. In case of any miss happening
everyone is worried as to what shall happen to his family.
Everyone knows that there is no substitute in case of death of an earning member of the family
and no compensation is able to fulfil the gap in case of death of the earning member. But for
supporting economically upto some extant the method adopted is known as insurance.
The life insurance is such a cover that provides security to the family of insured in case of his
death. Life Insurance in such cases provides some solutions to the worries of family members.
Once upon a time it was very difficult to convince people for getting an insurance cover but today
it has become a need of the day. Today the life insurance does not cover the risk of life only but
also provides many added benefits also in the field of saving and investments.
People need insurance because the unexpected does happen. Whether it is a fire, a car wreck,
illness or a death, the financial consequences can be devastating if you are uninsured. Insurance
helps people have peace of mind when life’s unexpected events happen.
Characteristics of Insurance:
One can easily differentiate these characters of insurance as below:
1. Any Insurance is a contract between insurer and insured for compensating the losses.
2. For any insurances contract not only premium is charged but it also obligatory to pay the
premium in time.
3. Payment to insured in the event of loss as per the agreement and terms of policy purchased
by the insured.
4. Insurance is a simple contract based on good faith.
72
5. Insurance contract is one that provides benefits to both the insurer as well as insured. In other
words it is a contract for mutual benefits.
6. All other contracts are based on present day situation whereas an insurance contract is one for
compensating future losses.
7. The insurance concept being based on pooling funds by many and distributing among few for
their losses is a social security also.
Working of Insurance:
The insurance is nothing than a group of people feeling similar kind of risk come together and
decide to make contribution towards formation of pool of funds to be used in case of crises arisen
out of uncertain happenings.
In the eventuality of happening an event of loss on account of any risk (for which the pool was
created) the member of the group is compensated out of the same pool of funds. Contribution to
the pool is made by a group people sharing common risk and collected by the insurance companies
which is popularly known as “premiums”.
The insurance can be briefly known as:
Insurance is a contractual agreement in law and business that provides compensation by an insurer
(insurance company) to an insured party (person or any company) if or when a particular situation
occurs in particular circumstances. Such state of affairs possibly consist of death or personal
grievance, mishap, joblessness or old age, lose control to of or harm to material goods, or such a
number of instances that can be money-wise compensated.
Several citizens who are uncovered to the threat of happening of an unpredicted incident make a
payment of relatively small amount of money to the insurer, by which the insurer can conducts its
operations by amassing those small amounts and create a fund that is used to compensate those
insured who in reality undergo from such an occurrence.
The contributions of the insured persons are called premiums. An agreement of cover is added in
a policy that specifies the conditions under which the insurer agrees to assure the policyholder for
loss in contemplation of the payment of a stated payment or payments.
Functions of Insurance:
classification of insurance functions as follows:
1) Primary Functions:
(i) Protection:
The Primary function of Insurance is as we think about any insurance. One feels insured and
contended about future risks only because one is sure to be compensated for any loss of future. It
is therefore Primary function of Insurance to provide protection against future risks, accidents and
uncertainty. No insurance can arrest the risk from taking place, no insurance can prevent future
miss happenings, but can certainly provide some cover for the losses of risk. In real terms Insurance
is a protective cover against economic loss by sharing the risk with others, (the pooling members).
73
(ii) Collective Risk:
The Insurance policies whether life insurance or general insurance are purchased by lacs of people.
But all of them are not subjected to losses every year. It is only a few or negligible who become
victim of some miss happenings. In other word lacs of people contribute towards insurance and
only a few people need its cover. It is therefore clear that insurance is a method by means of which
a few losses are shared by a large number of people. All the people insured contribute by paying
annual premium towards a fund out of which the persons exposed to risks are paid as per the terms
and conditions of the insurance policy purchased by them.
(iii) Assessment of Risk:
What is volume of risk is determined by the Insurance companies by assessing diverse factors that
give rise to risk. The rate of premium is also decided on the basis of risk involved.
(iv) Certainty:
Unless we are insured we remain uncertain about our capability to meet the future risks. But once
we are insured it converts our uncertainty into certainty of bearing future risks.
2) Secondary Functions:
(i) Prevention of losses:
In simple words we can say precautions are better than the treatment. It is better instead of seeking
the help of insurance if one adopts such measure which prevent the losses. Every Insurance
prescribes to take preventive measures against losses. Such as installation of safety devices like
automatic sparkler or alarm system, CCTV system etc.
If such type of preventive measure exist there shall be lower rate of premium for getting insurance
cover against risks. Prevention of losses is to adopt preventive measures against unexpected losses.
For example while driving a two wheeler we use helmets only because we take preventive
measures to avoid any accidental loss. It is not certain that an accident is going to happen even
than a preventive measure is adopted.
If an insured take such steps he saves a lot in form of the amount of premium required to be paid.
If prevention techniques have been adopted and applied the Insurance company may rate the risk
at lower level and shall prescribe a lower rate of premium otherwise a higher rate of premium shall
be charged.
(ii) Covering Larger Risks with small capital:
Every businessman is always worried about the security of his business. After making large
investments in the business it is natural to take care of the business investments. There are two
alternatives first one is that the concerned businessman should invest out of his own pocket to
create a proper security. The second method is to get his business activities insured.
74
In such a case the insurance relives a businessman from security investments by paying small
amount in the shape of premium against larger risks and uncertainties. This assuages the
businessman from security investments for a small amount of premium against larger losses.
(iii) Helps in development of larger Industries:
Larger Industries are prone to more risks in their setting up. The large industries have diversified
fields of functioning where one field sometimes has no relation with the other field of the same
industry. The activities of large industries are diversified that it goes above any planning to cover
every type of risk.
It is only insurance that comes not only to help these large industries against possible risk but also
help them to grow. It becomes possible only because insurance provides an opportunity to develop
to those larger industries which have more risks in their setting ups.
3) Other Functions:
(i) Insurance is a tool used for saving and investments:
By purchasing any Insurance Policy it becomes completion by the purchaser to make payment of
the insurance policy. This completion is blessing in disguise. Most of the policy buyers particularly
individuals do not know the purpose of payment of premium. They know only one thing that
paying premium is compulsory for them. The fact is otherwise true.
Once an insurance policy is purchased it assume the compulsory way of savings. Not only savings
but such funds collected by insurance companies are further invested to the benefit of insured.
Because it is compulsory it restricts the unnecessary expenses by the insured’s on one hand and on
the other hand insurance provides them the opportunity to avail Income tax exemption for the
amount paid as insurance premium. Some prudent people take up insurance as good investment
option also.
Such savings help growth in national economy.
(ii) It is one of sources to earn Foreign Exchange:
The business of insurance has crossed the national borders of any country. While traveling by Air
one needs aviation insurance. While on board at sea whether humans or cargo it needs marine
insurance which is also spread over across the boarders of any country. In simple words the
insurance has become an international business and is necessary also.
It being an international business any country is free to earn foreign exchange as much as per the
polices of insurance devised in a way to attract more and more foreign business. It is a good source
of earning foreign exchange for any country.
(iii) Risk Free Trade:
Insurance promotes export insurance, which makes the foreign trade risk free with the help of
different types of polices under marine insurance cover.
75
(iv) Subrogation:
In its most common usage refers to circumstances in which an insurance company tries to recoup
expenses for a claim it paid out when another party should have been responsible for paying at
least a portion of that claim.
Ongoing through the functions of insurance there appear that the business of insurance has
inherited certain character sticks as well.
Transport
Transport is the physical movement of people and goods from one place to another. It helps bridge
the gap between producers and consumers hence creating place utility.
Importance of Transport to Business










Bridging the gap between producers and consumers/ linking consumers to producers Transport links consumers to producers which enable the consumers to obtain the goods they
need.
Employment creation - Transport helps in solving unemployment problem by creating job
opportunities. For example, people may be employed as drivers, pilots, mechanics and road
constructors.
Promotes specialization -Transport enables people to specialize in jobs they are best at. For
example; producers would concentrate in production only while other people carry out
distribution.
Making goods and services more useful-Through transport goods are moved from a place
where they are least required to a place where they are most required thereby making them
more useful.
Improving people’s standard of living-It enables consumers to get a variety of goods and
services thereby improving the standards of living.
Availing a wide market for products-It helps producers to widen the markets for their
products by enabling them access to areas they would otherwise not have accessed
Increased production/ facilitates mass production-Due to the wider market created through
transport, producers are able to increase the volume of goods produced.
Avoiding wastage -Transport makes it possible for surplus goods to be disposed of by taking
them to areas where they are required. Perishable goods such as flowers, fruits and vegetables
can also be transported fast hence minimizing/ avoiding wastage.
Promoting development of industries -Through transport, raw materials can be taken to
manufacturing industries and also finished goods to the market.
Similarly, it promotes development of service industries such as tourism. Adds value to
goods and services- creates utility in goods by moving them from the point of production to
where they are needed thereby adding their value.
76

Leads to the opening of new markets - Goods and services can be taken to new areas with
ease. It facilitates the movement of labour- people can easily move from where they stay to
where they work.
ESSENTIAL ELEMENTS OF TRANSPORT
In order for a transport system to function efficiently it should have certain basic elements. These
elements are:
1.
2.
3.
4.
Unit(S) of carriage
Methods of propulsion
Ways
Terminals(terminus)
A) Unit(S) of carriage - This refers to anything i.e. vessel that is used to transport goods and
people from one place to another. Units of carriage include: ships, trains, aeroplanes, motor
vehicles, bicycles and carts. Units of carriage are also referred to as means of transport.
B) Methods of propulsion - This is the driving force (source of power) that makes a unit of
carriage to move.The power for most vessels may be petroleum products, electricity, human force
or animal power.
C) Ways - It refers to either the route or path passes by the vessel. The route can be on land, on
water or through air. Examples of ways are roads, railways, paths, canals, seaways and airways.
The ways can be classified into either natural ways or manmade ways.


Natural ways-As the name suggests, natural ways are the ways that are provided by nature.
They are therefore free to acquire. They include airways and seaways.
Man-made ways-These are ways that are made available by human being. They include
roads, canals and railways. Manmade ways are usually expensive to construct and
maintain.
D) Terminals (terminuses) - The vessel used to carry goods and people starts from one destination
and ends up at another. At these destinations the loading and off-loading take place respectively.
The loading and off-loading places are referred to as terminals or terminus. Examples of
terminuses are bus stations, airports and seaports.
MODES OF TRANSPORT
Mode refers to the manner in which transport is carried out. There are three modes of transport
namely:
1.
2.
3.
4.
Land transport
Water transport
Air transport
Containerization
77
1. Land transport - This mode of transport involves movement of goods and people using units
of carriage that move on dry land. The various means under this mode includes:
a) Human Porterage - This involves human beings carrying goods on their heads, shoulders or
backs. Human Porterage as a means of transport is the oldest kind of transport and is still very
common in our society. The means is suitable for transporting light luggage over short distances.
It is also appropriate where other means of transport are not available or convenient.
Advantages of Human Porterage






Could be the only means of transport available
Compliments other means of transport
Flexible as it has no fixed time table or routes
May be a cheap means compared to other means of transport
Readily available when required
Convenient over short distances
Disadvantages of human Porterage





Not suitable for long distances
They add onto congestion on roads
Not suitable for transporting heavy and bulky goods
It is relatively slow
Relies on human energy which is exhaustible
b) Carts - Carts are open vessels usually on two or four wheels that are pushed or pulled by either
human being or animals such as oxen and donkeys. The carts pushed or pulled by human beings
are referred to as hand carts or mikokoteni. The ones pulled by animals, on the other hand, are
called animal driven carts. Carts are used to carry relatively large quantities compared to human
porterage. Like human porterage, they are not suitable for long distances. Types of goods that are
transported using this means include, agricultural produce, water and animal feeds.
Advantages of carts







Compliments other means of transport
Relatively cheap to hire
Initial buying and maintenance cost is low
Appropriate in remote areas where other means are not available
Readily available for hire
Can carry fairly heavier and bulky goods
Convenient for transporting goods over short distances
Disadvantages of carts



May not be suitable for transporting heavy and bulky goods
Cause traffic jams on roads leading to congestion and accidents
Not suitable for transporting goods over long distances
78
c) Vehicles - These are means (units of carriage) of transport that ferry goods and people on roads.
Vehicles are the most commonly used means of transport. Vehicles are either passenger or goods
carriers. Passenger carriers may be buses, matatus, taxis and private cars while goods are
transported using Lorries, pick-ups, tankers and trailers. Vehicles are expensive to acquire and
maintain. The convenience of vehicles may depend on the nature of the road on which they travel.
Some roads are impassible especially when it rains while others are usable throughout the year (all
weather roads).
Of special concern in road transport is the matatus. These are privately owned passenger vehicles
which were introduced to supplement the existing mainstream transport companies that were
inadequate at independence. They got their name from the amount of fare they used to charge
originally, that is, mapeni matatu. The operators have to obtain the relevant documents such as
insurance cover in order to be allowed to operate. Their owners may form associations which take
care of their interests along given routes or in certain areas.
Advantages of matatus






They supplement regular bus companies, especially in remote areas where they are the only
means. They fill up faster than buses hence save time
They are more flexible since they can change routes easily depending on demand
They reach out into the interior of rural areas where big buses cannot access
They are more flexible with the fares they charge
They are easier to hire as most of them are readily available
They are cheaper to acquire as compared to buses
Disadvantages of matatus








Some matatus are poorly maintained to the extent of being unroadworthy
Most drivers are reckless as they rush to compete for customers.
They pick or drop passengers anywhere
In some cases, touts use impolite language when dealing with passengers
They may cause noise pollution such as unnecessary hooting and loud music
They may cause congestion in towns unnecessarily because of careless driving and parking
Uncalled for sudden increase in fares at peak hours, during the night and on public holidays
Their operation is concentrated on peak hours, rarely operating at night.
They at times unexpectedly change their route hence causing breach of contract.
Advantages of vehicles






Most readily available means of transport
Relatively fast compared to carts and human Porterage
Relatively cheaper over short distances
Flexible as it can offer door to door service
Vehicles may be available for transporting special goods
Roads are widely spread thereby making many areas accessible.
79
Disadvantages of vehicles





Acquisition and maintenance costs are high
May not be suitable for transporting heavy and bulky goods over long distances as
compared to railways
Traffic jams in roads may cause delays
Vehicle transport is prone to accidents which may lead to loss of goods and life
Some roads may be impassible especially during the rainy seasons.
d) Trains
Trains are vessels that transport goods and people on rails hence the term railways. The terminuses
of trains are the railways stations. Therefore; the goods to be transported by trains have to be taken
to the railway station. Railway transport is suitable for heavy and bulky goods as well as
passengers. There are two types of trains: cargo and passenger train.
Advantages of Trains





Relatively secure as cases of theft and accidents are rare –
Enables a transporter to plan for the transport of his/her goods as trains follow a fixed
timetable
Economical for transporting heavy and bulky goods over a long distance
-Trains may have facilities for carrying special types of goods e.g. gas, petrol and vehicles
-Where shunting facilities are available trains may deliver goods up to or from the owner’s
premises
Disadvantages of Trains






-Not flexible as trains follow a strict time table
-Railway lines are expensive to construct and to maintain
-Not all areas are served by railway lines
-Not suitable for transporting urgently required or perishable goods as it is slow
-Unsuitable for transporting goods over short distances
-Trains are expensive to acquire and maintain
e) Pipeline Transport
This is the movement of liquids and gases from one place to another through a pipe. Products
transported through pipes include water, gases, petrol and diesel. Solids that cannot be dissolved
or damaged by water may also be transported through pipes as suspension. Examples coffee berries
from machines to drying places. The pipeline is both a vessel and a way. Products flow by the
force of gravity or pressure from an original station. If the original terminal is at a higher level than
the receiving terminal, the force of gravity is adequate to move the product. But if the receiving
terminal is at a higher level than the original than the originating terminal, then power is required
to pump the product uphill. For example, petroleum from Mombasa which is at sea level needs
pressure to pump it to all the receiving stations.
80
Advantages of pipeline Transport
-It is labour saving as it requires minimal manpower
-It is environmentally friendly since it is free of noise or smoke
-It may be constructed in areas where it is difficult to construct roads or railway lines. For example,
over rugged terrain
-Pipelines allow continuous flow of the goods being transported
-It ensures that road damage is reduced as the number of tankers is reduced on roads
-It helps to reduce accidents that may be caused by tankers on roads
-It reduces delays arising from congestion on roads
-Maintenance costs are reduced as it relies on gravitational force and booster stations along the
way
-It may not be affected by adverse weather conditions Disadvantages of pipeline Transport
-A leakage not detected in good time may lead to high losses
-Initial construction cost is high
-Accidents leakages may lead to environmental pollution
-It is unidirectional that is, travels only in one direction
-It can transport only one product at a time
-It is not flexible since once a line is laid, it cannot be adjusted according to transport patterns or
demands
-Generates comparatively fewer job opportunities as it is capital intensive
-It is vulnerable to sabotage by enemies. -Once laid, it is difficult to re route or re locate.
2. Water Transport
It is a mode of transport where the units of carriage transport goods and people on water. Water in
this case includes; navigable rivers, lakes, seas and oceans. The means of transport which are the
units of carriage or vessels using this mode include; ships, dhows, boats, steamers and ferries.
Water transport can be divided into inland waterways and sea transport. a) Inland waterways This
is transport carried out on lakes, rivers and inland canals.
The Lake Victoria facilitates transport among the three east African countries i.e. Kenya, Uganda
and Tanzania. Ferries also connect the mainland to islands such as Rusinga Islands, found in Lake
Victoria. Water hyacinth has however been a threat to transport on the lake.
81
Most rivers in Kenya are not navigable due to reasons such as: Too small Presence of rapids and
waterfalls Too shallow Most are seasonal High gradient b) Sea Transport This is where goods and
people are transported in seas and oceans.
All types of water vessels may be used in sea transport. Sea transport is important as it connects
continents of the world thereby facilitating international trade.
Kilindini in Mombasa provides a good natural harbor facilitating sea transport between Kenya and
other countries of the world. Ferries also connect the island of Mombasa and the mainland.
Types of Water vessels
Ships - A ship is a large vessel that transports people or goods through water. Their sizes however
vary depending on quantity of goods and passengers they carry. Ships help in connecting countries
or places which borders the sea. They load and offload in terminals referred to as harbors found at
sea ports. For example, the Kilindini harbor is found in the port of Mombasa. Ships that transport
people are referred to as passenger ship while those that transport goods are referred to as cargo
ships.
Cargo ships are convenient for carrying heavy and bulky goods. Ships may also be classified as
either liners or tramps.
Liners - These are ships that are owned and operated by shipping companies called conferences.
Each conference is responsible for specifying the route on which each liner would operate the rates
to be charged and setting the rules and regulations to be followed by the members.
Characteristics of liners




Have fixed routes -Follow a fixed timetable
Charges are fixed
Call at specified ports along the route at specified intervals
Travel at regular intervals.
Tramps - These are ships that do not follow a regular route or time table. Their routes therefore
depend on demand. During times when demand is high, they charge higher rates and when demand
is low they lower their rates. Tramps can therefore be likened to matatus. Tramps may be owned
by either individuals or firms.
Characteristics of tramps
-Do not have a fixed rate. They therefore move to wherever there are goods or passengers to carry.
-Have no set timetables. They therefore move according to demand
-Their fares change according to demand.
-Their travelling patterns are irregular and therefore cannot be relied upon
NB: Liners and tramps owners are in constant competition business. Traders therefore need to
choose the type of ships to hire. Liners are however more popular than tramps among traders
82
because of their reliability. When a trader hires an entire ship to transport goods to a given
destination, he/she and the ship owner signs a document called a charter party. This document
shows the terms and conditions under which the goods would be transported. Other information
included in the agreement are destination, nature of the goods and freight charges. When the ship
is hired to carry goods for a given journey the document signed is referred to as voyage charter.
On the other hand, if the ship is hired to transport goods for a given period of time, the document
signed is called time charter. Ships may be specially built to carry special commodities. These may
include tankers specially built to transport petroleum products and other liquids. Refrigerated ships
may also be available to transport perishable commodities such as meat, fish and fruits. Boats and
Ferries These are water vessels used in transporting goods and people over short distances. They
are therefore found in both inland water transport and also the sea transport.e.g the Likoni ferry in
Mombasa carries people from and to the island of Mombasa and the main land.
Advantages of water transport








-Sea transport is economical to the owner as the number of employees to carriage volume
ratio is less compared to road transport
-Suited for transporting heavy and bulky goods
-It is cheap as the way is natural and free
-Connects countries of the world which border the sea
-Special types of ships are available for transporting goods
-Large volume can be carried thereby reducing cost per unit
-Not affected by traffic congestion -Some ships can be very luxurious for passengers and
may even provide swimming pools.
-At the port/dock, there are many depots for storage of goods.
Disadvantages of water transport





Sea-sickness, sea-pirates and storms may occur
They are slow therefore not suitable for transporting perishable and urgently required
goods -It is expensive to construct and maintain artificial harbors
Unfavorable weather conditions may affect water transport
Sea transport is not accessible to land locked countries
Lack of loading and off-loading facilities may lead to delay
Cost of acquiring and maintaining ships is high.
Theft of cargo and other valuables may occur during loading and offloading.
4. Air Transport
This refers to the movement of goods, people and documents by aircrafts. Aircrafts/ aeroplanes
are the units of carriage and air the way. The terminals include airports and airstrips. Aeroplanes
are fast compared to other means of transport i.e. they are the fastest means of transport. They are
therefore suitable for transporting urgently required goods like drugs and perishable goods Such
as flowers over long distances.
83
Aircrafts may be classified as either passenger planes or cargo planes. Passenger planes transport
people from one place to another. On the other hand, cargo planes transport light cargo to the
required destinations. Aeroplanes may be fitted with special facilities for handling special goods.
Aeroplanes are expensive to acquire and to maintain. Their operations may also be affected by
weather conditions.
Advantages of Air Transport
-There is less handling of goods on the way since aeroplanes may move direct to the final
destinations.
-The way does not require construction or maintenance as it is natural and free.
-Planes can move through places where other means cannot, such as over the earth poles and across
high mountains/ planes are not hampered by physical barriers.
-Have efficient interconnections between airlines all over the world which makes it convenient Suitable for long distance travelers especially from one continent to another
-Very fast therefore suitable for transporting perishable and urgently required goods.
-Chartered planes can be used to reach remote areas.
-The movement of aircrafts is smooth therefore suitable for transporting fragile goods such as
glassware and eggs.
-Passengers are given the highest degree of comfort and personal attention making it the most
comfortable means of transport.
Disadvantages of Air Transport
-
-
Causes noise pollution
Air fields are not available in all places
Cannot be conveniently used to carry heavy and bulky goods
Expensive to acquire and maintain aircrafts
Requires highly trained manpower e.g. air traffic controllers, pilots e. t. c
Unfavorable weather conditions such as fog, mist and heavy rains may cause delay
It is an expensive means of transport in terms of freight charges
Not suitable for transporting inflammable goods such as cooking gas and petrol
In case of accidents results are catastrophic/ accidents are rare but fatal.
Has limited carrying capacity that should not be exceeded.
It is not flexible.
Most airfields/ terminals are located some distance away from town/ city centers and
therefore require transport or railway links that are affected by jams occasionally causing
delays.
Recent hijackings by terrorists have made air transport an insecure means especially for
transporting valuables.
4. Containerization
84
This is a recent development in transport. It refers to the packaging of goods in standardized ‘box
like’ containers designed for use in transporting cargo. The containers are mainly made of metal
though a few are made of wood. They can either be hired or bought from firms that provide them.
The hired containers are returnable to the owner after the goods have been transported.
Containers are designed in a way appropriate to transport goods by ships, train, lorry or by air. To
safeguard the goods against risks such as theft and unfavorable weather conditions the containers
are sealed immediately after goods have been packed.
The sealed containers are then transported up to the final destination where they are off-loaded.
The consignee can then break the seal. Goods can be transported in containers as Full Container
Load (F.C.L) or as Less Container Load (L.C.L).Full container load applies where the container is
filled with goods belonging to one person. In FCL, goods are delivered to the consignee intact. On
the other hand, less than container load applies where a container is filled with goods belonging to
several consignors. This may be the case where a single consigner does not have enough goods to
fill a container. When such a container reaches the destination, it is opened and the various
consignees take their goods.
There are special handling facilities for loading and offloading containers onto and from the units
of carriage. Apart from the container depot at Mombasa, Kenya Ports Authority (K.P.A) has
established inland container depots referred dry ports. An example of a dry port is found at
Embakasi in Nairobi. The establishment of dry ports aims at relieving congestion at the sea port.
It also aims at making handling of cargo easier and efficient for inland importers and exporters.
When containers are off loaded from ships at Mombasa, they are loaded into special container
trains called railtainer which transports them by railway to the inland container depot at Embakasi.
Containers can also be transported by specially designed trucks between the ports or from the port
to consumer’s destination.
Advantages of containerization
-Minimizes the risks of loss or damage of goods as containers are sealed at source
-Containers are lifted with devices which make movement and handling easy
-Saves time and labour in loading and off-loading due to use of machines
-Containers sealed at source in presence of customs officials may not be opened until they reach
their final destination. This reduces delay.
-Special containers are available for goods requiring special attention like chemicals.
-Insurance costs are relatively low as risks are less
-Space is saved when containers are used as opposed to when individual items are packed in the
carrier.
-Can carry large quantities of cargo if packed well.
-Containers are tough structure, which offer protection to sensitive and fragile goods.
85
Disadvantages of containerization
-
-They are expensive and this increases the cost of transporting goods
-Contributes to unemployment since it is capital intensive
-Not suitable for transporting small quantities of goods.
-Requires special handling equipment which may be expensive
-May not be suitable for goods with irregular shapes.
-Training labour force is long and expensive.
-They may be used to smuggle illegal goods.
-The large trucks used on the road increase road damage and may increase accidents.
5. Pipeline
This is movement of a commodity through pipes from one place to another. The pipes are used as
means of transport.
Advantages of pipeline transport
Advantages of pipeline transport includes:
-
It reduces congestion on roads.
It is suitable for transporting highly combustible products.
It is not affected by adverse weather conditions.
Disadvantages of pipeline transport
-
The disadvantages of pipeline transport includes:
The Initial construction costs are high. It is vulnerable to sabotage.
Only limited types of products can be transported through pipes
Factors that influence the choice of appropriate means of transport Cost;
The cost of transporting a good should be reasonable; except where other factors should be
considered such as need for quick delivery.
Otherwise should be proportional to the value of goods transported.
Nature of goods; - The nature of goods should be considered when choosing a means of transport.
For example, perishable goods require a fast means. Similarly, heavy and bulky goods require a
means of transport convenient for such goods e.g. trains and ship.
Reliability;- The means chosen should be able to deliver the goods to the required place at the
right time and in the right form. Urgency; For goods that are urgently required, the fastest means
available should be chosen.
Safety and Security:- The means chosen should ensure that the goods on transit are secure against
loss, theft or physical damages.
86
Distance; - Some means of transport are suitable for long distances while others are suitable for
short distances. If goods are to be transported for long distances, air, sea or railway transport would
be appropriate, otherwise roads would be suitable for short distances.
Availability of means; - The means of transport to be selected should be based on its availability.
For example, where there is only one means of transport, it would be the only one to be chosen.
Flexibility; - This is the ability of means of transport to be manipulated to suit the convenience of
the transporter. Where flexibility is required, then the means that would provide such should be
chosen. For example a matatu is usually more flexible than an aeroplane.
Terminals;- Some means of transport may have their terminals near the transporter than others. In
this case, the transporter should choose the means whose terminals are conveniently accessible to
facilitate loading and offloading of goods.
Value of goods to be transported - goods of high value require special handling and high security
during transportation.
Trends in transport
Pipeline and containerization
Electric trains are replacing diesel engines
Underground tunnels for trains are being used to ease congestion on the surface
Dual-carriage roads are being developed in various parts to ease congestion and minimize
accidents
Development of planes with larger carrying capacity and speed is a major feature in the transport
industry
Use of bicycles commonly known as boda boda are a common feature in towns, bus terminals and
rural areas, supplementing other means of transport to ferry people and cargo to their destinations.
The bicycles are being modified to make them more convenient. It is not unusual to find a bicycle
(boda boda) which has been fitted with facilities such as: Motors to increase their speed and reduce
energy applied by the cyclist. Music systems to entertain passengers and More comfortable seats.
Motor cycles are also being used as bodabodas in various areas. Similarly, the three wheeled
vehicles commonly known as ‘Tuk Tuk’ is a major feature in cities and most towns. Private
personal vehicles with less carrying capacity e.g. four-seater vehicles are being used as matatus.
The vehicles are convenient to the passengers as they:
-
Fill up within a shorter time compared to larger vehicles
May accommodate each of the customers interests.
Passenger vehicles are being fitted with radios, music systems and videos to entertain
customers as they travel. However, some forms of entertainment may not be conducive to
all.
87
Read more at: https://www.ebookskenya.com/transport-form-2-business-studies-notes/
BANKING
This is the process by which banks accept deposit from the public for safe keeping and lending out
the deposits in form of loans. A bank is a financial institution that accepts money deposits from
the public for safe keeping and lending out in terms of loans.
COMMERCIAL BANKS
These are financial institutions that offer banking services with a profit motive. Their activities are
regulated by the Central bank.
FUNCTIONS OF COMMERCIAL BANKS
a) Accepting deposits: They accept deposit from members of the public inform of current
accounts, savings account and fixed deposit accounts. Such accounts help individuals to keep
money safely.
b) Provision of safe means of payments: They provide safe and reliable means of payment such
as cheques, bank drafts, credit transfers, electronic funds transfers etc.
c) Provision of loan facilities: They provide loans to members in form of short term and long
term. These loans are repayable with interests thus income to the banks.
d) Facilitates foreign exchange payments: They provide foreign exchange that is used in
international trade. They also make payments on behalf of their customers.
e) Provision of safe keeping of valuables: They provide security for valuables to their customers
at a fee
f) Discounting bills of exchange: This is process by which a bank accepts bills of exchange and
promissory notes from its customers in exchange of cash less than the face value of the bill
or note.
g) Provision of financial information: - They advise their clients on financial matters affecting
their businesses such as investment option and wise use of loans.
h) Money transfer: - They provide varied, safe and reliable means of money transfer. Such
means include cheques, standing orders, credit transfers, bank drafts, letters of credit, credit
cards, travelers’ cheques etc.
i) Act as guarantors and referees: - They act as guarantors to their customers who want to
acquire credit facilities from other financial institutions.
j) Act as intermediaries: - They act as a link between the savers and borrowers.
k) Credit creation: - This is the process of creating money from the customer deposits through
lending.
l) Provision of trusteeship: - They can manage a business on behalf of the client especially if
the client does not have managerial skills. They can also manage the assets of the deceased
client if there was no will.
Non- Bank Financial Institutions
88
These are financial institutions that offer finances for development purposes to individuals and
organizations. These institutions address themselves to the needs of specific sectors in the
economy. They offer the finances inform of either short term or long term loans.
The following are some of the non-bank financial institutions in Kenya 
1.
2.
3.
4.
5.
6.
7.
8.
Development banks 
Building societies 
Finance houses 
Savings and Credit Co-operative Societies 
Micro finance organizations 
Insurance companies 
Pension Funds’ Organizations 
Hire Purchase Firms
Housing Finance Companies
They are mainly formed to finance housing activities that is they either put up houses and sell to
the individuals or offer mortgage finance to those who wish to put up their own houses. They
includes
-
Housing Finance Corporation of Kenya (HFCK),
National Housing Corporation (NHC)
Development Finance Institutions
These are development banks which are formed mainly to provide medium term and long term
finances, especially to the manufacturing sector. They perform the following functions 
Financing people who wishes to start either commercial of industrial enterprises, as well as the
existing enterprises in the above sectors for expansion 
Offering training services through seminars and workshops to equip the entrepreneurs’ with the
relevant skill in industrial and commercial sectors 
Offer advisory services to those people wanting to start or expand their businesses 
Acting as guarantors to people wishing to take loan from other lending institutions to help them
expand their business They includes the following Kenya Industrial Estates (KIE),
-
Development Finance Company of Kenya (DFCK),
Industrial Development Bank (IDB),
Industrial and Commercial Development Corporation (ICDC)
Savings and Credit Co-operative societies
These are co-operative societies that are formed to enable members save and obtain loans at most
conveniently and favorable conditions. They are formed by those engaged in similar activities.
They includes:
89



Mwalimu Savings and Credit Co-operative Societies;
Afya Savings and Credit societies;
Harambee Savings and Credit Societies
Insurance companies
These are companies that assist in creating confidence and sense of security to their clients as well
as offering financial assistance to their clients. Their functions include; 
Enable the policy holders to save through their schemes 
Provide finances to their policy holders in form of loans 
Offer guarantee services to the policy holders wishing to obtain loans from other non-bank
financial institutions 
Provide advisory services to the policy holders on security matters 
Provide finances to meet the expenses in cases of loans
They includes the following: Stallion Insurance Company; Madison insurance company; Blue
shield insurance company Micro Finance Companies These are financial companies formed to
provide small scale and medium size enterprises with finance.
They also carry out the following functions
 Offer advisory services to their clients in matters such as business opportunities available and
how to operate them.
 Encourage the clients to carry out business activities by offering loans to them
 They encourage the savings by advancing loans to the individual member of a certain group
 They supervise, monitor and advise those whom they have given loans
 They includes the following: Kenya Women finance Trust (KWFT), Faulu Kenya
Agricultural Finance Houses
These are institutions formed to promote the agricultural sector. They carry out the following 
Giving loans to farmers 
Offering supervisory and training services to the loaned farmer 
Offering technical and professional advice to loaned farmer 
Carry research and come up with better ways and means of agricultural sector 
Coming up with projects that would open up new areas for agriculture
Differences between commercial banks and non-bank financial institutions
90
No. Commercial Banks
a)
Offer all types of accounts
b)
c)
Provide both short term and medium term
finances to their customers
Their finance is not restricted to any sector
d)
May offer foreign exchange services
e)
f)
Their finance is mainly for working capital
Participate in clearing house as they offer
cheque
Offer facilities for safe keeping of valuable
items such as title deeds
Always in direct control of the central bank
g)
h)
i)
May offer
customers
overdraft
facilities
to
their
Non-Bank Financial Institutions
Offer only two types of accounts savings
and fixed deposit
Mainly provide medium term and long
term finances
Their finance is restricted to a particular
sector
Do not provide foreign exchange
services
They provide capital for development
Do not participate in clearing house since
they don’t offer
Do not offer facilities for safe keeping of
valuable items
Not usually in direct control of the
central bank
Do not offer overdraft facilities to their
customers
COMMUNICATION
Communication is the transfer or conveyance of messages or information from one person to
another. Communication is the process of sending and receiving meaningful messages,
information and ideas between two or more people located at different points in space. Note: The
space between the sender (s) and the receiver (s) maybe as narrow as when people are talking to
each other or as wide as between the North Pole and the South Pole.
Importance of communication (purposes)
1. To give and obtain information For an organization to run smoothly there should be proper
flow of information within the business and also between the firm and outsiders e.g. the
manager may inform members of staff about a planned meeting. Similarly the business may
receive a letter of inquiry from a customer
2. To clarify issues and points Through proper communication the organization is able to clarify
confusing issues from within and without the firm for example in cases where there are many
managers. It would be necessary to clarify the responsibilities of each manager.
3. To enhance public relations Good/efficient communication enables the business to create a
more positive image and a favorable reputation of itself to outsiders and overcome prejudices
and negative attitudes that people may have against the business.
4. To start and influence Action Proper communication enables the business to get new ideas
make plans and ensure that they are implemented in the desired way.
5. Improving customer service; Good communication helps in reducing errors providing
customers with desired feedback and assisting in handling inquiries more efficiently
91
6. Giving instructions; Through proper communication management is able to get work doneby
issuing instructions (procedures and orders)e.g. a supplier may be instructed when and where
to deliver the goods ordered.
7. To give Reassurance; Information is needed to reassure people that their performance is good
e.g. an employee may feel better is he/she is served with a “will done”memo or a “customer of
the year” award.
8. Confirming arrangements; Through communication arrangements are confirmed for example
confirmation of meetings conferences or details of transactions
9. Co-ordinating departments of the firm; Charges in one department are communicated to other
departments that have a direct bearing to those changes e.g. when sales increase the sales
department informs the production department so as to increase production proportionality
10. Modifying behavior of persons within or outside the organization; Through effective
communication persons are trained and counseled and as a result their behavior knowledge and
attitudes change
Communication process
Communication is a process that involves interchange of information and ideas between two or
more people. Communication therefore is a circular process i.e communication may lead to some
reaction which in turn may generate further communications or feedback. This flow can be
illustrated as below:




Sender –this is the person who writes, speaks or sends signs (symbols or signals) and is the
source of the information.
Receiver – this is the person to whom the information or the message is sent.
Message – this is the information that is transmitted from the sender to the receiver. It may
be spoken, written or in the form of symbols.
Feed back – this is the response to the sender’s message.
A message is said to have been understood if the receiver provides the desired feedback.
Lines of communication
Communication can be classified according to either the levels of the communicating parties or
according to the nature of the message.
a) According to levels-This can either be: Vertical Horizontal Diagonal
i) Vertical communication This is where messages are passed between a senior and her/his
juniors in the same organizations Vertical communication can be divided into two parts Downward communication -Upward communication -Downward communication-This is
a communication process which starts from the top manager to her/his juniors. This can be
informed of: Training juniors Evaluating performance Delegating duties Solving the
problems facing workers Inspiring and motivating the juniors(giving rewards) -Upward
communication-This is a communication process that starts from the juniors to the seniors
and maybe in the form of: Submitting reports Giving suggestion Submitting complaints a
grievances Making inquiries
92
ii) Horizontal communication (lateral communication) This is communication between
people of the same level (rank) in the same organization e.g. departmental heads in an
organization may communicate to achieve the following: Co-ordination and harmonization
of different activities. To create teamwork within the department. To exchange ideas in
order to develop human resources. To reduce goal blindness among different departments.
To create a sense of belonging among department heads thus acting as a motivating factor.
One of the major characteristics of this type of communication is that there are less
inhibitions. The people involved are more open and free with each other than in the case
of people with different ranks.
iii) Diagonal communication This is communication between people of different levels in
different departments or different organizations e.g. an accounts clerk may communicate
with a sales manager of the same organization or of different organizations. Diagonal
communication enhances team work.
b) According to nature of message This can either be; Formal communication Informal
communication
i) Formal communication - This is the passing of messages or information using the approved and
recognized way in an organization such as official meetings, memos and letters. This means that
messages are passed to the right people following the right channels and in the right form. Formal
communication is also known as official communication as it is the passing of information meant
for office purposes. Formal systems of communication are consciously and deliberately
established.
ii) Informal communication - This is communication without following either the right channels
or in the right form i.e. takes place when information is passed unofficially. It is usually used when
passing information between friends and relatives hence it lacks the formality. Informal
communication may also take the form of gossips and rumor-mongering. Informal communication
usually suppliments formal communication as is based on social relations within the organization.
Note: Both formal and informal communication is necessary for effective communication in an
organization.
Essentials of Effective communication
For communication to be effective it must be originated produced transmitted received understood
and acted upon. The following are the main essentials to effective communications.
i)
ii)
iii)
iv)
The sender/communicator This is the person from whom the message originates.
He/she encodes the message i.e. puts the message in the communicative form.
Message This is the information to be sent. It is the subject matter of communication
and may contain words, symbols, pictures or some other forms which will make the
receiver understand the message
Encoding; This is the process of expressing ones ideas in form of words, symbols,
gestures and signs to convey a message
Medium/channel; This refers to the means used in communicating. This could be in
the form of letters, telephones and emails among others. v)The receiver; This is the
93
v)
vi)
person for whom the message is intended. The receiver decodes the message for proper
understanding.
Decoding; This is the process of interpreting or translating the encoded message to
derive the meaning from the message
Feed-back; This refers to the reaction of the receiver of the message. This maybe a
reply /response which the receiver sends back to the sender. The above can be
represented in a diagram as shown below;
vii)
FORMS AND MEANS OF COMMUNICATION
Forms; - These are channels or ways of passing on messages. The four main forms are:



Oral communication
Written communication
Audio –visual communication
Visual communication Means; -This is the device used to pass on information e.g. messages,
letters, telephones e.t.c
Oral communication - This is where information is conveyed by talking (word of mouth) It is
also known as verbal communication
Means of communication
i) Face-to-face conversation - This involves two or more people talking to each other. The parties
are usually near each other as much as possible to ensure effective communication. It is suitable
where subject matter of discussion require convincing persuasion and immediate feed-back. It
may be used during meetings, interviews, seminars, private discussions, classrooms e.t.c It is
the most common means of oral communication
Advantages of face-to-face communication





Provides for immediate feedback
Has personal appeal
Body language can be easily expressed
One can persuade or convince another It is the simplest communication to use
It is direct i.e. does not pass through intermediaries Convenient for confidential messages
Disadvantages of face-to-face communication





No record for future reference
Can be time consuming
Messages can be distracted
Not suitable when people are far apart
Unsuitable for the dumb and deaf
94
ii) Telephone - This form of communication is commonly used in offices and homes. It is useful
in sending messages quickly over short and long distances. It is however not suitable for
sending; Confidential messages Long and detailed reports, charts and graphs Messages that
would require reference or evidence
In Kenya telephone services are mainly provided by Telkom Kenya Limited. The subscriber is
required to purchase the telephone equipment from the post office or other authorized dealers
before installation. Installation is done on application by the subscriber (applicant).He/she pays
the installation fee in addition; the subscriber is sent a monthly bill with the charges for all the
calls made during the month. The charges for calls depend on the time spent time of the day of
the week and distance of the recipient from the caller e.g. it is cheaper to call at night than
during the day. It is also cheap to make calls during public holidays and weekends than on
weekdays.
There are also mobile phones which have no physical line connection to exchange and may be
fixed to a vehicle or carried in pockets. In Kenya these services are provided by safaricom,
Airtel, orange and Yu mobile communications.
Advantages of Telephones
 Relatively fast Has personal appeal
 Provides for immediate feedback
 One can persuade or convince another
 Suitable for long distance communication
Disadvantages of Telephone
 Can be expensive especially over long distances
 No record for future reference Lacks confidentiality
 Not convenient for dumb and deaf Can be time consuming
Reasons why mobile phones have become popular
 They are portable and can be conveniently carried around.
 It is not very expensive especially when making local calls.
 Relatively cheap to acquire.
 Some mobile phones can record conversations / calls thereby acting as evidence.
 Can be used to send short text messages (sms)
 Can be used anywhere since they are portable.
iii) Radio calls - This involves transmitting information by use of radio waves i.e. without
connecting wires between the sender and the receiver The device used is called a radio
telephone. It is commonly used in remote areas where normal telephone services are lacking
or where telephone services are available but cannot be conveniently used e.g. policemen on
patrol in different parts of a town
Radio transmission is a one way communication system i.e. only one person can speak at a
time. It is therefore necessary for the speaker to say’over’ to signal the recipient that the
communication is through so that the recipient can start talking. To end the conversation, the
95
speaker says ‘over and out’ The radio calls are commonly used by the police, game rangers,
researchers, foresters, ship owners and hotels situated in remote areas. They are also used for
sending urgent messages such as calling for an ambulance and fire brigade
Note; Radio calls are not confidential since they use sound frequencies that can be tapped by
any radio equipment that is tuned to that frequency
Advantages of Radio calls





Relatively fast Has immediate feedback
Has personal appeal
Provide room for one to persuade and convince another
Suitable for remote areas
Convenient for long distances
Disadvantages of Radio calls






No record for future reference
Lacks confidentiality
Messages are sent one way at a time
Can be expensive
Cannot be used by dumb and deaf
Can be time consuming.
iv)Paging - This is a means of communication used to locate staff or employers who are scattered
in an organization or who are outside and need to be located urgently
When within the organization portable receivers, lighted signals, bells, loudspeakers etc are
used When outside the organization employees are contacted using portable receivers (pocketsize) used to send messages through sms (short message services)
The paying system can only be used within a certain radius. When using a portable receiver, the
caller will contact the subscriber by calling the post office which will then activate the pager.
The subscriber is then informed to contact the originator of the message.
Paging is mostly used in emerging cases v)Radio Usually messages intended for a wide
audience can be transmitted through a radio more quickly and economically than by using other
forms of communication.;` Radio is used for different reasons apart from advertising e.g for
formal notices, and venue for activities
Advantages of oral/verbal communication
 Very effective method of communication since the recipient can be persuaded/convinced
 It is relatively faster method of communication
 The sender can get immediate feedback
 It indicates some sence of regard hence more appealing.
Disadvantages of oral/verbal communication
 Has no records for future reference
96



Is an expensive method especially if the two parties are far apart Is not good for confidential
messages
It is not suitable for confidential messages
It may be time wasting especially where one needs to be convinced
Written Communication
This involves transmission of messages through writing. It is the most formal way of
communication because the information is in recorded form and can be used for reference Means
of written communication
i) Letters - Letters are the most commonly used means of communication. There are two
categories of letters;
a) Formal letters
b) Informal letters
a) Formal letters; - These include business letters and official letters. Business letters are written
to pass messages and information from businessmen to customers and vice versa e.g. letters of
inquiry and acknowledgement notes. It can also be used between employees and employers in
an organization e.g. a complimentary note. Official letters are letters between people in authority
and others that touch on the activities of the organization e.g. an application letter for an
advertised vacancy in an organization. Formal letters have a salutation clause which usually
starts with “Dear Madam “or “Dear Sir”. It also bears the addresses of both the sender and the
recipient, a subject heading and a complimentary clause ending with “Yours faithfully”.
b) Informal Letters; - These are letters between friends and relatives They are also known as
Personal letters
ii) Telegrams - This is a means of communication provided by the post office. The sender obtains
the telegram form from the post office and fills the message on it in capital letters and hand it
over to the post office employees at the counter. Alternatively the sender may use a telephone
to read the message to the post office. The post office then transmits the message to the
recipient post office. The charges of a telegram are based on the number of words used, the
more the words used the higher the charges. However there is a standing charge. Telegrams
are used for sending urgent messages. Note; Due to changing technology telegrams have lost
popularity. Short messages can now be sent by cell phones (mobile phones) using the short
messages services (sms)
iii) Telex - This is a means of communication used to send short or detailed messages quickly by
use of a teleprinter. The service is provided by the post office on application. A message is sent
by use of two teleprinters one on the senders end and another on the recipients end. When
sending information through a teleprinter which is a form of electric typewriter producing
different electric signals, its keys are pressed and automatically the message is printed at the
recipient’s machine. Telex saves time for both the sender and recipient as the messages are
brief precise and received immediately. However, it’s an expensive means of communication
97
iv) Facsimile (Fax) - This involves transmission of information through a fax machine. Both the
sender and the receiver must have a fax machine. These machines are connected using
telephone lines Fax is used to transmit printed messages such as letters, maps, diagrams and
photographs. To send the information, one dials a fax number of the required destination and
then the document is fed into the sender’s machine. The receiving machine reproduces the
document immediately. It is used for long distance photocopying service.
v) Memorandum (Memo) - This is printed information for internal messages within an
orgaanisation. It is normally used to pass information between departments or offices in an
organization. Memoranda have no salutation or complimentary clause. They are suitable for
informing the officers within an organization of matters related to the firm. A memo is pinned
on the notice board of an organization if it is meant for everybody otherwise passed to the
relevant staff.
vi) Notice - This is a written communication used to inform a group or the public about past
current or future events. It is usually brief and to the point. It can be placed on walls, in public
places, on trees, in newspapers or on notice boards.
vii) Reports - These are statements/within records of findings recommendations and conclusion
of an investigation/research. A report is usually sent to someone who has asked for it for a
specific purpose.
viii) Circulars - These are many copies of a single letter addressed to very many people when
the message intended for each is the same.
ix) Agenda - This is an outline of the items to be discussed in a meeting. It is usually contained
in a notice to a meeting sent in advance to all the participants of the meeting. The notice of the
meeting contains; The date of the meeting The venue of the meeting Time of the meeting Items
to be discussed
x) Minutes - These are records of the proceedings of a meeting. Keeping minutes of certain
meetings is a legal requirements e.g. companies Keeping minutes for other meetings are for
management purposes to ensure that decisions made at the meetings are implemented
Advantages of written communication
1.
2.
3.
4.
5.
6.
It can be retained for future reference
Some like letters are relatively cheap(can produce many copies)
It is suitable for confidential messages
Allows for inclusion of fine details
It is not prone to distortion of messages
Can be used as evidence Can be addressed to many people.
98
Disadvantages of written communication
1.
2.
3.
4.
5.
6.
7.
It lacks personal appeal
It takes time to prepare and reach the recipient
Suitable for the literate only
Immediate feedback may not be possible
Does not offer room for persuasion and convincing
It may be expensive because it involves a lot of paperwork and time.
Not suitable if the sender and the receiver do not share a common language.
3) Visual Communication
This is the process of passing information by use of diagrams, drawings pictures, signs, and
gestures e.t.c
a) Photographs - A photograph is an image (visual representation of an object as it appeared at
the time when the photograph was taken Photographs are self-explanatory and may not be
accompanied by any narration or explanation. The recipient is able to get the message at a glance.
b) Signs - Refer to marks, symbols, drawings or gestures whose purpose is to inform the public
about such things as directions, distances, dangers and ideas. Examples; road signs, traffic lights
and danger signs on electricity poles This means of communication can only be effective if the
meaning of the sign used is understood.
c) Graphs; These are used to show and illustrate statistical information
d) Charts; These are diagrams which show or illustrate the flow of an idea e.g. an organization
chart illustrates the whole organization structure indicating the chain of command Advantages of
visual communication It can be used to pass confidential information The information may be
obtained at once
Disadvantages of visual communication




Can only be used by people who can see
The information may be wrongly interpreted
It may be an expensive method of communication
Cannot be used for long distances
4) Audio-Visual communication
This is a form of communication in which messages are sent through sounds and signs. This form
of communication ensures that the receiver gets the message instantly. It is suitable where both the
sender and the receiver know the meaning of specific sounds and signs.
Means of Audio-visual communication

Television (TV): This is a device that transmits information inform of a series of images
on a screen accompanied by sound. It is a very effective method of communication since
99

it combines the advantages of image and sound. A television can be a very suitable means
of sending urgent messages especially when it gives live coverage of events.
Siren: This is a device used to produce a loud shrill sound accompanied by a flashing light.
It is commonly used by the police, ambulances, and the fire brigade and security firms to
alert the public of the danger involved e.g. the ambulance siren conveys the message that
somebody is seriously sick and therefore other motorists should give way.
Advantages of Audio-visual communication








It reaches many people
It is more appealing than other means of communication
Reinforces verbal communication
May have a lasting effect on the receiver
Suitable where receivers are illiterate.
Disadvantages of Audio-visual communication
It is suitable to those people who can interpret the messages correctly
It is not suitable for confidential messages Preparation may take long.
3) Audio Communication
This is when the message is transmitted through sounds. Examples include
A whistle; This is a device which is blown to produce a sharp shrill sound to alert or warn the
public or employees in an institution. It is normally used by security guards when there is danger.
In some organization, a whistle is used to announce change in shifts
Horn; This is also an instrument that is used to produce sound which passes different information
depending on the way it is blown.
Other methods of audio communication include drums, alarms, and bells among others
Advantages of Audio communication



Is a faster method of communication
It can reach several people at once
The message is received instantly
Disadvantages of Audio communication



The message may be interpreted wrongly
It can only be used within a certain radius at a time
It distracts people’s attention
FACTORS TO CONSIDER WHEN CHOOSING MEANS OF COMMUNICATION
Speed: Speed is an important factor when the message is urgent. In such a case telex, fax,
telephone, telegram or e-mail would be the most suitable means of communication. Otherwise
ordinary mail would be used
100
Cost: The cost incurred in using a means of communication vary from one means to another e.g.
it is cheaper to send messages by ordinary mail than by telegram or telex
Confidentiality: Some messages are quite confidential and are intended for certain person only.
Where confidential messages are involved, appropriate means should be used e.g. registered mail
or internal memo enclosed in an envelope
Distance: The geographical gap between the sender and recipient is very important in determining
the means of communication to be used. Some means are suitable for long distances while others
are not. Paging and sirens are suitable for short distances. For long distances, fax letters,
telephone,e-mail may be appropriate
Evidence: Some means of communication do not provide record of the message communicated
while others do. All means of written communication provide evidence of messages
communicated.
Reliability: This is the assurance (certainty) that the message will reach the intended person at the
right time in the right form. Face-to-face communication is more reliable than other forms of
communication because one can ask for clearly and get answers immediately. For some written
information, courier service may be preferred
Accuracy: This refers to the exactness of the message communicated as intended by the sender.
Written messages are generally more accurate than other means of communication.
Desired impression: The impression created upon the recipient of a message is very important
e.g. a telegram or speed post mail will carry some sence of urgency, registered mail will create an
impression of confidentiality while use of colourful and attractive letterheads would convey a good
image of the business.
Availability: One may want to telephone, for example, but the services are not there so the person
would be forced to use alternative means e.g. letters or radio call.
BARRIERS TO EFFECTIVE COMMUNICATION
Communication is said to be complete only when the recipient gets the message the way the sender
intends it to be. When information is not received the way it was intended then it has been distorted.
Distortion of a message is brought about by some communication barriers which may exists in the
path of the message between the sender and the recipient. Some of these barriers are:

Language used: the language used by the sender should be known (understood) by the
recipient so that communication can take place
 Poor Listening: the effectiveness of communication will depend on the willingness of the
recipient to listen keenly listening require careful attention and concentration. It may
however be the task of the sender of the message to attempt to gain the attention of the
listener. Through his/her choice of words and expression among others.
 Negative Attitude: Attitude refers to the feelings of the communicating parties towards each
other. It is important that there exists a mutual feeling of trust and respect between the parties
101








concerned in order to avoid bias .If there is mistrust and prejudice then there may be
deliberate or unintentional misunderstanding of the message involved.
Poor Timing: poor timing leads to breakdown in communication , therefore for effective
communication to take place the message must be sent and received at an appropriate time,
eg a message sent when one is in a hurry may not be properly received or delivered
Wrong medium: the medium used to communicate must be appropriate for the message being
conveyed otherwise there may breakdown in communication e.g. one may not convey a
confidential message over the telephone effectively
Prejudgment: our understanding of the message is often conditional by our earlier experiences
and knowledge this may make one individual draw premature conclusion e.g. a student
who always fail in a subject and this time round has improve may be failed by the
teacher because he has always failed in the past .
Ambiguities: it occurs when the sender express in a manner which leads to wrong
interpretation. When the receiver interprets the message differently it automatically leads to
communication breakdown.
Emotional responses: Emotional responses such as those resulting from hunger or excitement
may lead to distortion of message.
Unclear System within the organization: if the channels of passing information in an
organization are not clear then the message will not get to the right people for whom the
messages intended
Noise: it refers to any disturbing sounds which interfere with concentration or listening ability
of the recipient of the message the presence of noise may make it impossible for any message
to be received in the right way.
Unfamiliar Non-verbal signals: lack of understanding of non-verbal sign may be a barrier to
effective communication.
Read more at: https://www.ebookskenya.com/communication-form-2-business-studies-notes/
ADVERTISING
Advertising is the action of calling public attention to an idea, good, or service through paid
announcements by an identified sponsor.
According to Kotler – Advertising is any paid form of non-personal presentation & promotion of
ideas, goods, or services by an identified sponsor.
According to the Advertising Association of the UK – Advertising is any communication, usually
paid-for, specifically intended to inform and/or influence one or more people.
A simpler (and modern) definition of advertising can be – A paid communication message
intended to inform people about something or to influence them to buy or try something.
Characteristics of Advertising

Paid Form: Advertising requires the advertiser (also called sponsor) to pay to create an
advertising message, to buy advertising media slot, and to monitor advertising efforts.
102

Tool For Promotion: Advertising is an element of the promotion mix of an organization.

One Way Communication: Advertising is a one-way communication where brands
communicate to the customers through different mediums.

Personal Or Non-Personal: Advertising can be non-personal as in the case of TV, radio,
or newspaper advertisements, or highly personal as in the case of social media and other
cookie-based advertisements.
Types Of Advertising
Advertising activities can be categorized into above the line, below the line, and through the
line advertising according to their level of penetration.

Above the line advertising include activities that are largely non-targeted and have a wide
reach. Examples of above the line advertising are TV, radio, & newspaper advertisements.

Below the line advertising include conversion focused activities which are directed
towards a specific target group. Examples of below the line advertising are billboards,
sponsorships, in-store advertising, etc.

Through the line advertising include activities which involve the use of both ATL & BTL
strategies simultaneously. These are directed towards brand building and conversions and
make use of targeted (personalized) advertisement strategies. Examples of through the line
advertising are cookie based advertising, digital marketing strategies, etc.
Advertising activities can also be categorized into 5 types based on the advertisement medium
used. These types of advertisements are:

Print Advertising: Newspaper, magazines, & brochure advertisements, etc.

Broadcast Advertising: Television and radio advertisements.

Outdoor Advertising: Hoardings, banners, flags, wraps, etc.

Digital Advertising: Advertisements displayed over the internet and digital devices.

Product/Brand Integration: Product placements in entertainment media like TV show,
YouTube video, etc.
Objectives Of Advertising
There are 3 main objectives of advertising. These are:
To Inform
Advertisements are used to increase brand awareness and brand exposure in the target market.
Informing potential customers about the brand and its products is the first step towards attaining
business goals.
103
To Persuade
Persuading customers to perform a particular task is a prominent objective of advertising. The
tasks may involve buying or trying the products and services offered, to form a brand image,
develop a favourable attitude towards the brand etc.
To Remind
Another objective of advertising is to reinforce the brand message and to reassure the existing and
potential customers about the brand vision. Advertising helps the brand to maintain top of mind
awareness and to avoid competitors stealing the customers. This also helps in the word of mouth
marketing.
Other objectives of advertising are subsets of these three objectives. These subsets are:

Brand Building

Increasing Sales

Creating Demand

Engagement

Expanding Customer Base

Changing Customers’ attitudes, etc.
Importance of Advertising
To The Customers

Convenience: Targeted informative advertisements make the customer’s decision making
process easier as they get to know what suits their requirements and budget.

Awareness: Advertising educates the customers about different products available in the
market and their features. This knowledge helps customers compare different products and
choose the best product for them.

Better Quality: Only brands advertise themselves and their products. There are no
advertisements for unbranded products. This ensures better quality to the customers as no
brand wants to waste money on false advertising.
To The Business

Awareness: Advertising increases the brand and product awareness among the people
belonging to the target market.

Brand Image: Clever advertising helps the business to form the desired brand
image and brand personality in the minds of the customers.

Product Differentiation: Advertising helps the business to differentiate its product from
those of competitors’ and communicate its features and advantages to the target audience.
104

Increases Goodwill: Advertising reiterates brand vision and increases the goodwill of the
brand among its customers.

Value For Money: Advertising delivers the message to a wide audience and tends to be
value for money when compared to other elements of the promotion mix.
Advantages Of Advertising

Reduces Per-Unit Cost: The wide appeal of advertisements increases the demand for the
product which benefits the organization as it capitalizes on the economies of scale.

Helps In Brand Building: Advertisements work effectively in brand building. Brands
who advertise are preferred over those which doesn’t.

Helps In Launching New Product: Launching a new product is easy when it is backed
by an advertisement.

Boosts Up Existing Customers’ Confidence In The Brand: Advertisements boosts up
existing customers’ confidence in the brand as they get a feeling of pride when they see an
advertisement of the product or the brand they use.

Helps In Reducing Customer Turnover: Strategic advertisements for new offers and
better service helps reduce customer turnover.

Attracts New Customers: Attractive advertisements help the brand in gaining new
customers and expanding the business.

Educates The Customers: Advertisements inform the customers about different products
existing in the market and also educates them in what they should look for in an apt product.
Disadvantages Of Advertising

Increases The Costs: Advertising is an expense to the business and is added to the cost of
the product. This cost is eventually borne by the end consumer.

Confuses The Buyer: Too many advertisements with similar claims often confuses the
buyer in what to buy and should he buy the product or not.

Is Sometimes Misleading: Some advertisements use smart strategies to mislead the
customers.

Only For Big Businesses: Advertising is a costly affair and only big businesses can afford
it. This makes small businesses out of competition with big businesses who get to enjoy a
monopoly in the market.

Encourages The Sale Of Inferior Products: Effective advertisements even lead to the
sale of inferior products which aren’t good for the consumers.
Advertising Examples
105
We are surrounded by advertisements. From TV to our mobile phones, we encounter
advertisements everywhere. Following are a few examples of advertising.
TV Advertisements Example
Coca-Cola’s ‘I’d like to buy the world a Coke’, aired in 1971, is the world’s most famous TV
advertisement.
Print Advertisements Example
Jeep’s ‘See whatever you want to see‘ is a perfect example of a great print advertisement.
Radio Advertisements Example
Radio advertisements get more attention among the target customers and are also played more
often. Here’s an example of a radio ad by Dove.
Audio Player 00:00
Digital Advertisements Example
Digital advertisements are advertisements made especially for the internet and digital devices
users. These ads can be video, image, or text ads.
The digital video ads aren’t restricted to a 30-second or 50-second slot. An example of a digital
video ad is this advertisement by Airbnb.
You might see digital image ads while visiting websites like Feedough, Facebook, Twitter. Here
is an example:
Outdoor Advertising Example
These include hoardings, banners, flags, wraps, etc. An example of an outdoor advertisement is
this hoarding by Audi.
106
TOPIC 5: INTRODUCTION TO ETHICS IN BUSINESS
Definition of terms in ethics – morals, values, virtues etc.
According to Crane, "Business ethics is the study of business situations, activities, and decisions
where issues of right and wrong are addressed."
Baumhart defines, "The ethics of business is the ethics of responsibility. The business man must
promise that he will not harm knowingly."
Features of Business Ethics
There are eight major features of business ethics −

Code of Conduct − Business ethics is actually a form of codes of conduct. It lets us know
what to do and what not to do. Businesses must follow this code of conduct.

Based on Moral and Social Values − Business ethics is a subject that is based on moral
and social values. It offers some moral and social principles (rules) for conducting a
business.

Protection to Social Groups − Business ethics protect various social groups including
consumers, employees, small businesspersons, government, shareholders, creditors, etc.

Offers a Basic Framework − Business ethics is the basic framework for doing business
properly. It constructs the social, cultural, legal, economic, and other limits in which a
business must operate.

Voluntary − Business ethics is meant to be voluntary. It should be self-practiced and must
not be enforced by law.

Requires Education & Guidance − Businessmen should get proper education and
guidance about business ethics. Trade Associations and Chambers of Commerce should be
active enough in this matter.

Relative Term − Business ethics is a relative term. It changes from one business to another
and from one country to another.

New Concept − Business ethics is a relatively newer concept. Developed countries have
more exposure to business ethics, while poor and developing countries are relatively
backward in applying the principles of business ethics.
107
Principles of Business Ethics
The principles of business ethics are related to social groups that comprise of consumers,
employees, investors, and the local community. The important rules or principles of business ethics
are as follows −

Avoid Exploitation of Consumers − Do not cheat and exploit consumer with measures
such as artificial price rise and adulteration.

Avoid Profiteering − Unscrupulous business activities such as hoarding, black-marketing,
selling banned or harmful goods to earn exorbitant profits must be avoided.

Encourage Healthy Competition − A healthy competitive atmosphere that offers certain
benefits to the consumers must be encouraged.

Ensure Accuracy − Accuracy in weighing, packaging and quality of supplying goods to
the consumers has to be followed.

Pay Taxes Regularly − Taxes and other duties to the government must be honestly and
regularly paid.

Get the Accounts Audited − Proper business records, accounts must be managed. All
authorized persons and authorities should have access to these details.

Fair Treatment to Employees − Fair wages or salaries, facilities and incentives must be
provided to the employees.

Keep the Investors Informed − The shareholders and investors must know about the
financial and other important decisions of the company.

Avoid Injustice and Discrimination − Avoid all types of injustice and partiality to
employees. Discrimination based on gender, race, religion, language, nationality, etc.
should be avoided.

No Bribe and Corruption − Do not give expensive gifts, commissions and payoffs to
people having influence.

Discourage Secret Agreement − Making secret agreements with other business people to
influence production, distribution, pricing etc. are unethical.

Service before Profit − Accept the principle of "service first and profit next."

Practice Fair Business − Businesses should be fair, humane, efficient and dynamic to
offer certain benefits to consumers.

Avoid Monopoly − No private monopolies and concentration of economic power should
be practiced.

Fulfil Customers’ Expectations − Adjust your business activities as per the demands,
needs and expectations of the customers.
108

Respect Consumers Rights − Honor the basic rights of the consumers.

Accept Social Responsibilities − Honor responsibilities towards the society.

Satisfy Consumers’ Wants − Satisfy the wants of the consumers as the main objective of
the business is to satisfy the consumer’s wants. All business operations must have this aim.

Service Motive − Service and consumer's satisfaction should get more attention than
profit-maximization.

Optimum Utilization of Resources − Ensure optimum utilization of resources to remove
poverty and to increase the standard of living of people.

Intentions of Business − Use permitted legal and sacred means to do business. Avoid
Illegal, unscrupulous and evil means.
Follow Woodrow Wilson's rules − There are four important principles of business ethics. These
four rules are as follows −

Rule of publicity − According to this principle, the business must tell the people clearly,
what it tends to do.

Rule of equivalent price − The customer should get proper value for their money. Below
standard, outdated and inferior goods should not be sold at high prices.

Rule of conscience in business − The businesspersons must have conscience while doing
business, i.e. a morale sense of judging what is right and what is wrong.

Rule of spirit of service − The business must give importance to the service motive.
Importance of ethics on society
1. Basic Human Needs:
Ethics corresponds to basic human needs. It is human trait that man desires to be ethical: not only
in his private life but also in his business affairs where, being a manager, he knows his decisions
may affect the lives of thousands of employees or customers.
2. Improve Creditability:
Values create credibility with the public. A business perceived by the public to be ethically and
socially responsive would be honoured and respected even by those who have no intimate
knowledge of its actual working. There will be an instinctive prejudice in favour of its product;
since people believes that the business offers value for their money. Public issues attract an
immediate response from the business as it affects its credibility.
3. Improve Coordination:
109
Values give credibility to the management by coordinating the language of value from the top to
the lower level in the organisations. Organisational ethics, when perceived by the employees as
genuine and create common goals, improves ethical environment.
The entrepreneur has credibility with its employees precisely because it has credibility with the
public. Neither sound business strategy, nor a generous compensation policy and fringe benefits
can win the employee credibility. Perceived moral and social uprightness about the business by its
employees can be the basis for credibility among the employees.
4. Better Decision Making:
Values help better decision making. An ethical attitude helps the management to make better
decisions, i.e., decisions which are in the interest of the public, their employees, and the business
own long good, even though the decision making is slower. Ethics force a management to take
various aspects of economic, social decisions keeping in mind their ethical implications.
5. Trade Off between Ethics and Profits:
Ethic and profit can go together. A company, which is inspired by ethical conducts, is also
profitable one. Value driven companies are sure to be successful in long run, though in the short
run they can loose money. Ethics help the business to develop long term brand equity in the society
which ultimately improves sales and profit.
6. Humanitarian Approach:
An ethical oriented management takes measures to prevent pollution and protects workers health.
Leading business houses had already initiated social responsibility initiatives to protect the
environment, provides social welfare amenities to the workers etc. These business houses are
incurring huge expenditures without any mandatory initiative of the government. It is a sharing of
wealth by the business in favour of society at large.
Reasons why business should observe ethics
1. Survival of the Business Unit:
Businessmen should consider the interest of the business unit. Unethical practices of businessmen
will lead to the closure of business unit. The closure of a business unit does not only create
problems to business but also to employees and the society in general. Normally, good behaviour
is rewarded and bad behaviour is punished. Since, a business is an economic institution, it aims at
maximising profits. Businessmen do not maximise the profit at the cost of existence of a business
unit. The behaviour of a businessman is affected by some of the factors such as – leadership
qualities, integrity, knowledge, skills, influence and exercising power. Businessmen are expected
to protect their units in all respects.
2. Growth of Business Unit:
The next reason for observing business ethics is that it ensures the growth of a business. Whenever
a businessman observes ethics strictly, definitely the particular business unit will get developed.
110
A business could not be run in such a manner as is detrimental to the interest of society or business
itself. So, it is argued that there should be some business ethics for the growth of a business.
3. Earning Goodwill:
The prime objective of any business is to earn profit. At the same time, no business is allowed to
earn profit without following business ethics. If business ethics are properly followed by a
business, automatically that particular business unit earns a good name among the public.
4. Improving the Confidence:
Business ethics are necessary to improve the confidence of the customers, employees and the like.
If confidence is infused, they (customers and employees) will popularise the name or excellent
consumer services of the particular business unit. For example, by speaking well of its merits and
pointing out its flaws.
5. Maintaining Inter-Relationship:
No business functions separately or independently. Each business has close relationship with
another business even though the nature and size of the other business differs. The proverb “No
tree can be considered as a forest” attests this fact. It is expected that each business unit should
have a smooth relationship with others. The inter-relationship of business is maintained by
adopting business ethics.
6. Solving Social Problems:
If a businessman observes ethics in his business, the public have no difficult in having their wants
fulfilled. There is no bargaining between the businessman and public. There is a fair treatment of
an employee by him. This will avoid social problems like strike, lockout, etc.
The role of professional ethics
1. They guide the workers on how to relate with one another
2. They define how worker should handle/relate with there clients
3. They help to create healthy interaction between the workers/employees and their
supervisors/authority.
4. They help in maintaining the standards of the service offered/goods produced in a work
place.
5. The determine how one should perform his/her duties/keep up the date with the demands of
the profession.
6. They help to maintain dignity of the profession/ integrity of the workers.
7. They help the public to respect the professional/protected from undue pressures from other
interested parties.
8. They help to determine the entry requirement/qualifications needed in a given profession.
111
The role of legal framework in promoting ethics
1. Legislative Framework:
Ethics is a voluntary phenomenon. It cannot be forced but it should be persuaded. However, if
businesses are not giving due weightage to ethics in their behaviour it is for the laws to intervene
in the process. Laws are generally passed as result of low ethical standards or the failure to
recognise social issues.
Legal action or government directives are the result of social pressure. A practice can be made
illegal if society views it as being unethical. For example, if contributions to political parties by
corporates are being viewed as excessive and unethical then the practice can be banned.
Factor # 2. Regulatory Framework of the Government:
From time to time, government regulates the working conditions, product safety, statutory
warnings (on cigarettes and other harmful products) etc. These are all supported by laws or
guidelines. These guidelines help the entrepreneurs in determining the working behaviour as per
the acceptable standards and practices.
Similarly, Jago Grahak Jago is another persuading strategy among the potential consumers about
the corporate business practices. This has also been launched by the Ministry of Consumer Affairs
to improve awareness about corporate defaults in their marketing practices.
Factor # 3. Corporates Ethical Codes:
Many times business provides specific guidelines to their managers and employees about the
ethical codes of behaviour. One important question in such instances is whether individuals within
organizations are really governed by the code of ethics or give lip services to the guidelines.
Factor # 4. Societal Obligations:
Social forces and pressure have considerable influence on ethics in business. Job reservation to the
handicapped in business is an important example of societal obligations being fulfilled by them.
Society in fact, forces the entrepreneurs to alter their decisions by taking a broader view of the
environment and the needs of society.
Factor # 5. Vision and Mission of Business:
Every day ethical decisions are usually made between the lesser of the two evils rather than obvious
right and wrong dimension of the judgment. These judgments generally include different types of
values being pursued by the industrial house in the vision and mission of the group companies. In
this context, we can include the norms of ethical standards formulated by the Tata and Birla group
of companies.
Chapter 6 of the constitution on ethics
112
Leadership and Integrity” is the title of that Chapter, and the enthusiasm for it is an indicator of
how far Kenyans have felt deprived of leaders with integrity. Someone even proposed setting up
an NGO called “Chapter Six”. The necessity of integrity is emphasised daily as news after news
breaks about corruption among “leaders” at both national and county levels. A wave of anger—
and despair—has spread over the country. This Katiba Corner piece is the first in an occasional
series assessing the strengths and weaknesses of Chapter Six, and what its impact has been and
might yet be.
Much of this discussion is about “integrity”, but the Chapter also has some interesting things to
say about leadership. Especially when you think of the puffed-up self-importance of our so-called
“leaders” (often our self-called leaders). Usually we try to avoid quoting the Constitution at any
length, but the very first part of Chapter Six is so straightforward that it cries out to be quoted:
73. (1) Authority assigned to a State officer—
(a) is a public trust to be exercised in a manner that—
(i)
(ii)
(iii)
(iv)
is consistent with the purposes and objects of this Constitution;
demonstrates respect for the people;
brings honour to the nation and dignity to the office; and
promotes public confidence in the integrity of the office; and
(b) vests in the State officer the responsibility to serve the people, rather than the power to rule
them.
The Constitution gives authority to “State Officers” (which means mainly elected representatives,
cabinet secretaries and their county equivalents, judges, magistrates and members of commissions,
as well as independent officers, the Auditor General and the Director of Public Prosecutions). In
fact it is the people that confer that authority, through the Constitution. And the purpose of
conferring that authority is that those officers will serve the people, not the people serve them.
The idea that “the leader of a people is their servant” is found in all great religions, including Islam,
Christianity and Hinduism, though all too often more in the rhetoric than in the practice.
Underlining this philosophy, Chapter Six requires state officers to embark upon their duties by
swearing an oath or making a solemn affirmation. For example, the incoming President must swear
(or affirm) “that I will truly and diligently serve the people and the Republic of Kenya”. The first
element of every oath is to serve the people.
As well as commitment to service of the people, the vision of the Constitution is of state officers
who are competent, impartial in their decision making, honest in every respect, not influenced by
favouritism or corrupt motives, selfless, disciplined and accountable. Since they are also bound by
the values of the Constitution in Article 10, we can add that they must be patriotic, committed to
human rights including dignity and equality, and committed to social justice, inclusiveness,
protection of the marginalised, good governance, transparency (openness) and public participation.
Chapter Six draws a distinction between state officers and public officers.
113
All the duties it imposes are for state officers. But the chapter says that Parliament must pass law
applying the principles to public officers also. public officers are —apart from state officers—
those who are in the public service and paid from public funds.
We should also note that Article 232 of the Constitution repeats the broad values of the public
service (adding efficient, effective and economic use of resources). Public service is defined to
cover all officers and employees of the state including the police and state corporations.
Chapter Six, provides some more specific rules and principles. Particularly important is the idea
of conflict of interest. that a state officer (or a public officer) must not allow personal interest to
conflict with his or her duty to the people and the country. A specific sort of risk of conflict of
interest is intended to be avoided by preventing foreigners serving as state officers, even if they
are also Kenyan citizens. This does not apply to judges or members of commissions (because it
was thought that it might be useful to be able to have foreigners serving on commissions.
Incidentally, to be a candidate for president, a person must be a citizen by birth. Basically this
means someone at least one of whose parents was a citizen. Oddly enough this does not apply to
the presidential candidate’s running mate (who might in some circumstances become president).
There are some specific rules about financial probity (a word that means having strong moral
principles and complete honesty), and about behaving so carefully that there is no risk of even
appearing not to be honest.
Chapter Six envisages a commission—the Ethics and Anti-Corruption Commission—to enforce
the provisions of the Chapter, and other law setting up procedures and prescribing penalties. The
Commission, of course, exists; it was created by the Ethics and Anti-Corruption Commission Act,
2011, the latest in quite a long line of anti-corruption commissions. And the main law is the
Leadership and Integrity Act.
But the 2003 Public Officers Ethics Act still applies to some extent. These between them create a
Code of Ethics for state and public officers, or rather several codes. There is also the Public Service
(Values and Principles) Act 2015, particularly concerned with Article 232 of the Constitution. In
fact a great deal of the Constitution is an elaboration of Chapter Six, including in chapters on the
legislature, executive and the judiciary. This reiteration owed a great deal to the anxiety of Kenyans
about whether we would ever be able to put corruption and the abuse of power generally, behind
us.
Later articles in this series will try to assess how far Chapter Six (and this plethora of laws) has
actually been able to improve the integrity of those in important offices of state, and the public
service.
Other important structure on ethic; - religious institutions, PBO, welfare associations
Most religions have an ethical component, often derived from purported supernatural revelation
or guidance. Some assert that religion is necessary to live ethically. Simon Blackburn states that
114
there are those who "would say that we can only flourish under the umbrella of a strong social
order, cemented by common adherence to a particular religious tradition
In the pursuit of its aims, objectives and activities, every public benefit organization shall be guided
by the following principles and aspirations;
a) commitment to the sanctity of human life and to a peaceful and non-violent orientation in
all its activities;
b) promotion of democracy, human rights, the rule of law, good governance as well as justice
for all the people of Kenya;
c) respect for the equality, rights and dignity of all people;
d) promotion of social justice to ensure balanced economic development;
e) rejection of partisan political, ethnic, cultural, racial or religious intolerance and all other
forms of discrimination;
f) commitment to the promotion of gender equality and social inclusion at all levels;
g) maintenance of a culture of transparency and accountability particularly in the receipt and
management of funds and avoiding corrupt and unethical practices;
h) maintenance of high standards of governance and management of the public benefit
organization by prescribing and implementing policies, norms of conduct and operational
requirements that apply to its staff, management and governing body;
i) promotion of a culture of dialogue and sharing of resources, information, expertise and
experiences;
j) maintenance of a high standard of professionalism in service and interactions and dealing
with people through honesty, fairness, integrity, respect for confidentiality, objectivity,
care, diligence, prudence, timeliness and straightforwardness;
k) rejection of research efforts, programmes projects and other activities which are directly or
indirectly aimed at developing methods of torture, or other forms of techniques that violate
and subvert people's human rights;
l) observance of clear guidelines on conflict of interest;
m) fostering and maintaining mutual trust, partnership and respect between public benefit
organizations, the private sector, donors and the Government;
n) identifying and reporting any breach or violation of the provisions of this Act to the
Authority;
o) Respect for the autonomy, independence and diversity of public benefit organizations.
Code of Ethics
Definition
A code of ethics is a business document outlining professional standards expected of all company
workers and representatives. Although it often addresses internal conduct, it primarily centers on
what is expected of employees when engaged in customer-centric activities. It establishes
standards by which business representatives are held accountable.
115
Certain common principles underlie professional codes and bodies, e.g. Medical and Dental
Council, Police Service Code of Conduct, Estate Agents Code of Conduct. Codes may not be
exhaustive and may not include all the rules and regulations that apply to every situation. The
contents therefore have to be viewed within the framework of company policies, procedures and
the requirements of the law. In our society ethical concerns have escalated in the past few years
and have been raised at government level. Organisations have hot lines for employees to
anonymously report unethical behaviour. In our field of engineering issues of fairness have been
legislated and we have a Code of Conduct in place. The question of ethical practice, however,
covers broad ground and encompasses everything we do as professionals and the way we behave
towards each other and our clients.
A code of ethics and code of conduct are two separate documents, the first of which addresses the
company's broad moral standards and the second of which instructs employees how to use those
standards in their day-to-day workplace actions
The six codes of ethics are;






Integrity.
Objectivity.
Responsibility
Professional competence.
Confidentiality.
Professional behavior.
Purpose of code of ethics
The launch of a code of ethics is just the beginning of the journey. Ongoing monitoring, training
on its use and rewarding those who demonstrate ethical leadership are also required. An ethical
workplace culture as one that gives priority to employee rights, fair procedures, and equity in pay
and promotion, and that promotes tolerance, compassion, loyalty and honesty in the treatment of
customers and employees. Such a culture encourages employee support and respect for the rules
of conduct and fair treatment by management. This, in turn, promotes trust in management and
internalization of the company’s values. Once this happens, ethics becomes embedded in the
workplace culture. The Institute of Business Ethics (IBE) outlines a 9-Step Model for developing
and embedding a code of business ethics as follows:
1.
2.
3.
4.
5.
6.
7.
8.
9.
Understand your context
Establish board level support
Articulate your core values
Find out what bothers people
Choose your approach
Draft your code
Test it
Launch it
Monitor it
116
Function of ethics in an organization










Code of ethics provides guidance and set common ethical standards to promote consistency
in behavior across all levels of employment. A code governs the actions and working
relationships of board members and top management with employees and in dealings with
other stakeholders.
Code of ethics provide a positive stimulus for ethical conduct and helpful guidance and
advice concerning the main obligations of the members of the group to which it applies.
Generally, a code will begin with broad commitments.
Code of ethics can serve as the formal basis for investigating unethical conduct. Where
such investigation is possible, prudence becomes a motive for acting ethically.
The code of ethics enables a company to integrate ethical values into its organizational
culture. The values addressed internally and in external relationships can dictate the
expectations a business has of its representatives.
Code of ethics give positive support to those seeking to act ethically. A publicly proclaimed
code allows a person who is under pressure to act unethically to say: “I am bound by the
code of ethics of my profession, which states that…” This provides a level of group
cooperation in taking stands on moral issues
Code of ethics outlines the standards of behavior for employees, vendors and the
management team. This performance framework defines acceptable and unacceptable
actions in a variety of situations with the intent of maintaining the organization's integrity
and legal compliance.
A code of conduct can be the first pre-acquisition investigative point a corporate buyer uses
to evaluate the risk potential of a target company. Other stakeholders turn to the code of
conduct to gather information about an organization
A code of conduct instills integrity among members and promote respect and trust with the
audiences they serve.
Code of ethics can present a positive image to the public of an ethically guided profession,
organization, or practice. Where the image is warranted, it can help members more
effectively serve the public.
Code of ethics can be used in the classroom and elsewhere to prompt discussion and
reflection on moral issues and to encourage a shared understanding among professionals,
the public, and government organizations concerning the special moral responsibilities of
individuals in professions, organizations, and/or a specific practice
Example of code of ethics – Medical doctors, Lawyers, Accountants
Medical Code of Ethics this document establishing the ethical rules of behaviour of physicians and
dental practitioners, defining the priorities of their professional work, showing the principles in
the relations with patients, other physicians and the rest of community. Good Medical Practice (the
code) describes what is expected of all doctors registered to practise medicine. It sets out the
principles that characterise good medical practice and makes explicit the standards of ethical and
professional conduct expected of doctors by their professional peers and the community. The code
was developed following wide consultation with the medical profession and the community. The
117
code is addressed to doctors and is also intended to let the community know what they can expect
from doctors. The application of the code will vary according to individual circumstances, but the
rules should not be compromised, they include;
 The greatest ethical imperative for the physician is the welfare of the patient.
 The physician should approach patients with consideration, respecting their personal
dignity, right to intimacy and privacy.
 The physician should perform all diagnostic, therapeutic and preventive procedures with
due exactitude and devoting the necessary time.
 The physician has the duty to maintain confidentiality. Information obtained in the course
of physician's professional duties concerning the patient and his background is to be kept
confidential. The death of the patient does not release the physician from the duty of
maintaining confidentiality.
 It is the duty of every physician to continually update and develop professional knowledge
and skills as well as to share them with co-workers.
Principles of medical ethics
These principles are intended to aid physicians individually and collectively in maintaining a high
level of ethical conduct. They are not laws but standards by which a physician may determine the
propriety of his conduct in his relationship with patients, with colleagues, with members of allied
professions, and with the public.
Section 1. The principle objective of the medical profession is to render service to humanity with
full respect for the dignity of man. Physicians should merit the confidence of patients entrusted to
their care, rendering to each a full measure of service and devotion.
Section 2. Physicians should strive continually to improve medical knowledge and skill, and
should make available to their patients and colleagues the benefits of their professional
attainments.
Section 3. A physician should practice a method of healing founded on a scientific basis; and he
should not voluntarily associate professionally with anyone who violates this principle.
Section 4.The medical professional should safeguard the public and itself against physicians
deficient in moral character or professional competence. Physicians should observe all laws,
uphold the dignity and honor of the profession and accept its self-imposed disciplines. They should
expose, without hesitation, illegal or unethical conduct of fellow members of the profession.
Section 5. A physician may choose whom he will serve. In an emergency, however, he should
render service to the best of his ability. Having undertaken the care of a patient, he may not neglect
him; and unless he has been discharged he may discontinue his services only after giving adequate
notice. He should not solicit patients.
118
Section 6. A physician should not dispose of his services under terms of conditions which tend to
interfere with or impair the free and complete exercise of his medical judgment and skill or tend
to cause deterioration of the quality of medical care.
Section 7. In the practice of medicine a physician should limit the source of his professional income
to medical services actually rendered by him, or under his supervision, to his patients. His fee
should be commensurate with services rendered and the patient's ability to pay. He should neither
pay nor receive a commission for referral of patients. Drugs, remedies or appliances may be
dispensed or supplied by the physician provided it is in the best interests of the patients.
Section 8. A physician should seek consultation upon request; in doubtful or difficult cases; or
whenever it appears that the quality of medical service may be enhanced thereby.
Section 9. A physician may not reveal the confidences entrusted to him in the course of medical
attendance, or the deficiencies he may observe in the character of patients, unless he is required to
do so by law or unless it becomes necessary in order to protect the welfare of the individual or of
the community.
Section 10. The honored ideals of the medical profession imply that the responsibilities of the
physician extend not only to the individual, but also to society where these responsibilities deserve
his interest and participation in activities, which have the purpose of improving both the health
and the well-being of the individual and the community
119
TOPIC 6: THE ROLE OF ETHICS IN DECISION MAKING
The role of organization structure – chain of command
Organizational structure is the method by which work flows through an organization. It allows
groups to work together within their individual functions to manage tasks. Organizations can
influence ethical conduct, according to Ozar, through positive impact on their members’ ethical
awareness, judgment, motivation, and implementation. A just organization, he said,
 fosters a rich awareness of, and sensibility for, its stated values and ideals, not just in
generalities but in ways linked to actual decisions “on the ground,” rather than leaving
individuals to their own devices, and it tests its structures and processes to ensure that they
are producing ethical results;
 emphasizes the complexity of ethical decisions and the difficult judgments they require,
provides resources to support individuals’ ethical reflection and judgment, and commends
individuals for displaying such reflection and judgment (e.g., in the military context,
neither commanders in theater nor superiors within the medical hierarchy should expect
physicians to act in isolation or blame them for ethical decisions not anticipated by rules
and regulations);
 supports the positive motivations of its members by focusing its systems on positive values
rather than using coercion and fear to attain results, and responds to ethical lapses first of
all as organizational issues rather than personal aberrations; and
 actively assists its members to implement ethics consistently by identifing barriers to
ethical conduct, developing a repertoire of interventions to assist individuals in making
ethical decisions, and establishing a communication system for promoting ethical decision
making before, during, and after an event.
 In this connection, most lapses in implementation can be attributed either to psychological
barriers, such as fear and hopelessness, or practical barriers, in which the individual does
not know how to decide or where to turn for consultation.
Structural mechanisms useful for promoting medical ethics within a health care organization
include;




peer review;
advisory boards;
institutional review boards, for investigative research;
systems engineering and continuous learning and improvement (in the patient safety
area, for example, effective approaches incorporate teamwork and opportunities for
speaking against the authority gradient and for both anonymous and compulsory
reporting of lapses); and
120
 involvement of multiple professions, such as clergy, educators, and social workers
Role of rules and regulations in decision making at both personal and professional levels
Business ethics and business law are interrelated in the sense that the ethical conduct of a business
is often enforceable by legal means. This relationship is not unique to the United States;
international entities such as the World Trade Organization (WTO) and the United Nations (UN)
legally enforce ethical conduct across various countries.
Using the example of contracts, ethical behavior stipulates that those who enter into an agreement
have an obligation to honor the agreement except in the case of rare and extenuating circumstances.
If you as a manager explain a contract to a customer, and that customer signs the agreement, you
are both obligated to adhere to the stipulations of that contract. Failure to do so by either party will
likely result in legal action being taken. Using this example, it is both ethically imperative per your
company's Code of Conduct to be honest and forthright about the contract, and legally binding in
a court of law.
On a larger scale, business ethics also intersects with business law in areas such as the minimum
wage, false claims on a product or service, and the hiring of illegal immigrants. All three examples
are cases where the law plays a part in regulating behavior and likely goes against a company's
Code of Conduct.
Advantage s of ethical behaviour at work places




Building customer loyalty
Retention of good employees
Positive work environment
Avoidance of legal problems
Build Customer Loyalty
Consumers may let a company take advantage of them once, but if they believe they have been
treated unfairly, such as by being overcharged, they will not be repeat customers. Having a loyal
customer base is one of the keys to long-range business success, since serving an existing customer
does not involve marketing costs, whereas acquiring a new one does.
Retain Good Employees
Talented individuals at all levels of an organization want to be compensated fairly for their work
and dedication. They want career advancement within the organization to be based on the quality
of the work they do and not on favoritism. They want to be part of a company whose management
team tells them the truth about what is going on, such as when layoffs or reorganizations are being
contemplated.
121
Companies that are fair and open in their dealings with employees have a better chance of retaining
the most talented people. For instance, employees who do not believe the compensation
methodology is fair are often not as dedicated to their jobs as they could be.
Enhance a Company's Reputation
A company’s reputation for ethical behavior can help it create a more positive image in the
marketplace, which can bring in new customers through word-of-mouth referrals. Conversely, a
reputation for unethical dealings hurts the company’s chances to obtain new customers,
particularly in this age of social networking when dissatisfied customers can quickly disseminate
information about the negative experience they had.
Positive Work Environment
Employees have a responsibility to be ethical from the moment they have their first job interview.
They must be honest about their capabilities and experience. Ethical employees are perceived as
team players rather than as individuals just out for themselves. They develop positive relationships
with coworkers. Their supervisors trust them with confidential information, and they are often
given more autonomy as a result.
Employees who are caught in lies by their supervisors damage their chances of advancement
within the organization and may risk being fired. An extreme case of poor ethics is employee theft.
In some industries, this can cost the business a significant amount of money, such as restaurants
whose employees steal food from the storage locker or freezer. One approach ethical companies
take to avoid this type of behavior is to take the time to train every member of the organization
about the conduct that is expected of them.
Avoid Legal Problems
At times, a company’s management may be tempted to cut corners in pursuit of profit, such as by
not fully complying with environmental regulations or labor laws, ignoring worker safety hazards
or using substandard materials in their products. The penalties for being caught can be severe,
including legal fees and fines or sanctions by governmental agencies. The resulting negative
publicity can cause long-range damage to the company’s reputation that is even more costly than
legal fees or fines.
Steps in Ethical Decision-Making;
 Establish ethical dimensions
 Establish stakeholders affected
 Generate alternative ethical choices
 Choose best option
122
1.Establish the Facts in A Situation
Establish exactly what has happened (or is happening) and who is involved in the situation before
trying to figure out what to do about it. Determine whether there is an ethical issue and/or dilemma.
Is there a conflict of values, or rights, or professional responsibilities? Which clause of the Code
of Conduct is affected by this dilemma? If no connection can be made, there is no ethical problem.
Ask yourself the following questions:
-
What has happened or what is happening?
When and where did certain events occur?
Who is (or might be) involved in or concerned by the situation?
What do the parties involved have to say about the situation?
2. Establish stakeholders affected
Certain key role players form part of the process of finding the best solution to an ethical problem.
Seeking co-operation and involvement of all the stakeholders will improve the transparency and
legitimacy of the engineering operation. The participation of all those affected by the ethical
problem is important and needs to be clarified.
3. Generate alternative ethical choices
Problem solving involves developing a choice of strategies. It is unusual for only one solution to
immediately present itself as the obvious and ideal answer. Sometimes it is the least undesirable
solution that ends up being chosen as the best solution. Potential strategies are explored that will
address and permanently eliminate the root cause. In this step a complete list of possible solutions
is generated.
A comprehensive list is necessary as this stops you from being impulsive and following the first
reasonable-sounding idea which may end up being incomplete or unbalanced. It also prevents
likely courses of action being overlooked. Produce an exhaustive list by tapping into the creativity
to come up with every possible, conceivable solution that could be thought of. Often people will
have their own idea of the best solution so it is important to hear everyone’s input and get all the
solutions documented.
4. Evaluate option
In this step, each idea is evaluated and compared. Each alternative is weighed according to its
advantages and disadvantages and the alternative with the most advantages and the least
disadvantages is then selected.
Identify the key values and principles involved. What meanings and limitations are typically
attached to these competing values? (For example, rarely is confidential information held in
absolute secrecy; however, typically decisions about access by third parties to sensitive content
should be contracted with clients.)
The ethical values and principles which in your professional judgment are most relevant to the
issue or dilemma, should be ranked. Why would you prioritize one competing value/principle over
123
another? (For example, your client's right to choose a beneficial course of action could bring
hardship or harm to others who would be affected.)



Eradicate unacceptable alternatives, i.e. those that are impractical, illegal or improper.
Finally, if possible, settle on at least three ethically justifiable options.
Analyse these options in turn and establish which ethical principles and values are
involved.
5. Choose best option
Decision-making is deciding on the most suitable way to solve or handle a specific problem or
situation after considering the different alternatives. During this step the choice is made. The best
alternative must be selected. All the previous steps were in preparation for this step to ensure that
decision-making works properly. One of the alternative solutions generated before is chosen as
the course of action forward. One strategy has to be decided on from all the options and it has to
be one that everyone will be behind and accept.
The final decision has to be rational and objective. Basing the decision on the work done at the
previous steps helps avoid unilateral decisions taken using political power, personal preference
or poor leadership. Develop an action plan that is consistent with the ethical priorities that have
been determined as central to the dilemma. Can you support or justify your action plan with the
values/principles on which the plan is based?
This step is about evaluation. This involves comparative evaluation where poorest options are
taken out of the equation and the options that remain are weighed against each other; the
alternatives are ranked, scored and prioritised until a final choice is made. The objective is to
find the best solution using a rational, practical method.
Decision-making implies using judgment, i.e. the application of knowledge, experience and
common sense to analyse a matter logically or sum up a situation correctly in order to reach an
acceptable conclusion between the more and less important aspects of a matter, followed by
level-headed action. In short, one’s sense of judgment allows one to make correct and intelligent
decisions. It enables one to choose between two alternatives, in a scientific manner.
124
TOPIC 7: CORPORATE SOCIAL RESPONSIBILITY (CSR)
Definition of CSR
Corporate social responsibility (CSR) is a self-regulating business model that helps a company be
socially accountable to itself, its stakeholders, and the public. By practicing corporate social
responsibility, also called corporate citizenship, companies can be conscious of the kind of impact
they are having on all aspects of society, including economic, social, and environmental.
CSR is how companies manage their business processes to produce an overall positive impact on
society. It covers sustainability, social impact and ethics, and done correctly should be about core
business - how companies make their money
Importance of CSR
Some clear benefits of corporate social responsibility are:

Improved public image. This is crucial, as consumers assess your public image when
deciding whether to buy from you. Something simple, like staff members volunteering an
hour a week at a charity, shows that you’re a brand committed to helping others. As a result,
you’ll appear much more favourable to consumers.

Increased brand awareness and recognition. If you’re committed to ethical practices, this
news will spread. More people will therefore hear about your brand, which creates an
increased brand awareness.

Cost savings. Many simple changes in favour of sustainability, such as using less
packaging, will help to decrease your production costs.

An advantage over competitors. By embracing CSR, you stand out from competitors in
your industry. You establish yourself as a company committed to going one step further by
considering social and environmental factors.

Increased customer engagement. If you’re using sustainable systems, you should shout it
from the rooftops. Post it on your social media channels and create a story out of your
efforts. Furthermore, you should show your efforts to local media outlets in the hope they’ll
give it some coverage. Customers will follow this and engage with your brand and
operations.

Greater employee engagement. Similar to customer engagement, you also need to ensure
that your employees know your CSR strategies. It’s proven that employees enjoy working
more for a company that has a good public image than one that doesn’t. Furthermore, by
showing that you’re committed to things like human rights, you’re much more likely to
attract and retain the top candidates.
125

More benefits for employees. There are also a range of benefits for your employees when
you embrace CSR. Your workplace will be a more positive and productive place to work,
and by promoting things like volunteering, you encourage personal and professional
growth.
Factors affecting choice of CSR activities
o Stakeholders’ interest
o Market completion
o Public policy
o Nature of business
CSR initiatives face many challenges in India and are often seen as a deterrent to even the bestintentioned plans. The most important ones are described here.
1. Lack of Community Participation in CSR Activities
Majorly, communities who are intended beneficiaries of a CSR program show less interest which
will affect their participation and contribution. Also, very little efforts are being made to spread
CSR within local communities and instill confidence in the people. The situation is further
aggravated by inadequate communication between the organization and the community at the
grassroots level.
2. Issues of transparency
Lack of transparency is one of the key issues. There is a perception that partner NGOs or local
implementation agencies do not share adequate information and make efforts to disclose
information on their programs, address concerns, assess impacts and utilize funds. This perceived
lack of transparency has a negative impact on the process of trust building between companies and
local communities, which is key to the success of any CSR initiative.
3. Lack of Consensus
There is a lack of consensus amongst local agencies regarding CSR project needs and priorities.
This results in lack of consensus often result in duplication of activities by corporate houses in the
areas of their intervention. The consequence results in unhealthy competitiveness spirit among
local implementing agencies, which goes against the necessity to have rather than building
collaborative approaches on important issues. This factor limits organization’s abilities to
undertake an impact assessment of their initiatives from time to time.
4. Civil Society Strengthening
126
Capacity for strong performance in the community is the foundation for lasting social benefits.
Worldwide, civil society is an important social and economic force with the potential to create a
more free, fair and just global order. The collective nature of civic action helps to ensure that the
interests of all citizens—including women, the poor and other marginalized groups—are
adequately weighed by public institutions that make policy and allocate resources. Many civil
society organizations (CSOs) face common challenges that limit their effectiveness namely, the
ability to manage human and financial resources, weak advocacy abilities, and insufficient
management ability to scale up promising innovations and results to achieve wider impact.
5. Social Impact Management
This addresses the issue of inclusive growth is more than mere poverty alleviation. It seeks to
address the problem of equity through the enhancement of opportunities for everybody.
Discuss examples of organization CSR activities – Safaricom, Kenya Airways
Kenya Airways CSR
Study by Muhia (2012) established that Kenya Airways has a CSR policy, which is well articulated
in the overall corporate strategy to ensure alignment and eliminate potential conflict which may
arise between the stakeholder goals and the shareholder goals. The importance of corporate social
responsibility in Kenya Airways is emphasized as one of the key issues by entrenching it in the
mission statement, which states that Kenya Airways endeavors to maximize stakeholder value by
consistently providing the highest level of customer satisfaction, upholding the highest level of
safety and security and maximizing employee satisfaction whilst being committed to corporate
and social responsibility.
For smooth execution of the CSR strategy, Kenya Airways constituted a corporate social
responsibility (CSR) committee charged with spearheading and managing the organization‟s CSR
strategy. This committee was constituted through an open balloting from all KQ staff that showed
interest by entering their names for a draw. The chairman of this committee is the CEO, who is
supposed to report to the board at regular intervals 25 informing the directors of the matters it has
reviewed and making recommendations when considered appropriate as and when requested. The
duties which the committee is tasked with are ensuring that its representation encompasses all
relevant functions and divisions of Kenya Airways. It should also review and ensure that Kenya
Airways prioritized need areas are focused on in the implementation of CSR projects and
initiatives by coming up with a suitable CSR management framework covering each of Kenya
Airways areas of activity, gathering and recording information about all existing CSR projects and
initiatives taking place in the company. The committee should also constantly monitor and review
the progress made in achieving the targets and ensuring that action is taken where necessary. This
is achieved by developing indicators and measures that are used to ascertain performance against
prioritized CSR impact areas and approving improvement targets against these, alongside specific
responsibilities.
127
The committee gets to evaluate the links between Kenya Airways overall performance and the
company‟s social and environmental performance. Finally, Kenya Airways recognizes the
importance of involving and constantly communicating the company‟s CSR responsibilities and
achievements internally and externally to both the staff and the other external stakeholders
respectively. External communication is done through reports such as press releases, monthly CEO
newsletter, annual CSR Report to be presented to all stakeholders and the CSR content contained
in 26 the Group‟s financial reports. The press releases are also sent to the company‟s website and
its facebook page.
Kenya Airways believes in transforming lives. This is achieved by building relationships with
customers, giving back to the community, managing safety and security risks, attracting and
retaining talented staff and maintaining the company‟s visibility and reputation. The intended
outcome of all the CSR practices the organization undertakes is to create a positive change in
society and support improvement in the lives of individuals. The practice of corporate social
responsibility is centered on four main areas which include educational infrastructure, water
accessibility, environmental sustainability and health.
Safaricom CSR
Safaricom has not been left out in ensuring that they give back to the society in an effort to improve
their living standards and ensuring a sustainable environment. Safaricom Ltd prides itself as
Kenya’s most profitable firm. The company came into being in 2000. Safaricom’s customer base
is at 25.2 million with 96% on prepaid services. Safaricom provides customers with a range of
integrated telecommunication services, including mobile and fixed voice, SMS, data, the internet,
and M-PESA. This range of services is provided to both individual and corporate/enterprise
customers. Over 94% of our customers are registered M-PESA users.
Safaricom’s network is on 2G, 3G, 4G and WiMAX technology. As at March 2016, it covered
95% of the population on 2G and 78% on 3G (Safaricom, 2016). Achieved 467 4G sites across 20
Counties offering high-speed internet. Rolled out 3,236km of own fibre in the major metro areas
to date. M-PESA runs on the upgraded, stable and robust (G2) system with over 23 million
registered users. The firm continues to leverage its distribution network which has a wider reach.
This enables them to be accessible to their loyal and growing customer base. Most of Safaricom’s
revenue comes from service revenues: Voice, M-PESA, Mobile Data, Messaging, Fixed Data and
another service (Emergency top up fees) revenue. The company also get other income from the
sale of devices and lease of infrastructure. Some of the CSR initiatives that Safaricom has engaged
in.
According to the Safaricom (2016a), some of the initiatives include economic empowerment,
disaster relief, education, art and culture, education, health, environmental conservation, and
employment as well as sports and water. Since its founding, the company has invested in Ksh 1.8
billion towards sponsorship of the listed programs and other humanitarian programs. In terms of
economic empowerment, the company has partnered with different charitable institutions to
support different community-based programs with the objectives of supporting economically the
less privileged. According to Safaricom Foundation (2014), the company CSR strategy indicated
128
15 economic empowerment projects as part of the corporate responsibility strategy 2014-2017.
Some of the major projects include Northern Rangelands Trust, a community-led initiative aimed
at wildlife conservation and community development in Northern Kenya (Safaricom Foundation,
2014).
Another economic empowerment program is the Bethsaida Children’s’ Home project in Nakuru
aimed at providing rehabilitation, rescue and reintegration survive to young street boys aged 6-14
years by transforming their lives through small scale income generating projects. In addition,
Safaricom has heavily invested in education CSR initiatives. For instance, Safaricom established
African Braille Centre to support children impaired visually with Integrated Education programs
and special schools. The company provides educational materials, equipment, and devices and
provide learning and teaching materials that enable the children with visual impairment to write
Braille. Again, Safaricom Foundation (2014) notes that the company has supported Salvation
Army Joy town Secondary School by providing wheelchairs and educational materials to the
people with walking disabilities.
Similarly, the company has a gender violence recovery centre that supports people who have been
exposed to gender violence to recover, especially women. Among many other programs,
Safaricom like other companies has made efforts to support the environmental sustainability goals.
For instance, the company supports 11 environmental conservation projects totalling to Shs 15
million (Safaricom, 2016a). High proportions of this money have gone to waste management by
purchasing e-waste grinders for schools in Kenya/ which is a growing challenge. The e-waste
systems are already complete and are expected to increase their recycling and grinding capacity.
Also, Safaricom through its Foundation has supported health initiatives in aneffort to ensure
accessible and affordable health care among the less privileged societies. At the moment, the
company has invested Ksh 38 million towards funding 25 health projects. This money has been
utilized in the construction of medical camps, purchasing and construction of equipment for health
facilities.
Further, Safaricom Foundation has partnered with Action Aid International-Kenya and the Red
Cross Society to help implement large-scale water projects in the communities having water
problems. Such communities are the ones living in Arid and Semi-arid areas of Kenya such as
Gachoka, Katalwa, Makueni and Garbutalla. The company has funded a total of 8 projects with
Ksh 24 million. These are just but a few projects that Safaricom supports through CSR initiatives.
Misuse of CSR activities;

As a disposal method of about to expire goods to the needy in the society

Expired goods put on sales promotion

Cover up malpractices

Clean up bad money or as illegal activities money
Recommendations on CSR
129
Executives should find other plausible ways to meet the company obligations to all stakeholders
without compromising the basic need for a fair return for shareholders.
Betsy Atkins advises that for companies to be considered socially responsible citizens by the
consuming public, they should 






Be transparent in their financial reporting.
Produce a quality product, and not misrepresent it.
Be alert in case they know something about the product that endangers the consumer, be
forthright and let the public know.
Not use predatory practices in offshore manufacturing, such as child labour.
Not pollute the environment or other environments, and adhere to laws and regulations.
Be respectful, fair and open in their employment practices.
TOPIC 8 : THE ROLE OF PROFESSIONAL BODIES IN PROMOTING ETHICS
Definition of professional bodies
A Professional Body is an organisation with individual members practicing a profession or
occupation in which the organisation maintains an oversight of the knowledge, skills, conduct and
practice of that profession or occupation.
Importance of professional bodies
Benefits of joining a professional body
130
1. You gain professional recognition
Most institutions have an assessment process that applicants must pass before they are granted
membership. This means that, once you have demonstrated that you have the requisite experience,
qualifications and skills, you may join the institution.
You may then add the appropriate letters to your CV and business card. Membership shows that
you have reached a certain level of expertise in your profession, and adds to your credibility. It
also shows that you are serious about your career and professional development.
2. Enhances your network
The institutions sometimes host regional networking and professional development events that you
can attend, which can be useful when it comes to making new contacts and learning more about
what’s happening in the sector.
Another benefit of enhancing your network is that you may find a mentor to help you with your
professional needs or you may be in a position to become a mentor to someone else.
3. Enables you to take charge of your career
Some of these bodies often have job listings online or in print available only to their members.
This means that being a member gives you exclusive access to their career resources. This is a
great way to find a job.
As a plus, the bodies usually offer career advice to their members in terms of effective resumes or
cover letters, job searching tips and negotiating techniques. Some associations even have panels
that you can contact for specific questions on career issues.
4. Enables you to broaden your knowledge
Gaining that extra knowledge in your field could give you an edge over other job seekers.
Membership to a professional body gives you an opportunity to attend courses, seminars and/or
lectures to keep you up to date on the latest industry innovations, research and trends.
If you are serious about the advancement of your career, joining a professional association is a step
in the right direction. Find out what associations exist in your particular field and get to know what
it takes to join. Some expense may be incurred, but it could be the most important investment you
will ever make.
Before joining a professional body it is important that you take into consideration what you expect
to gain from it and go with one that matches your needs and that is authentic.
The role of professional bodies




Members’ registration
Members’ education
Disciplinary concerns for members
Regulate who practices/qualify to practice
131



Set up the operating standards
Create new knowledge through research
Champion the philosophy of the profession
The impact of ICT on ethics in the society




Quick flow of inaccurate information products /services
E-marketing and frauds
Unethical use of social media
Hacking of database/ unauthorized access to data
TOPIC 9: EMERGING ISSUES
Emerging issues in commerce
E-commerce
E-Commerce or Electronic Commerce means buying and selling of goods, products, or services
over the internet. E-commerce is also known as electronic commerce or internet commerce. These
services provided online over the internet network. Transaction of money, funds, and data are also
considered as E-commerce. These business transactions can be done in four ways: Business to
Business (B2B), Business to Customer (B2C), Customer to Customer (C2C), Customer to
132
Business (C2B). The standard definition of E-commerce is a commercial transaction which is
happened over the internet. Online stores like Amazon, Flipkart, Shopify, Myntra, Ebay, Quikr,
Olx are examples of E-commerce websites. By 2020, global retail e-commerce can reach up to
$27 Trillion. Let us learn in detail about what is the advantages and disadvantages of E-commerce
and its types
Types of E-Commerce Models
Electronic commerce can be classified into four main categories. The basis for this simple
classification is the parties that are involved in the transactions. So the four basic electronic
commerce models are as follows,
1. Business to Business
This is Business to Business transactions. Here the companies are doing business with each other.
The final consumer is not involved. So the online transactions only involve the manufacturers,
wholesalers, retailers etc.
2. Business to Consumer
Business to Consumer. Here the company will sell their goods and/or services directly to the
consumer. The consumer can browse their websites and look at products, pictures, read reviews.
Then they place their order and the company ships the goods directly to them. Popular examples
are Amazon, Flipkart, Jabong etc.
3. Consumer to Consumer
Consumer to consumer, where the consumers are in direct contact with each other. No company
is involved. It helps people sell their personal goods and assets directly to an interested party.
Usually, goods traded are cars, bikes, electronics etc. OLX, Quikr etc follow this model.
4. Consumer to Business
This is the reverse of B2C, it is a consumer to business. So the consumer provides a good or some
service to the company. Say for example an IT freelancer who demos and sells his software to a
company. This would be a C2B transaction.
What is m-Commerce?
Examples of E-Commerce







Amazon
Flipkart
eBay
Fiverr
Upwork
Olx
Quikr
133
Advantages of E-Commerce

E-commerce provides the sellers with a global reach. They remove the barrier of place
(geography). Now sellers and buyers can meet in the virtual world, without the hindrance
of location.

Electronic commerce will substantially lower the transaction cost. It eliminates many fixed
costs of maintaining brick and mortar shops. This allows the companies to enjoy a much
higher margin of profit.

It provides quick delivery of goods with very little effort on part of the
customer. Customer complaints are also addressed quickly. It also saves time, energy and
effort for both the consumers and the company.

One other great advantage is the convenience it offers. A customer can shop 24×7. The
website is functional at all times, it does not have working hours like a shop.

Electronic commerce also allows the customer and the business to be in touch directly,
without any intermediaries. This allows for quick communication and transactions. It also
gives a valuable personal touch.
Disadvantages of E-Commerce

The start-up costs of the e-commerce portal are very high. The setup of the hardware and
the software, the training cost of employees, the constant maintenance and upkeep are all
quite expensive.

Although it may seem like a sure thing, the e-commerce industry has a high risk of failure.
Many companies riding the dot-com wave of the 2000s have failed miserably. The high
risk of failure remains even today.

At times, e-commerce can feel impersonal. So it lacks the warmth of an interpersonal
relationship which is important for many brands and products. This lack of a personal touch
can be a disadvantage for many types of services and products like interior designing or
the jewelry business.

Security is another area of concern. Only recently, we have witnessed many security
breaches where the information of the customers was stolen. Credit card theft, identity theft
etc. remain big concerns with the customers.

Then there are also fulfillment problems. Even after the order is placed there can be
problems with shipping, delivery, mix-ups etc. This leaves the customers unhappy and
dissatisfied.
Glocalization
134
This is the practice of conducting business according to both local and global considerations.
Glocalization is a combination of the words "globalization" and "localization." The term is used
to describe a product or service that is developed and distributed globally but is also adjusted to
accommodate the user or consumer in a local market.
Understanding Glocalization
Glocalization is the adaptation of global and international products, into the local contexts they're
used and sold in. The term was coined in the Harvard Business Review, in 1980, by sociologist
Roland Robertson, who wrote that glocalization meant "the simultaneity—the co-presence—of
both universalizing and particularizing tendencies."
In regards to a particular product or service, this means the adaptation of globally marketed
products and services into local markets. A global product or service, something everyone needs
and can get used out of, may be tailored to conform with local laws, customs, or consumer
preferences. Products that are "glocalized" are, by definition, going to be of much greater interest
to the end user, the person who ends up using the product. This is because while it's something
that everyone can use and has use for, as a global product, it's localization makes it more specific
to an individual, their context, and their needs.
Glocalization works for companies with decentralized authority structures, and for companies that
exist and compete in multiple, different cultural contexts. The process can be expensive, and
resource intensive, but it often pays off for companies that practice it, as it allows for greater access
to a larger, more culturally varied target market. It also makes those countries more effective
competitors in those markets.
If globalization was charged with cultural homogenization, glocalization is something of an
answer to it. Glocalization can be thought of as the opposite, or the inverse, of Americanization,
too, which is the influence that American culture and business has on another country's culture.
Glocalization and Local Economies
This has mixed results for the larger economy. In making these companies more effective
competitors, it should increase the quality of competition and drive down prices, making goods
more accessible.
However, since glocalization is generally the practice of large multinational corporations, driving
the price down and taking a big share of the market, the process can hurt smaller, local businesses,
struggling to compete with these corporations low costs of production. This can result in less
competition, and end up driving prices up.
135
Glocalization works better for businesses, the management structures of which are decentralized
and those that compete in various cultural settings. Glocalization is a big investment but it will pay
great dividends. It will give companies wider access to a bigger target market in different cultures.
The concept allows the different countries to be better equipped to compete effectively.
It extends to localizing ad campaigns and marketing thrusts to make them friendlier to local
consumers, to encourage them to accept the products that come from a different country.
Glocalism affects international business in different ways:
1. A local event can impact the global market in the same manner that a global event can have
a big relevance to the economy of the local market. This means that there is an
interconnection among things. For example, an exporting country where a natural disaster
occurred may not be able to supply the resources needed for manufacturing in the importing
country temporarily. When there is a political unrest in an oil and gas exporting country,
the cost of these petroleum products may increase in the importing countries.
2. The company sees to it that their product or service is adapted to each locale or culture
where the product is marketed. The adaptation helps to position the company to have
relevance in the local culture, with its inherent values, perceptions and nuances.
Glocalization is done in all the target markets.
3. Glocalism pushes the services and products to the local and global consumers
simultaneously. This means reaching to consumers in all the markets the company serves
and at the same time, the local clients want to know if the brand understands them and
could meet the needs and wants of the local users.
Effects of glocalism on social media
Glocalism was trending as early as 2013 and it was predicted that social media would make it
popular. It was determined that beneath glocalism, cultures, economies and local customers can
exert bigger power in the world economy. It enables them to require services and products to be
translated into the language they understand. At the same time, these products and services should
be able to speak to local users in a manner that is relevant to them.
Effects of glocalism on localization and translation
Cultural relevance of the products or services has a higher importance than the translation of
materials into the language spoken in the target market. Companies should be working with
professional language services providers like Day Translations, Inc., which has a team of native
speakers who reside in the target localities. With glocalization, the company cannot only claim
that it speaks the language of the local market, but also share the practicalities of their language
and make everything culturally relevant to each end user.
Differences between localization and glocalization
136
Localization and glocalization are interlinked, yet they have different definitions. In localization,
the cultural and linguistic barriers are addressed. In glocalization, it is the product that is being
technically enabled to get it ready for localization, which is the way to reach globalization status.
Successful Example of glocalization
Large companies entering local markets can mean new jobs, products and services in the area
where there may have been a desperate need. But glocalization can also have a negative effect on
smaller economies that have grown from grassroots businesses.
Corporations have a higher budget for glocalization and can offer lower prices, quickly owning
the majority of the market. It can be difficult for local and small businesses to compete.
And when local businesses can’t keep up, corporations can raise their prices because they no longer
have any competition
McDonald’s glocalizes its products around the world
McDonald’s restaurants in Israel sell kosher Big Macs without cheese. Their Indian restaurants
include mostly chicken, lamb, and vegetarian offerings to cater to Hindus who don’t eat beef.
The franchise’s products in India include the Chicken Maharaja Mac (a grilled chicken double
patty with habanero sauce) and the Veg Maharaja Mac (a corn patty with cheese cocktail sauce). In
Arab countries, you can pick up the McArabia Chicken – a pita sandwich with two grilled chicken
or beef patties, tomato, onion, lettuce, and garlic sauce.
McDonald’s recognizes that food plays a huge role in culture and glocalizes their brand and
products accordingly. This has resulted in countries around the world appreciating their products
and feeling comfortable with their brand.
GLOBALIZATION
Globalization is a process where by business activities in the world are brought together into one
market through modern technology.An example is buying and selling of shares for companies all
over the world by use of the internet.
Privatization
Privatisation is a process of changing ownership of a government owned business unit to members
of the public through the sale of shares.A good example is the sale of Kengen and Safaricom shares
through Initial Public Offers(IPO) in 2007 and 2008 respectively.
137
Amalgamation
Amalgamation is the process of bringing two or more different business units into joint ownership.
Franchising
Franchising is the granting of production rights and operations to another firm or individual to
produce similar goods under the name of the original business at a fee. A Sole proprietorship is
formed through an application and acquisition of trading license from a local authority
The Pros And Cons Of Globalization
There is no question that globalization has been a good thing for many developing countries who
now have access to our markets and can export cheap goods. Globalization has also been good for
Multi-national corporations and Wall Street. But globalization has not been good for working
people (blue or white collar) and has led to the continuing deindustrialization of America.
Globalization is a complicated issue. It is necessary to evaluate the pros and cons before drawing
any conclusions.
Advantages
Supporters of globalization argue that it has the potential to make this world a better place to live
in and solve some of the deep-seated problems like unemployment and poverty.








Free trade is supposed to reduce barriers such as tariffs, value added taxes, subsidies, and
other barriers between nations. This is not true. There are still many barriers to free trade.
The Washington Post story says “the problem is that the big G20 countries added more than
1,200 restrictive export and import measures since 2008
The proponents say globalization represents free trade which promotes global economic
growth; creates jobs, makes companies more competitive, and lowers prices for consumers.
Competition between countries is supposed to drive prices down. In many cases this is not
working because countries manipulate their currency to get a price advantage.
It also provides poor countries, through infusions of foreign capital and technology, with the
chance to develop economically and by spreading prosperity, creates the conditions in which
democracy and respect for human rights may flourish. This is an ethereal goal which hasn’t
been achieved in most countries
According to supporters globalization and democracy should go hand in hand. It should be
pure business with no colonialist designs.
There is now a worldwide market for companies and consumers who have access to products
of different countries. True
Gradually there is a world power that is being created instead of compartmentalized power
sectors. Politics is merging and decisions that are being taken are actually beneficial for
people all over the world. This is simply a romanticized view of what is actually happening.
True
There is more influx of information between two countries, which do not have anything in
common between them. True
138








There is cultural intermingling and each country is learning more about other cultures. True
Since we share financial interests, corporations and governments are trying to sort out
ecological problems for each other. – True, they are talking more than trying.
Socially we have become more open and tolerant towards each other and people who live in
the other part of the world are not considered aliens. True in many cases.
Most people see speedy travel, mass communications and quick dissemination of information
through the Internet as benefits of globalization. True
Labor can move from country to country to market their skills. True, but this can cause
problems with the existing labor and downward pressure on wages.
Sharing technology with developing nations will help them progress. True for small countries
but stealing our technologies and IP have become a big problem with our larger competitors
like China.
Transnational companies investing in installing plants in other countries provide
employment for the people in those countries often getting them out of poverty. True
Globalization has given countries the ability to agree to free trade agreements like NAFTA,
South Korea Korus, and The TPP. True but these agreements have cost the U.S. many jobs
and always increase our trade deficit
Disadvantages
•
•
•
•
•
•
•
The general complaint about globalization is that it has made the rich richer while making
the non-rich poorer. “It is wonderful for managers, owners and investors, but hell on workers
and nature.”
Globalization is supposed to be about free trade where all barriers are eliminated but there
are still many barriers. For instance161 countries have value added taxes (VATs) on imports
which are as high as 21.6% in Europe. The U.S. does not have VAT.
The biggest problem for developed countries is that jobs are lost and transferred to lower
cost countries.” According to conservative estimates by Robert Scott of the Economic Policy
Institute, granting China most favored nation status drained away 3.2 million jobs, including
2.4 million manufacturing jobs. He pegs the net losses due to our trade deficit with Japan
($78.3 billion in 2013) at 896,000 jobs, as well as an additional 682,900 jobs from the Mexico
–U.S. trade-deficit run-up from 1994 through 2010.”
Workers in developed countries like the US face pay-cut demands from employers who
threaten to export jobs. This has created a culture of fear for many middle class workers who
have little leverage in this global game
Large multi-national corporations have the ability to exploit tax havens in other countries to
avoid paying taxes.
Multinational corporations are accused of social injustice, unfair working conditions
(including slave labor wages, living and working conditions), as well as lack of concern for
environment, mismanagement of natural resources, and ecological damage.
Multinational corporations, which were previously restricted to commercial activities, are
increasingly influencing political decisions. Many think there is a threat of corporations
ruling the world because they are gaining power, due to globalization.
139
•
•
•
•
•
Building products overseas in countries like China puts our technologies at risk of being
copied or stolen, which is in fact happening rapidly
The anti-globalists also claim that globalization is not working for the majority of the world.
“During the most recent period of rapid growth in global trade and investment, 1960 to 1998,
inequality worsened both internationally and within countries. The UN Development
Program reports that the richest 20 percent of the world's population consume 86 percent of
the world's resources while the poorest 80 percent consume just 14 percent. “
Some experts think that globalization is also leading to the incursion of communicable
diseases. Deadly diseases like HIV/AIDS are being spread by travelers to the remotest
corners of the globe.
Globalization has led to exploitation of labor. Prisoners and child workers are used to work
in inhumane conditions. Safety standards are ignored to produce cheap goods. There is also
an increase in human trafficking.
Social welfare schemes or “safety nets” are under great pressure in developed countries
because of deficits, job losses, and other economic ramifications of globalization.
Globalization is an economic tsunami that is sweeping the planet. We can’t stop it but there are
many things we can do to slow it down and make it more equitable.
What is missing?
Leadership – We need politicians who are willing to confront the cheaters. One of our biggest
problems is that 7 of our trading partners manipulate their currencies to gain unfair price advantage
which increases their exports and decreases their imports. This is illegal under WTO rules so there
is a sound legal basis to put some kind of tax on their exports until they quit cheating.
Balanced Trade – Most of our trading partners can balance their trade budgets and even run a
surplus. We have not made any effort to balance our trade budget and have run a deficit for more
than 30 years resulting in an $11 trillion deficit. The trade deficit is the single biggest job killer in
our economy, particularly manufacturing jobs. We need the government to develop a plan to begin
to balance our trade deficit even though this is not a political priority in either party.
Trade Agreements – Both the NAFTA and the South Korean Korus trade agreements might have
been good for Wall Street and the multi-national corporations but they eliminated jobs in America
and expanded our trade deficit. The upcoming Trans Pacific Trade Agreement will do the same
thing and Congress should not fast track this bad agreement for a dozen reasons.
Enforcing the rules – China ignores trade rules and WTO laws with reckless abandon. Besides
currency manipulation they subsidize their state owned companies to target our markets, and
provide funding to their state owned companies that dump their products in America. They also
steal our technologies, sell counterfeit versions of our products, and impose tariffs and other
barriers anytime they want - as we do nothing to stop them. China does not deserve to be on our
most favored nation list and we need to tax their exports to us until they stop these illegal activities.
What is good for third world countries, like Kenya, or countries with tremendous growth, like
China, has not been good for American workers. Globalization is deindustrializing America as we
140
continue to outsource both manufacturing blue collar and white collar jobs. Supporters of
globalization have made the case that it is good because it has brought low priced imported goods,
but they have not matched the decline of wages in the middle class and will not offset the loss of
many family wage jobs
Globalization is like being overwhelmed by a snow avalanche. You can’t stop it – you can only
swim in the snow and hope to stay on top. I would like to make the argument that the US should
try a lot harder to swim in the snow and stay on top. We can’t stop globalization but there are many
policies and strategies we can use to make it more equitable. We can enforce the trade laws, force
the competition to play by the same rules, and stop giving our competitors the tools (technology
and R& D) to ultimately win the global war.
Read more at: https://www.ebookskenya.com/warehousing-form-2-business-studies-notes/
141