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UNIVERSITY OF NAIROBI COLLEGE OF HUMANITIES AND SOCIAL SCIENCES

SCHOOL OF BUSINESS

In collaboration with

CENTRE

FOR OPEN AND DISTANCE LEARNING

DBA 101: INTRODUCTION TO BUSINESS

AUTHORS KEPHA MONAYO: LECTURER, SCHOOL OF BUSINESS JUSTUS M. MUNYOKI: LECTURER, SCHOOL OF BUSINESS JAMES GATHUNGU: LECTURER, SCHOOL OF BUSINESS

REVIEWER S. M. Nzuve EDITED BY S. P. Nzuki

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Lecture series: DBA 101 – Introduction to Business

Published by University of Nairobi, P. O. Box 30197, Nairobi, Kenya Printed by College of Education and External Studies, University of Nairobi, P. O. Box 30197, Nairobi, 2006

© University of Nairobi, 2006, all rights reserved. No part of this Module may be reproduced in any form or by any means without permission in writing from the Publisher.

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TABLE OF CONTENTS Table of Contents ……………………………………………… iii General Introduction ……………………………………………. ix

LECTURE 1: Introduction and General Overview of Business… 1.1. Introduction …………………………………………… 1.2. Objectives …………………………………………….. 1.3. Meaning of Business …………………………………. 1.4. Characteristics of Business …………………………… 1.5. Objectives of Business Organizations ………………… 1.6. Scope and Nature of Business ………………………… 1.7. Types of Industry ……………………………………… 1.7.1. Primary Industries ……………………………… 1.7.2. Secondary Industries …………………………… 1.7.3. Classification of manufacturing Industries …….. 1.7.4. Commerce ……………………………………… 1.7.5. Trade …………………………………………… 1.7.6. Categorization of Business Organization ……… 1.8. Sources of Business …………………………………… 1.9. Business as a System …………………………………. 1.10. An Open System of Organization ……………………. 1.11. Business as a Way of Life …………………………… 1.12. Summary …………………………………………….

1 1 2 2 2 4 5 5 6 7 7 9 11 12 12 15 17 18 19

LECTURE 2: Business Environment …………………… 2.1. Introduction …………………………………………. 2.2. Objectives …………………………………………… 2.3. Meaning of Environment …………………………… 2.4. Types of Environments …………………………….. 2.4.1 Internal Environment ………………………… 2.4.2 External Environment ……………………….. 2.5. Ethics ………………………………………………… 2.5.1. Ethics Defined ………………………………… 2.5.2. Sources of Business Ethics …………………… 2.5.3. Benefits of Ethics to Business ………………… 2.6. Core Stake Holders and their Rights ………………… 2.7. Social Responsibility ………………………………… 2.7.1. Meaning of Social Responsibility …………….. 2.7.2. Arguments for Social Responsibility …………..

20 20 21 21 21 22 22 23 24 24 25 25 27 27 28

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2.8. 2.9.

2.7.3. Arguments against Social Responsibility ………… 2.7.4. Social Responsibility of Business ………………… Summary ………………………………………………… Further Reading …………………………………………

28 28 30 30

LECTURE 3: Forms of Business Organizations …………… 3.1. Introduction ……………………………………………… 3.2. Objectives ………………………………………………… 3.3. Private Sector …………………………………………… 3.4. Public Sector …………………………………………… 3.5. Selection of form of Business …………………………. 3.6. Sole proprietorship …………………………………… 3.7. Partnerships …………………………………………… 3.8. Limited Liability Companies ………………………… 3.9. Co-operatives ………………………………………… 3.10. Summary ……………………………………………. 3.11. Further Reading ……………………………………..

31 31 31 32 32 33 34 40 46 54 59 59

LECTURE 4: Public Business Enterprises 4.1. Introduction …………………………………………… 4.2. Objectives ……………………………………………. 4.3. Need for Public Enterprises ………………………… 4.4. Reasons for Government Enterprises ………………. 4.5. Reasons against Public Enterprises ………………… 4.6. Organization of State Enterprises …………………. 4.7. Government Department …………………………… 4.7.1. Limitations of Departmentally Enterprises .………… 4.8. Public Corporations/Parastatals …………………………… 4.8.1. Features of Public Corporations …………………… 4.8.2. Formations ………………………………………… 4.8.3. Ownership ………………………………………… 4.8.4. Management ……………………………………… 4.8.5. Capital Sources …………………………………… 4.8.6. Types of Public Corporations ……………………… 4.8.7. Advantages of Public Corporations ……………… 4.8.8. Disadvantages of Public Corporations …………… 4.8.9. Dissolution of Public Corporations ………………

60 61 61 61 62 63 63 64 64 64 65 66 66 66 67 69 71 72

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4.9. Privatization ……………………………………………. 4.10. Summary ……………………………………………… 4.11. Further Readings ………………………………………

73 74 75

LECTURE 5: Small Business Management ……………… 76 5.1. Introduction …………………………………………… 76 5.2. Objectives ……………………………………………… 77 5.3. Meaning of Small Business …………………………… 77 5.4. Characteristics of Small Business Enterprises ………… 78 5.5. Advantages of Being Small …………………………… 79 5.6. Disadvantages of Small Enterprises …………………… 80 5.7. Role of Small Businesses in Kenyan Economy………… 81 5.8. Constraints in the Development of Small Enterprises in Kenya ..83 5.9. Ownership and Management of Small Enterprises …… 85 5.10. Summary ……………………………………………… 86 5.11. Further Reading ……………………………………… 86

LECTURE 6: Principles of Management ………………… 6.1. Introduction …………………………………………… 6.2. Objectives ……………………………………………… 6.3. Meaning of Management ……………………………… 6.4. Characteristics of Management ……………………… 6.5. Levels of Management ……………………………… 6.6. Management Functions ……………………………… 6.6.1. Planning ……………………………………………… 6.6.2. Organizing …………………………………………… 6.6.3. Staffing ……………………………………………… 6.6.4. Directing ……………………………………………… 6.6.5. Communication ……………………………………… 6.6.6. Motivation …………………………………………… 6.6.7. Leadership …………………………………………… 6.6.8. Controlling ………………………………………….. 6.7. Development of Management Thought .…………… 6.8. Qualities of a Good Modern Manager ……………… 6.9. Summary …………………………………………… 6.10. Further Reading …………………………………….

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88 88 89 89 90 90 91 92 95 96 97 98 99 100 100 101 102 103 104

LECTURE 7: Human Resource Management ………… 7.1. Introduction ……………………………………… 7.2. Objectives ………………………………………… 7.3. Meaning of Human Resource Management ……… 7.4. The role of Human Resource Management ……… 7.5. Human Resource Management Activities ..………… 7.6. Staff welfare and Disciplinary Procedures ………… 7.7. Summary …………………………………………… 7.8. Further Reading ……………………………………

105 105 105 105 106 108 112 113 113

LECTURE 8: Labour Relations ……………………… 8.1. Introduction ……………………………………… 8.2. Objectives ………………………………………… 8.3. Meaning of Labour Relations …………………… 8.4. Trade Unions …………………………………… 8.5. Collective Bargaining …………………………… 8.5.1. Features of Collective Bargaining ……………… 8.5.2. Merits of Collective Bargaining ………………… 8.5.3. Demerits of Collective Bargaining ……………… 8.6. Compulsory Adjudication ………………………. 8.6.1. Merits of Compulsory Adjudication …………… 8.6.2. Demerits of Compulsory Adjudication ………… 8.7. Grievance ……………………………………… 8.7.1. Causes of Grievances ………………………… 8.8. Discipline …………………………………….. 8.9. Summary ………………………………………

114 115 115 115 115 116 119 120 121 122 122 122 123 123 123 125

LECTURE 9: Organization and Organization Structures… 9.1. Introduction …………………………………………… 9.2. Objectives ……………………………………………… 9.3. Meaning of Organization ……………………………… 9.4. Formal and Informal Organizations ……………. 127 9.4.1. Formal Organization …………………………………… 9.4.2. Informal Organization ………………………………… 9.5. Organization Charts ………………………………….. 9.5.1. Meaning ……………………………………………… 9.5.2. Purpose of Organization Chart ……………………… 9.5.3. Types of Charts ………………………………………

126 126 126 127

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128 128 131 131 131 131

9.6. Organization Structures ……………………………… 9.6.1. Benefits of a Good Organization Structure ………….. 9.7. Forms of Organization Structure and Charts ………… 9.7.1. Line Organization …………………………………… 9.7.2. Line and Staff Organization ………………………… 9.7.3. The Divisional Organization Structures …………… 9.7.4. Project Organization Structure ……………………. 9.7.5. Matrix Organizational ……………………………. 9.8. Summary …………………………………………

134 134 135 135 136 138 142 144 146

LECTURE 10: Fundamentals of Marketing ………… 10.1. Introduction ………………………………………. 10.2. Objectives ………………………………………… 10.3. Meaning of Marketing …………………………… 10.4. Marketing Concept and Theories/Philosophies …… 10.5. Difference between Selling and Marketing ……….. 10.6. Marketing Mix Variables …………………………. 10.6.1. Product …………………………………. 10.6.2. Price …………………………………… 10.6.3. Place (Distribution) …………………… 10.6.4. Promotion ……………………………. 10.7. Product Life Cycle ……………………………… 10.8. Consumer and Industrial Markets ……………… 10.9. Marketing Environment ………………………… 10.10. Summary ………………………………………. 10.11. Further Reading …………………………………

148 148 149 149 150 152 153 153 153 157 158 160 161 162 164 165

LECTURE 11: Product Management …………… 11.1. Introduction …………………………………… 11.2. Objectives ……………………………………. 11.3. Meaning of Productivity ……………………… 11.4. Elements of Production ……………………… 11.4.1. Product Development ………………. 11.4.2. Plant ………………………………… 11.4.3. Purchasing …………………………. 11.4.4. Manufacturing Process ……………. 11.4.5. People ………………………………

166 166 167 167 167 168 168 168 169 170

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11.5. Product Planning …………………………… 11.6. Production Control ………………………… 11.7. Industrial Productivity ……………………. 11.8. Logistics and Physical Distribution ………… 11.9. Productivity in Organizations ……………… 11.10. Organizational Trends in Productivity ……… 11.11. Summary……………………………………… 11.12. Further Reading ……………………………………

170 171 174 175 179 181 184 184

LECTURE 12: Business Finance ………………………… 12.1. Introduction …………………………………………… 12.2. Objectives ………………………………………………… 12.3. Meaning of Business Finance …………………………… 12.4. Role of Finance in Business ……………………………… 12.5. Objectives of Business Finance …………………………… 12.6. Functions of a Finance Manager …………………………… 12.7. Sources of Finance in Business …………………………… 12.8. Shares …………………………………………………….. 12.8.1. Meaning of a Share ……………………………… 12.8.2. Types of Shares …………………………………… 12.8.3. Kinds of Preference Shares ………………………. 12.8.4. Equity Shares of Ordinary Shares ………………… 12.8.5. Different Shares of Management or Founder Shares … 12.9. Debentures ………………………………………………… 12.9.1. Kinds of Debentures ……………………................ 12.10. Factors Influencing the Methods and source of Finance … 12.11. Financial Analysis ………………………………………… 12.11.1. Financial Statements ……………………………… 12.11.2. Financial Ratios ………………………………….. 12.12. Financial Institutions ……………………………………… 12.12.1. Purposes of Financial Institutions ………………… 12.12.2. Classification of Financial Institutions …………… 12.13. The Stock Exchange ……………………………………… 12.13.1. Quotation …………………………………….…… 12.13.2. Benefits of Quotation ……………… ……….…… 12.13.3. Functions of Stock Exchange .…………………… 12.14. Summary ………………………………………………… 12.15. Further Reading …………………………………………

185 185 186 186 187 187 188 188 190 190 190 190 191 191 191 192 193 193 193 194 197 197 198 198 199 199 199 200 200

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LECTURE 13: International Business ………………… 201 13.1. Introduction …………………………………………… 202 13.2. Objectives ……………………………………………… 202 13.3. Meaning of International Business ……………………… 202 13.4. Reasons why Firms go International ……………………. 204 13.5. Forms of International Business ………………………… 206 13.6. Practices in International Trade ………………………… 208 13.7. Ways of Entering International Trade …………………… 210 13.8. Barriers to International Trade …………………………… 214 13.9. Government Policies and Restrictions of International Trade …..216 13.10. Effects of Trade Restrictions ……………………………… 217 13.11. Multinational Corporations ………………………………… 219 13.12. Summary …………………………………………………. 221 13.13. Further Reading ………………………………………… 222 GENERAL REFERENCES …………………………………… 223

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INTRODUCTION Welcome to this Course Unit in your Bachelor of Commerce Degree Programme by Distance Learning. The Introduction to Business Course Unit has been designed to introduce you to the general issues in business, and therefore covers most of the areas in the bachelor of Commerce degree programme. It is divided into thirteen different lectures which progress from introduction and general overview of business to international business. You will be exposed to the nature of business and its environment, forms of business organization including public enterprises. Principles of Management, Human Resource Management and Production Management have also been elaborately discussed, thereby exposing the learner to various management practices, and the crucial role played by managers in organizations. You will also be exposed to Marketing and International Business. The unit also discusses Labour Relations, Small Business Management and Organizational Structures as well as Business Finance.

In this course unit you will be assessed as follows: Take away assignment (Term Paper)  Timed test (CAT – one hour)  Final examination (two hours) The take away assignment and timed test together constitute course work, which carries 30% of the marks, while the final examination constitutes 70% of the total marks.

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COURSE GENERAL OBJECTIVES This is an introductory course to the study of business with an integrated approach to achieve the following objectives:

1. to provide the learner with an overview and scope of the business world with specific emphasis to the Kenyan emphasis.

2. to introduce students to various fields which are fundamental in business studies. 3. to provide students with a general understanding of the inter-relationships among various fields of business and environment.

4. to help students choose business as a career 5. to prepare students to meet future challenges in the business world.

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LECTURE ONE OVERVIEW OF BUSINESS Lecture Outline 1.13. Introduction 1.14. Objectives 1.15. Meaning of Business 1.16. Characteristics of Business 1.17. Objectives of Business 1.18. Scope and Nature of Business 1.19. Types of Industry 1.19.1.

Primary Industries

1.19.2.

Secondary Industries

1.19.3.

Classification of Manufacturing Industries

1.19.4.

Commerce

1.19.5.

Trade

1.19.6.

Categorization of Business Organizations

1.20. Success of Business 1.21. Business as a System 1.22. An Open System of Organization 1.23. Business as a way of Life 1.24. Summary

1.1. Introduction Business is both an economic activity and a way of life. Without business, the material side of life would not be possible. It is business which manufactures and distributes goods that customers need. Businesses avail goods and services when customers require them.

In essence, therefore there are many integrated activities which constitute

business. These activities of business bridge the gap between the manufacturer and the ultimate customers or users.

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We have also referred to business as a way of life. This is for those who choose business as a career. Such people may feel intrinsically rewarded by owning and running a business. In this chapter, we shall get a bird’s eye view of what business is, its scope, types of businesses, the success of business among other aspects related to business.

1.2. Objectives At the end of this lecture you should be able to: 1 Explain the meaning of business 2 Explain the characteristics of business 3 Outline the scope business 4 Categorize business organizations 5 Explain the success factors of a business 6 Explain business as system 7 Explain business as a way of life

1.2.Meaning of Business We may define business in many ways, such as (a) Business refers to all profit-producing activities that provide goods and services to customers. (b) Business means work efforts and acts of people, which are concerned or connected with the production of wealth. (c) A business is any enterprise, which makes, distributes, provides a product or a service, which other members of the community need and are able and willing to pay for. In essence, therefore business is concerned with producing and selling for profit. From the above definitions, it would be said that business is an economic activity whose aim is to make profit by satisfying customer’s needs.

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1.4. Characteristics of Business The activities termed “Business” posses the following characteristics: (a)

Production and Acquisition of goods. Since it is the business of “Business” to provide goods to people for a price, it is necessary that there are goods to be supplied. They must therefore be either manufactured or produced so that they can be sold and supplied.

(b)

Sale or transfer acquisition of goods.

Goods which have been produced or

procured for sale in return for price enter the realm of business. This activity of selling results in the production and acquisition of wealth. Goods produced or acquired for personal consumption, however, do not fall within the scope of business. (c)

Dealings in goods and services. Business means dealing in goods and services. The goods may be consumer goods, such as cloth, bread, jeans, jams, shoes, watches, etc or producer goods such as machinery and tools. Services consist of activities or intangibles, such as transport services.

(d)

Regularity of dealings. There must be regularity and recurring nature of buying and selling of goods or services which ensures continuity of transactions. A single transaction involving buying and selling does not become business. For instance, if a person sells his motor car and makes profit, it does not amount to business. On the other hand, if he keeps a stock of cars and sells them to customers, that would be business.

(e)

Profits as reward for service rendered. Business is an activity by which owners make their living or earn a profit. Making profit is an essential characteristic of business. Profit is the biggest stimulus for maintaining the continuity of business. In other words, profit is essential for survival and development of a business. The hope of making a good profit attracts people to business. In fact, profit is, in a sense, a reward for the individual ability or efficiency in managing an enterprise and also for the service that he renders to the community.

(f)

Uncertainty or risk about the future. Economic activity focuses on the future: and one thing is certain about the future, its uncertainty, hence its risk. It is through risk – taking that any businessman earns his profit. The conduct of in business

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always involves a certain amount of risk and uncertainty of return to the entrepreneur.

1.5. Objectives of Business Organizations Objectives of a business organization would be: (a) To make profit - This is the prime objective of any business organization. In fact this notion of profit differentiates business organization from non business organizations. Non business organizations such as government agencies may not have profits as their major motive. Business profits can be used by the business to pay dividends to the shareholders. They may also be used to expand the business, and in promoting its products and services, extending charitable donations to society etc. (b) To grow – Every business organization aspires to become bigger in size. (c) To develop – This implies the aspiration of a business to become better. This is normally achieved by providing quality goods and services, being prompt to customer’s tastes and preferences etc. (d) To survive –Every business strives to stay in business. In order to survive in a business must adapt to the environment. (A study of business environment is to be found in the following chapter). A business environment is quite competitive. Businesses have to look for strategies to enable them cope and stay in business.

Note Among others, the business objectives are to make profits to grow , to develop as well as survive

All these four objectives discussed seem to cut across all business organizations Other business objectives would be: (e) To a...