UNIT 1: MEANING AND THE OVER-VIEW OF BUSINESS

Content
1.0 Object ives and Aims
1.1 Introduction
1.2 Definit ion o f Business
1.3 Characteristics of Business
1.3.1. Dealing with Goods and Services
1.3.2. Sales, Transfer and Exchange of Values
1.3.3. Recurrence of Dealing
1.3.4. Profit Motive
1.3.5. Element of Risk

1.4. Classifications of Business

1.4.1. Industry
1.4.2. Commerce
1.5. Business Environment
1.5.1. Internal Factors
1.5.2. External Factors
1.6. Business Ethics and Social Responsibilit ies
1.6.1. Business Ethics
1.6.2. Social Responsibilit y
1.6.3. Ethics and Social Responsibilit y in Business
1.6.4. Views of Social Responsibilit ies
1.6.5. Determinants of Ethical Standards and Practices

1.7. Major points for the success of a modern Business

1.8. Qualit ies of a Good Business person
1.9 Summary
1.10 Answers for Check Your Progress Questions

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1.0 AIMS AND OBJECTIVES

The main purpose of this lesson is to introduce students with the meaning and
definit ion o f business. In this unit, you will study about the different characteristics,
types and classificat ion o f business. Further more, you will look at the general business
environment that influences the operation and success o f any business organizat ion. We
also discuss the terms ethics and social responsibilit ies that study how the standards of
moral conduct among individuals are classified and expressed behaviorally.

At the end of this unit you are expected to:

 clearly define business;
 know the main characterist ics of business
 ident ify the major classification o f business and commerce
 understand the business ethics and social responsibilit ies of a business;
 know the main parts that affect a business in a certain environment
 specify the important qualit ies of a business person.

1.1 INTRODUCTION

In order to survive themselves, all human beings can invo lve into two major act ivit ies ;
economic act ivit ies and non-econo mic act ivit ies. The econo mic activit ies invo lve in the
production and distribution o f material wealt h for the purpose of making profit or
earning return in terms o f money. On the other hand, the non-econo mic act ivit ies are
activit ies that are not involved in the production of material wealth and people do these
activit ies for non-profit purpose. Example, Religious organizat ions, Research inst itutes,
Charit y organizat ions etc. These organizat ions engage in non-econo mic act ivit ies where
their main priorities or motives are to help others.

All human beings have so me basic needs: things that they must consume to survive. In
addit ion to these basic needs, there are many things that people wants to make their
lives more comfortable and satisfying. The work that every person performs is there
fore, related direct ly or indirect ly to the satisfact ion of these needs and wants.

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Business is one of the econo mic act ivit ies where people engage in to benefit themselves
and others (customers) with the main purpose of generat ing profit or return. A business
funct ion is the process of putting of different resources such as time, effort, skill,
knowledge, capital, etc. to produce goods or services. Therefore, a businessperso n
should know how to create a business that could stay for long with the sat isfaction o f
the need and want of customers.

1.2. DEFINITION OF BUSINESS

Business is an econo mic activit y and a continuous process of ident ifying and sat isfying
the demand (willing and able users) need and want of customers by providing goods
and services with the main aim o f making profit.

So from the above definit io n we could take out the fo llowing basic points: -
-Business is an econo mic activit y
-A Continuous process
- Satisfies needs and wants.
- Provides goods and services
-Its main goal is to make profit.

1.3 CHARACTERISTICS OF BUSINESS

As it was pointed out in the above definit io n, business has some unique characteristics
of its own.
It has five basic characterist ics that are going to be discussed.

1.3.1 Providing (dealing) with goods and services

A business has to produce or give service to others by way of adding utilit y. Utilit y
refers to the characterist ics of a good or service in terms of giving value (sat isfact ion) to
customers.
So business not only provides goods and services but it should provide so mething that
satisfies customers. Through the provision o f a product or service a business deals in
satisfying four types of ut ilit ies.

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 Form utility- Changing of the shape and character of a raw material into a
value added product. Example cotton in to cloth, sugarcane in to
sugar. Manufacturing co mpanies creates form utility.

Time utility- Making the product produced or the service to reach users at the
right time or when it is required by customers. Time utilit y
answers the quest ion of when consumers obtain the product or
service. Warehousing co mpanies create time utility

Place utility- Providing of a good or service to the right place where customers
fount it /putting it where it is needed/. i.e making goods available
to the place of the consumers. Transporting company creates
place ut ilit y.

Possession utility- it is the process of selling goods or services to front line

users (customers). It is an exchange process between buyers and
sellers and invo lves in the transfer of tit le from seller to the
buyer.

To support the above, take a look at this example: Eat-Fruit Co. produces different
types of vegetables (form utilit y) and using its own transport it provides the fruit at the
right time and place i.e. to fruit eaters in Addis (time and place utilit y) and using its
distribut ion methods (out lets) it sells its product to customers (possessio n ut ilit y)

1.3.2 Sale, Transfer and Exchange of values

In any business there are two or more persons who exchange goods and services and
they are referred to as buyers and sellers. So making of ‘Doro Wot’ for personal
consumption is not a business activit y unless soled to another person on a continuous
base.

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And when transferring and selling, a businessperson should ident ify the need and want
of customers so as to satisfy them.
. Need is a general desire. Eg. Hunger, thirst etc
. Want is a specific need. Eg. Want for water or cock or alcoho lic drink

1.3.3 Recurrence of Dealings- business is not a one-time activit y; it should be a

continuous process. For example if I sell my watch to you, it is not a business act ivit y
since it has been done only ones. Instead business is a regular and continuous activit y
whereby business people do it on a repeated way. So selling of a car to a friend is not a
business act ivit y.

1.3.4 Profit motive- the main mot ive or purpose of business is to get profit since it is
an econo mic act ivit y -NGO’s (Non-Governmental Organizat ion), religious
organizat ions or a person drawing (point ing) pictures for his/her own satisfact ions are
invo lved in a non-econo mic act ivit ies and hence are not regarded as business. But
through this profit the act ivit y that the business does should be in harmony (balance)
with customers and societ y i.e the activates should be ethical and socially responsible.

1.3.5 Element of Risk- to set up a business, one should invest either in cash or item. As
an investor, people should realize that there is a probabilit y of losing this invest ment
through natural or artificial events.

A business might get bankrupt (loss), products might get damaged, burned etc. So a
businessperson should make a calculated risk in at least minimizing the unforesee n
events that may occur. For example one could insure (buy an insurance policy) for the
fixed assets of the co mpany (business) in order to secure and get the damaged or lost
items through the insurance policy.

So as discussed above so me of the major characterist ics of business are: -

-it deals in the provisio n of goods and services
-it sales, transfers and exchanges goods and services that satisfy the need and
want of customers.
-it is a continuous process (business has a recurrence of dealing)

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 -the main purpose of business is getting profit by being ethical and socially
responsible
-any business has an element of risk.

1.4 CLASSIFICATIONS OF BUSINESS

In the previous discussio ns, we have seen the definit ion o f business and its unique
characterist ics. In the fo llowing discussio n we will see the main classificat ion o f
business.

Generally business could engage in the making or producing o f goods and the
distribut ion (provisio n) of these goods and services to customers. Individuals or
businesspersons who produce or make goods (tangible products) are called producers
(Manufacturers). And those businesspersons who distribute the produced materials
fro m the center of production to the center of consumption are called co mmercia l
people.

1.4.1 Industry- is a productive firm concerned wit h a particular business dealing wit h
tangible products or other service giving businesses. Under this context, we can also
define industries as part of a business act ivit y, which concerns itself wit h the raising,
producing, processing or fabricat ing of products.
An industry may produce final products that are ready to be used by ult imate customers
(finished goods) such as shoes, automobiles etc. These goods are known as consumer
goods. Industrial goods are goods that are going to be used in the production of other
goods. For example Sulfuric Acid produced by ‘Awash Melkesa’ is used to process
many industrial goods such as textiles, plast ics etc. And if products need further
processing by another industry, the type of industries that do this kind of act ivit y are
referred as intermediary good receiving industries. For example iron (steel) or
aluminum fro m steel industry could be processed by an airplane industry to whic h
materials are referred as intermediate goods. So to summarize the difference between
the three types of industrial goods;
Consumers goods- used by final consumers as they are
Eg. Soaps, bread, cloth, sugar, etc.

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 Industrial goods-need further production or are used in the production of other
goods.
Eg. Chemicals that are used as an input to produce another item such as,
the different parts of a car to be assembled together to have the fina l
good (car)
Intermediate goods (semi-finished good) are goods that require further
processing or need to be converted to a finished goods.
Eg. Plastics or Aluminum that are further processed to come up with a
value added good

Types of Industries

We have defined industry in a broad way above. We will also see the types or
classificat ions of industry based on the type o f products (goods) they produce as
fo llo ws.

Extractive Industry- it is the discovery and utilization of natural resources from the
earth, air or water. It is also referred to as a primary activit y under Geography study.
Farming, mining, fishing etc. are examples of extractive industry.

Genetic industry- this type o f industry engages in producing and mult iplying of certain
animals and plant species for profit. Plant and cattle breading, fish culturing, or cross
breeding of cattle of Ethiopia wit h European or Western cattle to have better
productivit y is an example of this industry.

Construction industry- invo lves in the construction (building) of roads, dams, hig h
ways etc. They are erected, built or fabricated at a fixed site. For example a perso n
building a ten-story building might rent it to some one to get profit out of it. By this
sense construction industry is regarded as a business act ivit y.

Manufacturing industry- concerns in the conversio n or transformat ion of raw

materials or semi-finished goods into a finished product. Manufacturing industry takes
an input, process this input to come up with a value added output. For example raw

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cotton is taken as an input by a text ile industry and processed in the industry through
different stages to come up with a shirt skirt etc.

Based on the act ivit ies carried out, manufacturing industries divided into the following
categories.

A. Analytical industry- to analyze means to break down. This t ype of manufacturing

industry changes one product to different products. That is to say it takes out many
products from one starting material. Eg. Oil refinery through fract ional dist illat io n
breaks down crud oil into petrol, gasoline, kerosine etc. Milk could be processed into
butter, cheese etc. These are good examples of analyt ical industries.

B. Synthetic Industry. This is the reverse of analyt ical industry i.e. it gets one product
fro m different inputs. Eg. Mugger cement factory uses concrete, gypsum, and other
inputs to produce cement.

C. Processing industry- a certain raw material is processed at different stages to have a

value added good. Eg. Addis Tayer, Akaki Textile or Wonji sugar factories process
Rubber, Cotton and Sugarcane respect ively.

D. Assembling industry- the different components of a certain good are assembled

(put together) in a physical way. Eg. Car, tractor, Televisio n etc. factories buy their
respective parts fro m different producers and put them together to come up wit h
respective goods. In Ethiopia AMEC and Vestel Televisio n are examples o f assembly
line industries. To summarize;
Analyt ical industry => one input into many eg. ‘Shola milk pasteurize’
Synthet ic industry => Many into one eg.“Awash Melkasa’ or ‘Mugger’ cement
factory.
Processing industry => Processing of one major raw material
Eg. ‘Mojo’ Tannery or Akaki textile
Assembling industry => putting of different inputs in a physical way.
Eg. Nazret Tractor or Mesfen Engineering (or assembly)

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1.4.2 Commerce

Once an industry produces a tangible products that needs to be delivered to customers.

The core duty of commercial people is to add time and place utilit y by providing the
product produced to where users available at the right time. Co mmerce engages in the
exchange and distribut ion of goods and services. Commercial people use a well-
organized system o f transport, insurance, warehouse etc. to facilitate the free and
uninterrupted flow of goods and services fro m center of production to the center of
consumption.

Some of the major problems so lved by co mmercial people are: -

- Finding of customers who have the capacit y and willingness to buy the
product or services.
- Solving o f problems of t ime, place and form of payment. They do this by
providing suitable way o f making payment such as using of check, banks or credit
system. Using of the appropriate type of transportation. For example a flower to be
exported to Europe needs a fast transportation, like airplane since the product can be
easily perishable (spo iled). Problems related to packaging and proper delivery o f goods
could be performed through specialized co mmercial people. Provisio n of proper
storage, warehouse and after sales service (e.g. Warranty, ho me delivery etc.)

COMPONENTS OF COMMERCE

As it has already defined commerce is a highly complex process, which invo lves the
operation of many act ivit ies that are direct ly related to buying and selling i.e exchange
process. These different activit ies may be described under two major categories. Under
commercial activit y, there are groups who try to solve the core problems of commerce
called traders and those who solve the peripheral (revo lving) problems o f commerce are
known as Aids to trade.

a. Trade. Traders are those groups that solve the central problem o f commerce by
finding and selling the product produced to willing and able buyers. Trade is the
process of buying and selling, exchanging or transferring o f goods to customers.

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Who lesalers, retailers, agents, importers and exporters are examples of traders and the y
solve the core problem o f co mmerce by directly interact ing with producers and
customers.

b. Aids to trade. The word aid means support. And as the word tells us this
commercial people try to solve the various revolving problem of commerce. They don’t
have a direct interaction with producers and customers in terms o f providing the
product produced but they so lve auxiliary or ancillary problem o f co mmerce such as
making payments, deposits etc through banks or protection of assets by insurance
companies. In the next part we will try to see some of the elements included under aid
to trade activit ies.

I. Banking- they so lve time, place and form of payment when transact ions are
made.
Banks as an independent unit engage in the fo llowing act ivit ies.
-Making of payments Eg. Mugger cement may write a check to its agent and
this agent could receive the money fro m the Bank of Mugger cement.
-Currency exchanges-different countries have their own currencies and banks
try to solve this problem by providing exchange rates for different countries and
making it easy for inter country business. Eg. Changing of birr with U.S dollar.
-They make deposits; give loan, settlement of debt, selling and buying of currencies
etc to solve the peripheral problem o f commerce.

II. Transportation- provides place utilit y by carrying goods form producers to

traders and finally to consumers. Transport companies specializ ing in this area
deliver products where traders and users want them to be delivered. Eg. (Ethiopian
Air Lines) gives this service to different exporters by transporting animal products,
Fruits and vegetables at the right time and place before they are spo iled (lose their
original form).

III. Insurance- One of the characterist ics of business is risk. And the main dut y of
insurance companies is to safeguard business assets through insurance policy.
Whatever it is, a production company or goods in transit need to have insurance to

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 overcome the events of unforeseen circumstances. Eg. The purchase of insurance
policy by ‘Ko mbo lcha’ textile factory has enabled it to cover the lose that ma y
happen by fire accident.

IV. Packaging- Packing is the process of putting things together in a proper

container so that breakage, leakage, shrinkage and spoilage can be avo ided or
minimized while goods are being transported.
V. Advertisement- brings goods and services to the attention and knowledge o f
prospective buyers. Through advert isement consumers can get better informat ion
about the availabilit y, usefulness, price, qualit y and other attributes of the products.
Advert ising agents try to promote local or foreign products so that customers could
purchase products.

1.5 BUSINESS ENVIRONMENT

Unt il now we have tried to see the definit io n and sub-divisio ns of business. In this part
we will try to explore the different factors that have impact on a certain business. A
business does not exist in a vacuum (empt y space) it is affected by those forces near
and far to it. Any business is affected by internal factors such as strategy, goal of the
organizat ion, policy, structure etc. Externally a business is affected by those forces that
have a direct impact such as customers, compet itors, supplies and human recourse; and
by indirect forces (PEST => polit ical, Econo mic, Socio-cultural and Technologica l
factors).

1.5.1 Internal factors: - As mentioned earlier above the policies and object ives of a
business and the capabilit y o f the organizat ion in terms of its financial and any other
resources have immediate impact on the performance of a business. If a company fails
to use its different resources properly, then it will have a direct implicat ion (effect) on
the performance o f the business. For example if management and emplo yee do not have
a smooth relat ion it will affect the performance of the business directly.

1.5.2 External factors- these are forces that could act on two levels. There are externa l
factors with direct force on a business operation and factors with an indirect force on a

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business performance. The next diagram briefly summarizes the factors that have
impact on the performance of business.

-Internal factors (organizat ion. policy, object ive,

management,
Business environment -Emplo yee, internal resources etc.)

Direct force
(customers, competitors, suppliers
External Factors and human resources.

Polit ical
Indirect force (PEST)
Economic
Socio-cultural
Techno logical

a. Direct external forces- these are forces that have a direct effect on the performance
of a business but beyond the boundaries of the business (the company).

i. Customers- “Customer is a king”, as marketers put it. Customers are the front line
users of a certain business’s goods or services. They are the one who make a
decisio n whether to buy or use a product/service. So they have a direct effect on the
performance of a business and the co mpany should have a good relat ion, with the
understanding of the need and want of customers.

ii. Competitors- these are individuals or groups that produce the same or similar
type of products. A business should know the mo ves and counter moves o f
compet itors (how they are reacting) in order to satisfy customers in a better way
than co mpet itors. Market intelligence is a key to determine the mo vement of
compet itors. Competit ion is not a one-way force (concept). A business ma y
compete against the other firm with regard to customers, emplo yees, raw
materials and other resources. Those compet itors who produce the same or

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 similar type of products or services are known as intratype co mpet itors. Eg.
Bedele Beer, Dashen Beer, Harar Beer and Meta Beer factories compete for the
same resource such as barely and for similar customers. Those co mpet itors that
are dist inct ly different but compet ing for the same resources are known as
intertype compet itors. Example, the Commercial Bank of Ethiopia and
Teleco mmunicat ion Corporation are compet ing for the same resources such as
human resource.

iii. Suppliers- these are groups or individuals that provide different resources to a
company. So a business should be sure to choose a client (supplier), which is
reliable and consistent in terms o f providing resources on time at a reasonable price.
For example the supply o f cement is a crit ical (important) input for a certain perso n
engaging in construction act ivit y.

iv. Human resource- there is skilled and unskilled human resources to an

organizat ion. Human resource is the most important part for the performance of a
business and the business should make sure that it has good supply o f huma n
resource. To do so an organizat ion must attract and keep good human resource
input. Eg. By providing attractive salary, benefit, securit y etc.

b. Indirect external forces- these are forces that have a less degree of control tha n
internal and external direct forces. But a business at least should know what these
indirect forces and make the necessary adjust ment using the controllable tools
Some of the indirect forces that have impact on a business are discussed as fo llows.

i. Political factors- A business should know the polit ical situat ion of a
country before making investment or while in operation. Understanding and
knowing of the rule, regulat ions, laws, policies etc of a country is an important
factor for the performance of a business. The stabilit y and predictabilit y of a
state is another issue that needs to be understood by a business. For example,
under Ethiopian law, foreign investors are not allowed to engage in financia l
business such as banks and insurances. So it is an opportunit y for local investors
and a threat (negative thing) for investors from abroad.

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 ii. Economic factors- Different macro-economic indicators such as GDP
(Gross Domest ic Product), PCI (Per-Capita Income), inflat ion, monitory value,
emplo yment rate etc. give us different information as to the constraints and
opportunit ies of a country. For example the per-Capital inco me of Ethiopia is
$100 while the PCI of Switzerland is between $ 30,000 and $35,000. This by
itself gives informat ion to a businessperson as to what type o f product/service to
produce to individuals o f Ethiopia or Switzerland. Therefore business
organizat ions should monitor changes in different macro-economic indicators to
minimize possible external threats and capitalize on opportunit ies.

iii. Cultural and social environment- culture is like a dist inct ident ity o f
one nat ion from the other. It indicate life st yle, value system, regio n, language
etc. of one group of people. For example pork meat (pig meet) is totally
forbidden (not allowed to be eaten) by Orthodox and Hindu religio n followers
do not eat Muslim countries or any animal product. So a businessperson should
ident ify what things are allowed in one country and what is not allowed before
making any decis io n as to what and how to market a product or service. Also
different countries have a number of social groups with different inco me leve l
and way o f life. So a businessperson should know which social group(s) are
his/her target groups to sell the product.

iv. Technological factors- different countries have different level o f

techno logical development and adaptation. For instance, using of a highly
computerized techno logy in poor country’s like Ethiopia might be a poor
calculated invest ment and an exist ing business also needs to update itself wit h
changing techno logical developments. For instance, opening a typewriter
producing company (business) is an outdated (obsolete) type of act ivit y.
Therefore any business must keep abreast of the latest developments in
techno logy and incorporate them as the situatio n demands so as to stay
compet it ive in this volatile environment.

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 So to summarize, a business can have different internal and external strengths,
weaknesses, opportunities and threats and the business should keep a good
sense o f the changing environment and adopt itself to this changing
environment accordingly.

Polit ical

Customers

Business org.
Competitors (Internal factors)
Economical eg. Marketing Human
mixes Resource Technological

Suppliers

Socio-cultural

1.6 BUSINESS ETHICS AND SOCIAL RESPONSIBILITIES

We have seen that as lo ng as a business exists in a certain environment, it should know

and take the necessary measure to have an opportunit y and to solve the possible threats.
When a business exists in a certain environment it should have ethical standard towards
those which it is serving and be responsible in the societ y it exists.

1.6.1 Business Ethics

Ethics is a word with a Greek root ‘ethos’ meaning standard, belief or character. Like
wise a business needs to have an ethical ground to the customers it is serving, create a

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fair co mpetit ion wit h co mpet itors and guide itself under the legal frame work in whic h
it exists.

Business Ethics is a micro-level issue that studies the principles and values, which
guides a business individual in making responsible cho ices in relation to the
possibilit ies set out by economics and business. In a rather simple expressio n, business
ethics is about honest y, trust, respect and fairness in all business dealings. For example
selling of an expired product to customers, giving of a wrong informat ion in
advert isement, not abiding one self in a legal frame work and the like are some of the
unethical act ivit ies done by business people.

1.6.2 Social Responsibility- It is a macro level issue that goes one-step forward to
think about the well being of societ y or issues such as pollut ion, discriminat ion, poverty
and unemplo yment are the moral conducts expected fro m business individuals.
For example, a business person giving money or donation to poverty stricke n
individuals or plant ing of trees to keep the environment or creating equal opportunit y in
the business or affirmat ive action for minorit ies are examples of socially responsible
activit ies.

1.6.3. Ethics and Social Responsibility in Business

The terms of ethics and social responsibilit y refer to value-oriented decisions and
behavior. As it has been explained earlier, the word ethics co mes fro m the Greek root
‘ethos’ meaning character guiding beliefs, standards, or ideals that pervade a group, a
communit y, and people. Today, ethics is the study of moral behavior, the study of how
the standards of moral conduct among individuals are classified and expressed
behaviorally. Business ethics is the study of the principles and values, which guide us
in making responsible cho ices in relat ion to the possibilit ies, set out by econo mics and
business. In simple expressio n, Terms such as business ethics, corporate ethics, medica l
ethics, or legal ethics are used to indicate the particular areas o f applicat ion. But to have
meaning, the ethics invo lved in each must still refer to the value-oriented decisio ns and
behavior of individuals.

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Social responsibilit y is a relat ively new term. It is the moral conduct that relates to such
broad issues as environmental pollut ion, discriminat ion, poverty, unemplo yment,
inflat ion, increased povert y of minorit y groups, and the like would be viewed as
socially irresponsible-as not fulfilling its responsibilit y to societ y. It can make genera l
statements that are readily accepted by the business co mmunit y, such as: safet y
standards in air sea travel are important.

However, there is a tendency to think of social responsibilit y in terms of business

organizat ions and to think of ethics in terms of individuals, but this is not a usefu l
dist inct ion. In the final analysis, decisio ns are made by people and, therefore, individua l
mangers at some level must assume responsibilit y for every corporate decisio n. The
executive who lies about a compet itor’s product, the manufacturer who markets a
highly flammable article of clothing, the individualist who dumps pollutants into
stream-all behave in an ethically irresponsible was. The most meaningful way to
dist inguish business ethics fro m social responsibilit y is in term of a decisio n’s
implicat ions for society as whole. Wit hin this frame of reference, business ethics are
concerned wit h micro-ethics (relat ing operating decisio ns wit h limited social impact);
social responsibilit y is concerned with macro-ethics (relat ing to decisio ns with broad
implicat ions for a large segment of societ y). Even this dist inct ion is hard to maintain
consistent ly. For convenience in co mmunicat ion, the term business ethics is somet imes
used in the broad sense to include both micro-ethics and macro-ethics as expressed in
profit making organizat ions.

1.6.4. Views of social responsibility

There are three views of social responsibilit y: (1) the classical view, (1) the
accountabilit y view, and (3) the public view.

a) The Classical view

The classical view of corporate social responsibilit y prevailed during the nineteenth and
early twent ieth centuries. In this view, the free enterprise economy as an invisible hand
is cont inually at work for the good of the public. From this perspect ive, the concepts of
social responsibilit y in terms of an objective set of ethical standards or intensit y o f
commit ment to the welfare of others makes no sense. It is the invisible hand-the

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compet it ive system itself- that protects the society. This is expressed as the value o f
capitalism.

The values of capitalis m originate in the belief that when a business selfishly pursues
its profit objective while compet ing with other businesses, the system forces it to be
efficient and to produce the best possible product at the lowest possible price.
Compet it ion further demands that businesses produce what people need and that the y
deal fairly and honest ly wit h the public. To do otherwise results in a loss of customers
to compet ing co mpany. Co mpet ition for labor and the need for a good public image
require companies to be fair in dealing with their emplo yees, and free competit ion for
jo bs encourages emplo yees to be efficient and productive.

The crit ics argue that if the system is allowed to operate without constraints, free
compet it ion will destroy itself and result in monopoly.

b) The accountability view.

A small step removed from the contemporary versio n of the classical view is the
accountabilit y view o f social responsibilit y. The accountabilit y view recognizes the
virtues of a free market and seeks to preserve them. On the other hand, it accepts the
fact that business is chartered by societ y and should there be accountable to it. Business
should not only fulfill it s responsibilit y to its stockholders but should also deal
equitably wit h others upon whom its success is dependent. These include emplo yees,
customers, suppliers, creditors, and the community and larger economy in which the
business funct ions.

The accountabilit y view of social responsibilit y is best expressed as each business pays
its own way and treat each of its publics wit h fairness and considerat ion.

c) The Public view

The public view of social responsibilit y, also called the qualit y o f life, is beyo nd mere
accountabilit y and portrays business as partner with government, education, and other
inst itutions in so lving societ y’s problems and thereby improving the qualit y of life for
everyo ne. One goal of business is to make a profit, but business is not free to pursue

18
only selfish goals. Business actively works at solving public problems, such as poverty,
unemplo yment, inflat ion and crime.

The public view differs from the accountabilit y view in that the obligat ion of business
goes beyo nd paying its own way. Because society has given business the right to
funct ion and has provided an environment favorable to profit making, business is a
servant of the public and is not private in the classical sense. The public view can be
best understood from the fo llowing discussio n as to the responsibilit ies of business to
its environmental elements.

Responsibilit y to the nat ion: in general these obligat ions are in relation to the
fulfillment of nat ional needs and aspirat ions and implementations of nat ional plans,
policies. Businesses should be a useful and effective instrument for the economic
growth. These business organizat ions should be responsible for the fo llowing po ints
and other related importance in contribut ing to the good of the nat ion.

Producing according to national priorit y, which means production and supplying goods
that are needed in the given nat ion.

Aiming at import substitution schemes in order to help the nation to become self-reliant
and avo id dependency on other nations.

Showing their endeavor in increasing the foreign currency earning of a country by

developing export markets.

Participating in remo ving inequalit ies of opportunities and provide a good ground to all
to work and progress.

Contribut ing in training and developing skilled personnel for economic growth and
development.
Paying special attention to the disabled and weaker sections of the societ y.
Respect ing the laws and regulat ions of the nation and pay taxes regularly and honestly.
Responsibilit y to the communit y: Here the emphasis will be to indicate some points as
to the responsibilit y o f business organizat ion in the co mmunit y or specific area where
they carry their act ivates. Business, as most often refereed as trustees of a communit y,

19
must discharge its obligat ions and generally strive to enhance to goodwill co mmunit y
in which it operates. This is usually manifested in one or all o f the fo llowings.

i. Contribute for improving the qualit y o f life and welfare of the communit y in
donating and giving aid for improving schools, hospitals, parks, roads, and
other facilit ies. Business also helps the communit y in alleviat ing so me socia l
problems arising due to some problems such as drought, flood, earthquake
and other social problems.
ii. Contribut ing to the healt h and wellbeing of the communit y in producing safe
and non-hazardous products. Together with taking in part in vo luntary
installat ion of ant i-pollut ion equipment, keeping industrial wastes fro m
being dumped in water or released in to the air and controlling excessive
no ise pollut ion.
iii. Create opportunit y for gainful emplo yment for the cit izens.
iv. To be responsible in the ut ilizat ion of scarce resources economically.
Responsibilit y to the customers: As stated earlier, customer refers to person or
business that purchases the products of the company. Since customers are the
foundat ions that determine what business is, and keep it in existence, businesses must
be responsible for the customers. To ment ion so me of them:

i. Supply goods and services o f standard qualit y at the right time, right place
and right time.
ii. Guard customers against the poor qualit y o f goods, incorrect measurements,
poor after sales service, adulteration of goods, misleading advertisement and
lack of courtesy and the like.
iii. Protect the interest of customers out scarcity conditions.
iv. The business should charge reasonable price.

D. Responsibilit y o f emplo yees or workers

Business activit y is conducted through human beings that work as individual or groups.
The efficiency and success of the business heavily depends upon how the workers are
managed and handled to get their willing cooperatio n and to make them carry out their
tasks with their maximum abilit y and interest. To pinpo int some of the points.

20
 i. Provide fair deal to emplo yees at different levels in the fro m of fair wages
and other incent ives.
ii. Give the opportunit y for developing new skills and abilit ies and have work
climate in which they will grow mature and productive beings.
iii. Give an opportunit y to participate in decisio n making.
iv. Provide job sat isfaction by making the job interesting and challenging and
by reducing the unpleasantness of work.

Other than the above mentioned points, business organizat ions should have to be
responsible for suppliers, compet itors, financial institutions, owners and other element s
in the societ y.

1.6.5. Determinants of Ethical Standards and Practices

Unethical pract ices include mis leading advertising, cheating customers, unfair credit
practices, overselling, failure to live up to contracts and prejudice in hiring and
promotion. But there are different views about ethical judgments among business
managers. In this part of the paper, we see different criteria to make ethical judgment.

Common practice. ‘E verybody does it’ is a commo n just ification for quest ionable
business pract ices. This just ificat ion usually rests on a belief that failure to engage in
certain pract ice-be it bribery, espio nage, or paying slave wages-is to place oneself at a
compet it ive disadvantage and thereby to court financial disaster. But since this
approach has no foundat ion in an abso lute system o f values, it often leads to
unacceptable behavior and to external controls.

Legality. When mangers behave in ways that societ y considers detrimental, laws are
passed to define correct of ethical behavior. There are many laws in many countries that
regulate business practices. But problems in implementation are also commo n in
developing countries. Businesses may deliberately break laws on the assumpt ion (1)
one may not get caught, (2) one may not be convicted and (3) if one is caught and
convicted, the financial gains will more offset the losses. Therefore, the problem o f
reliance upon the law as a basis for ethics is that a good part of the laws passed are not
to be implemented, at least not systemat ically and effect ively.

21
Codes of ethics. There is a need for object ive standards, other than laws and
government and government regulat ion, to help managers make ethical decis io ns.
When dependent solely on the subject ive standards of individual managers, ethica l
decisio ns are unpredictable and subject to all forms of perceptual, defensive, and self-
serving bias.

Most professio ns have dealt with the need for object ive standards by
developing codes of ethics by which their members are expected to live.
Notable amo ng these are the ethical codes of physicians, psycho logist,
lawyers, and certified public accountants.

Personal morality. There are many determinants of the ethical standards and practice s
of managers, but single determinant is suffic ient to protect individuals and societ y fro m
the consequences of unethical behavior. The one determinant most likely to lead to
ethical behavior is high personal standards of conduct-individual co mmit ment to values
respect human rights and dignit y. Managers wit h persona integrit y and moral sensit ivit y
are capable of the understanding and motivat ion required to benefit fro m ethics and
legal statements of socially responsible conduct. Managers who are deficient in these
qualit ies can be expected to behave unethically in spite of external constraints.

Finally, the factors that influence ethical behavior are the business environment, the
organizat ion and the individual as shown in summery under Table 1.1.

22
 Table 1.1 Determinants of Ethical behavior
PERSONAL DETERMINANTS FROM DETERMINANTS FROM THE
DETERMINANTS OF WITHIN THE EXTERNAL ENVIRONMENT
ETHICAL BEHAVIOR ORGANIZATION
 Early home and community  Statements of organizational  Ethical climate in the industry.
influence. philosophy.  Ethical climate in the government.
 Commitment to religious and/or  Behavior of superiors within  Values and ethical expectations of
other value systems. the company. the societ y.
 Beliefs about the role of business in  Behavior of organizational  Extent of relevant laws and other
societ y. peers. constraints.
 Explicitness of personal code of  Nature and extent of  Extent of prosecution and penalties
business ethics. company. for lawbreaking.
 Extent of financial and other  Availability of a company  Emphasis of news media on
personal needs. codes of ethics. unethical behavior.
 Maturity and resistance to an  Consequences of unethical
unhealthy need to conform. behavior.
 Pressures to conform to
organized norms.
 Excessive pressure to be
productive.

1.7 MAJOR POINTS FOR THE SUCCESS OF A MODERN BUSINESS.

As ment ioned above environment is dynamic and comes with opportunit ies and threats.
So what are some of the requisites (condit ions) to stay compet it ive in this vo lat ile (fast)
environment?
In this part some of the steps that could make an organizat ion successful are cussed.
1) Determinat ion of object ive- a business wit h no object ive is like a ship wit h no
compass. Object ives give purpose and direct ion to a business. The object ives set
by a business should be clear and achievable. Also they should be translated
into short and long-range object ives.
2) The applicat ion of the management process i.e. planning, organizing,
implementation and control.

23
* Planning –it gives a wise judgment of the future. As the saying goes ‘Failing to pla n
is planning to fail.’ Planning is helpful to meet the unforeseen events of the future-Like
object ive a business need to have short and long range plan that takes into account the
resources it has and its object ive realit y.

* Organization- it is the process of co-coordinating internal recourses in an efficient

and effect ive way. Man, Machine and Materials should be properly co mbined or co-
coordinated to accomplish the task intended (to be effect ive) and to use recourses in an
economical way (to be efficient).

* Implementation- this is the practical aspect of the business where emplo yees do the
task, which they are assigned. Motivation and good leadership are the keys to keep
(move) the work force to achieve what has been intended.

* Control- what has been planned and what has been produced at least should be
compared. Control helps to take the posit ive lessons and correct the mistakes done so as
to be better next time.
Qualit y and quant it y control help to compare the capabilit y o f a business.

* Research- Research, which is a systemat ic search for new knowledge, helps a

business to understand the changing need and want of customers or the moves and
counter moves o f co mpet itors. One of the main reasons for many businesses to go out
fro m market is due to lack o f adequate market research. And that is why we see
duplicat ion of effort in our country. Hotel, taxi, Internet café, pastries are the commo n
examples for this.

* Finance- One of the most important asset of a company is finance. A business not
only should plan by taking into account its internal resources but it should have
possible source of finance. So a business must correctly est imate the financia l
requirement and managements for securing its finance and sources.

* Proper location, layout and size- a business should take sufficient care in the init ia l
stage to find out a suitable place, for locating a limit and to fix a proper size for it. For
example when setting or starting a certain beauty salo n the business person should

24
make sure that there are enough number of customers in that area or who might use the
service before starting the business.

1.8 QUALITIES OF A GOOD BUSINESSPERSON

In the above discussio n, we have tried to point out some of the important points needed
to make a business successful in general. In this part the qualit ies that a businessperson
need to have as an individual are go ing to be discussed.

* Ability to analyze situations accurately

This is the abilit y of a businessperson to use his/her intelligence to analyze situations. It
also includes the abilit y of co llect ing relevant and accurate informat ion and to use the m
to forecast what would happen. He/she should be able to analyze the test and feeling o f
customers, their behavior to a given set of price, the impact of changes in the size of the
firm are the qualit ies expected fro m him/her in terms of analyzing situat ions.

* Initiative and capacity to take prompt (quick) decisions.

“A poor decisio n made on t ime is better than a good decisio n made out of time.” As
the saying puts, it one of the qualit ies needed from a businessperson is the abilit y to
make quick decisio n on time and to be smarter than co mpet itors.

* Determination courage and perseverance

These are qualit ies of will, power and determination to succeed. A businessperso n
should keep in mind that there is always risk in a business and he/she should think of a
way to come fro m a situation than trembling (panic) out of it.

* Intelligence and alertness

A businessperson should be intelligent enough to make use of business opportunit ies
when and how they come. He/she also should be alert enough for new developments,
opportunit ies and threats.

* Quality of leadership and motivation

Communicat ing wit h emplo yee o f the business, creating a good relation betwee n
management and personnel is a key qualit y that a businessperson needs to have.

25
Motivat ing o f workers through an appropriate reward is the qualit y expected from a
businessperson.

* Business morality and integrity

Honest y, fair dealing, good trust towards customers and moral are also the other qualit y
of a businessperson.

A businessperson not only should give priorit y to the money (profit) he/she is getting
but to honesty and integrit y.
* Training and Education-
On the job training and educat ion are important ways of developing the
abilit y o f a businessperson. For example it is through training that a
businessperson can acquaint him/her self wit h co mputer and new
techno logy.
* Sound practical experience-
Experience is the best teacher. A businessperson should put his/her
experience o f the past and present in order to improve the future in a better
way.

Check Your Progress

1. What is business for you?

________________________________________________________________
__________________________________.
2. What is an econo mic activit y?
________________________________________________________________
___________________________________.
3. What makes business different fro m religious organizat ions?
________________________________________________________________
__________________________________.

26
4. Using an example o f your own, try to explain the provisio n of different types o f
utilit ies.
________________________________________________________________
________________________________.

5. Which of the fo llowing is invo lved in the business activit y?

United Nat ion --------Yes/ No
Unit y Universit y Co llege --------- Yes/ No
Buying of a co mputer set from a friend ---------Yes/No
6. Mention the main characterist ics of business with example for each
________________________________________________________________
__________________________.
7. Give an example of your own for the three types of goods produced by an
industry:
________________________________________________________________
_____________________________.
8. What is the difference between manufacturing and construction industry?
________________________________________________________________
____________________________.
9. Explain the different types of manufacturing industries
________________________________________________________________
______________________________.
10. Etfruit has its own distribut ion outlet of its products while Wenj sugar factory
produces and gives the responsibilit y o f distribut ion to other commercial people.
Which is advantageous? Give your reason.
________________________________________________________________
_________________________________.
11. Mention the main divisio ns and sub-divisio ns of business.
________________________________________________________________
___________________________________.

27
 12. Mention so me other points that have internal influence on the business
operation.
________________________________________________________________
________________________________.
13. Why do mult inat ional co mpanies move fro m USA to Far eastern countries such
as Vietnam and China?
________________________________________________________________
_____________________________.
14. Mention the possible effect of one of the external factors.
________________________________________________________________
________________________________.
15. How could a business have informat ion about PEST Factors?
________________________________________________________________
_____________________________.
16. Give two examples for business ethics and social responsibilit y.
________________________________________________________________
___________________________.
17. What is the difference between business ethics and social responsibilit y?
________________________________________________________________
___________________________.
18. Mention the main t ypes o f social responsibilit ies.
________________________________________________________________
_______________________________.

1.9 SUMMARY

In this lesson, we have studied the meaning and definit ion o f business and the genera l
classificat ions o f human act ivit ies in to economic and non-econo mic activit ies. The
economic act ivit ies related to the production, exchange and distribution o f materia l
wealth, Non-economic activit ies invo lve in other activit ies such as social, polit ica l
cultural and religious obligations. Business activit y has special characteristics that

28
different iate it fro m other activit ies. Business invo lves in dealing wit h goods and
services for value, generat ing profit and so me elements of risk.

Business is also classified into two broad categories: industry and co mmerce. Industry a
part of business activit y, which concerns itself with raising, producing and processing
or fabricat ing tangible products. There are different types of industries such as
extractive industry, Genet ic industry, construction industry and manufacturing industry.
The manufacturing industry also sub-divided into analyt ical industry, synt het ic industr y
processing industry and assembly line industries.

On the other hand, commerce is the other category of business, which is concerned wit h
the exchange, and distribut ion o f goods and services. Trade and aids to trade are
components of business that facilitate the buying and selling process. Business
operation is influenced buy internal and external environments. External factors include
customers, compet itors, suppliers, techno logy, economy, social and cultura l
environments.

29
 Human Beings

Non-Economic Economic

Business

Industry Commerce

Trade Aid to trade

Genetic Manufacturing Construction Extractive

Processing Analytical Synthetic Assembly

1.10 ANSWER FOR CHECK YOUR PROGRESS

(2) An economic act ivit y is an activit y where people engage them selves for the
purpose of getting so mething in returns profit in the case of business.

30
(3) Business aims in getting profit and it is an economic act ivit y. A religiou s
organizat ion main motive is not profit ing but to help and teach others. It is a non-
economic act ivit y.

(5) I) No ii) Yes iii) No

(8) Manufacturing industry changes a certain input by adding, removing or modifying it

to a value added good in a certain specific site. Construction industry is on activit y o f
building up different infrastructures fuel or dam, highways etc.

(10) It depends on the cost, choice, abilit y and the nature of product produced by a
company. (See distribut ion channel in Chapter III

(11) See Summery

(12) Internal factors may also include organizat ional structure, detailed budgets and
programs, relation between emplo yee and mgt. Etc. are some other interna l
environments of a business.

(13) Search for cheep human resource and inputs, which are expensive in the U.S

(15) By using different spastics, researches etc.

(17) Management tries to force the future in an educated way, co-ordinate resources in
an effective and efficient way, fo llow the preparing lamentation o f tasks and
controls them.

1.11 REFERENCE

 R.K SHARM AND SHASHI K. aupta: Business Organizat ion and Management;
1988.
 SHARMA, M Business Management, RBSA, 1996
 BACERYEE, M. Business Organizat ion and Management, Kalyania, Pub. 1984.
 PRAKUSH JAGDISK, Business organization and management, 5th ed, 1997.
 Buchhoiz, R. Business environment and Public policy, 5th ed. 1995.
 Richard son, J. Business Ethics, 96/97, 8th ed. Dushkin Pub, 1996

31
UNIT 2: LEGAL FORMS OF OWNERSHIP OF BUSINESS

Contents
2.0. Aims and Object ives of the Block
2.1 Introduction
2.2 Characteristics of Ideal Forms of Business Organizat ion
2.3 Sole proprietorship
2.3.1. Advantages of so le proprietorship
2.3.2 Disadvantages of so le proprietorship
2.4 Partnership
2.4.1. Features of partnership
2.4.2. Types of Partnership
2.4.3. Types of Partners
2.4.4. Advantages of partnership
2.4.5 Disadvantages of partnership
2.5 Private limited co mpany
2.5.1 Definit io n and nature
2.5.2 Format ion of Private Limited Company
2.5.3 Management of the Company
2.5.4 Disso lut ion
2.6 Corporation (Joint Stock Company)
2.6.1 Nature and Characterist ics
2.6.2 Classification
2.6.3 Corporate Structure
2.6.4 Advantages of Corporation
2.6.5 Disadvantages of Corporation
2.7 Summary
2.8 Reference

32
2.0 AIMS AND OBJECTIVES

There are various legal forms of ownership of business that the businesspersons ca n
own. These are so le proprietorship, partnership, Private Limited Co mpany
(Corporation). The major object ives of this session are to introduce students with the
cho ice of the different forms of business ownership, the characterist ics of a suitable
form of organizat ion, advantages and disadvantages of each form of business
organizat ion.

Therefore, after reading this unit, the student will be able to:
 understand the specific features of individual enterprise;
 define the different forms of business ownership;
 evaluate the advantages and disadvantages and disadvantages of different
business organizat ions;
 dist inguish between general partnership and limited partnership
 understand the role of general partners and limited partners in the limited
partnership form of business organizat ion;
 describe how to organize and manage PLC.
 understand special characteristics of corporate form o f business organization;
 describe the duties and responsibilit ies of stockholders, board of directors and
officers of the corporation;
 dist inguish the difference between preferred stocks and commo n stocks.

2.1 INTRODUCTION

Ownership o f business organizat ion may take many different legal forms, each o f
which carries specific dut ies and responsibilit ies. There are four most prevalent forms
of ownership of business-named sole proprietorship (individual ownership), partnership
(joint ownership), private limited co mpany, and corporation (stockholders ownership).
All business owners must decide which form o f legal organizat ion will best satisfy their
interest and requirement. There are certain factors that deserve due considerat ions in
choosing the suitable form of ownership of business.

33
2.2 CHARACTERISTICS OF IDEAL (SUITABLE) FORM OF BUSINESS
ORGANIZATION

 Simple to establish and dissolve - The desirable form of business is the one,
which can be, organized with the least difficulty least expense and whic h
requires minimum effort to fulfill legal requirement. Just like organizat ion, the
ideal form of business is that which requires minimum effort to disso lve that
business. Disso lut ion means terminat ion of the operation of that business.

 The requirement of capital - Sufficient amount of fund is necessary to finance

the operation of the business. If the amount of capital required is very large, the
owners must ensure the safet y o f their invest ment, fair return on invest ment and
the transferabilit y o f their capital. Owners always interested in the business that
will pay them the best return on their invest ment,
 Less Risk (limited liability) - The businesspersons will naturally prefer to have
limited liabilit y. They choose the organizat ion in which they are responsible to
the extent of their invest ment in that business i.e limited liabilit y. This is a lega l
condit ion under which any damages or liabilit y attribute to the business will not
be attached to the owner’s personal property. That means if the business beco me
inso lvent or wind up, the owners will be responsible only up to the amount the y
contribute to the business. In this case, the creditors do not have the legal right
to claim the personal property of the owners if the assets of the business could
not cover the liabilit y o f the business.

 Relation ship between ownership and management (control) - There is a

situation where ownership of the business and management of the business are
separated. That means owners may not manage or control the operation o f
business. Non-owner managers may manage the business. But a good form o f
business is the one, which invites a direct relationship between ownership and
control because non-owner management may not have a direct personal interest
in maximizing profit through efficient operating.

34
  Flexibility of Operation - This is the amount of change and adjust ment of the
organizat ion with out difficult y as the need may be. That means a good form o f
organizat ion is that which is flexible and adaptable to the changing condit ions.

 Continuity and Stability - This refers to the extent to which an organizat io n

enjo ys uninterrupted existence over a long period of time. The business should
be able to formulate plans for the future so that it attracts investors and pays
return on invest ment for considerable period of time. Continuit y is also socially
desirable because if the organizat ion is continuous and stable, it provides a
continuous emplo yment opportunit y to the member of the society.

 Maintenance of secrecy - A good form o f business organizat ion is the one,

which retains the vital business secrets with out being leaked out to the
compet itors. The businessperson has to be careful to ensure the business chosen
by him/her should allow to retain business confident ial.
 Less Government Control - Different forms of organizat ion are to varying
degrees of regulat ion and control by the government. If there is strong
government control, the business may entail considerable amount of time,
mo ney, energy and effort to comply wit h legal formalit y and instructions o f the
government.

 Less Tax Liability - Other things being equal, the ideal form of organizat io n
will be that which incurred minimum amount of tax liabilit y.

2.3 SOLE PROPRIETORSHIP

The sole proprietorship can be defined as a form of business organizat ion in which an
individual introduces his/her own capital, uses his/her own skill and intelligence, and is
solely responsible for the results of its operation. It is the oldest and most commo n form
of business organizat ion in which one person assumes all risks and all pro fits. In this
form o f business there is no distinction between the business and the individuals private
affairs. That means the law recognizes the business and the individual owner as one and
the same.

35
A so le proprietor may receive help fro m others (family) in operating the business, but
he/she is usually the only boss. The capital needed to start and operate the business is
not high and it is normally provided by the owner fro m personal wealt h or borrowed
mo ney. In such form of ownership, prompt decisio n is very important and specia l
consideration is given to the needs, tasks and fashions of customers.

This form is also known as individual or single proprietorship, sole proprietorship,

individual enterprise or individual entrepreneurship. Examples are private colleges,
restaurants, photo studious, grocery, retail shop, private hospitals, clinics etc.

2.3.1. Advantages of Sole proprietorship

A so le proprietor is usually an act ive manager working in his/her business everyday,

he/she controls the operations, supervises the employees and makes decisio ns prompt ly.
Some of the advantages of the so le proprietorship are:

 Ownership of all Profits The single ownership allows the owner to receive all
profits generated by the business. The profit created by the business will not be
shared with other individuals.

 Simple and Low cost of Establishing and dissolution. It is very simple to start
and operate a sole proprietorship form of business. If an individual has a reasonable
mo ney to start the profitable business the necessary thing is only to get license fro m
the authorized office. There is litt le legal procedure to be followed. Similarly if the
business is not profitable and the owner would not be able to run that business, it is
easy to disso lve such kind of business. The necessary thing to be done is to pay debt
if there is any and to return the license to the theorized office.

 Independence and personal satisfaction. The concept of being one’s own boss
may be the most important reason for an individual to establish one’s own business.
As a so le proprietor, one has the satisfact ion of working for himself/herself. One
can make his/her own decisio n regarding the hours to work, the emplo yees to hire,
whether to expand the business in to another line. In taking business decisio ns, the
owner does not need to consult other persons and he/she can take fast decisio ns to

36
 take advantage of business opportunities. Therefore, co-ordinat ion is not as such a
problem and decisio n-making beco mes absolute and quick.

 Tax advantages. Special taxes that are levied against a corporation that causes
double taxat ion are not applicable in the so le proprietorship. Since the law
recognizes the business and the owner as one and the same, the business is levied a
single tax.

 Retention of business secrecy. The so le proprietor is not legally required to

publish its financial condit io n nor it is required to make other confident ia l
informat ion public. That means the so le proprietor does not have to disclose his/her
performance or plans to the public and since confident ial information is a key to the
success of a co mpet it ive business, it is unlikely that the owner will leak the
informat ion. Thus, any change that the owner wants to make concerning the
business methods, policies and procedures can be done with out the knowledge o f
others. This can help the so le proprietor to take advantage of business opportunit ies.

 Social Acceptability. This form o f owner ship of business is also socially desirable
since every body beco mes the owner of business; it implies that wealth is
distributed among the majorit y of the members of the society. It is obvious that
instead of working for others business, every one of the member of the societ y
wishes to have his/her own business or property. This may ensure equitable
distribut ion of the wealth of the country among the members of the societ y.

2.3.2 Limitation of Sole Proprietorship

As there are some advantages of owning this form of business, there are also some
limitations. The limitations include the fo llowing.

 Unlimited Liability. In this form of ownership business liabilit ies are persona l
liabilit ies. The owner of the business is personally liable for all debts incurred by
the business. Unlimited liabilit y makes the owner’s assets available to satisfy the
claims of creditors of the business. It means that the individual owner is legally
liable for all debts of the business and if his/her original invest ment will not cover

37
 the obligat ion of the business, the creditors have legal right to claim the persona l
and legal property of the owner.

 Limited resources. That means there is a limitat ion of financial and huma n
resource. Since the individual is the so le owner of the business, he/she must rely on
his/her own abilit y to borrow money in order to finance the operation o f the firm.
Banks and other lending inst itutions may hesitate to lend large sum o f money to a
single proprietor. Similarly creditors might be unwilling to sell large quant ities o f
items on credit to a single owner or to a business that is run and supported by one
individual.

 Difficulties of management. Because o f the smallness of the firm, the individua l

owner must assume the responsibilit y of a diversificat ion of managerial tasks
(hiring emplo yees, purchasing, selling, financing etc.). Most failures of the sole
proprietorship directly attributed to lack of such managerial capabilit y.

 Lack of Continuity. Since the business and the owner are one and the same, the
death, insanit y, imprisonment, retirement of the owner or bankruptcy of the
business could terminate the life of the business.

An individual may create a good business but because of phys ical incapabilit y he/she
may not be able to continue work. This means that the life of the business depends up
on the life o f the owner and the profitabilit y of the business. However the business can
be recognized and recover soon after the owner’s death if a successor has been trained
to take over the business.
 Lack of Opportunity for employees’ status. Emplo yees of the organizat ion, by
nature are ambit ious to grow up in the cont inuing status of their posit ion in the
organizat ion hierarchy. But the so le proprietorship, since, it may be small, may not
satisfy this interest of the emplo yees. Therefore, ambit ious emplo yee may not stay
in the business for a long period of time where there is so limited opportunit y to
grow in their status. Therefore, the proprietorship may be unable to keep highly
qualified individuals for long even though it offers good salaries and fringe benefits.

38
2.4 PARTNERSHIP

Partnership is legal associat ion of two or more persons as co-owners of a business for
profit. The word ‘partner’ is derived fro m two words “part” and “owner”. This form o f
business ownership represents the second stage in the evaluat ion of the form o f
business organizat ion. Partnerships are often the extensions of a business that began as
a sole proprietorship. The original owner may want to expand the business or the
business may have grown too big for a single person to manage it. It grew essentially to
meet the requirements of expanding the business, which calls for more capital and
diversified managerial abilit y that were considered as limitat ions of the sale
proprietorship.

According to the commercial code of Ethiopia (1960) article No 211-partnership

agreement is defined as a contract where by two or more persons who intend top join
together, make contribut ions for the purpose of carrying out activit y o f all econo mic
nature and of participat ing in the profits and losses arising out there of, if any.

2.4.1 Features of Partnership

I. FORMATION

It requires the existence of two or more persons.

There must be a contractual agreement between the persons known as memorandum o f
associat ion or articles of partnership.

The memorandum o f associat ion is also known as article of co partnership. Since the
partnership is a vo luntary associat ion of individuals, each partner usually contributes
capital, labor, skill etc. to the firm. An agreement must be reached regarding such items
as to the invest ment to be made by each member, how to divide the future profits
among the themselves etc. Such an agreement may be oral, written, or implied by the
actions of the parties alt hough it is preferable that the agreement be in writ ing to avoid
misunderstandings.

39
If the partnership invo lves real property to be transferred to the firm, or if the length of
business transact ions will be longer than one year from the date of the contract, then
they must prepare a written agreement.

According to the commercial code of Ethiopia (1960), the formation o f any business
organizat ion other than jo int venture shall be of no effect unless it is made in writ ing
and is known to third parties. It sets fourth the exact relat ionship between the parties
and includes the fo llowing items.
 Date of the contract.
 Name o f the business
 Names, nat ionalit y and address of each partner
 Location of the business (the head o ffice and branches, if any)
 The purpose of the firm and the nature of the business
 Contribut ion of each partner, his or her value and methods of valuat ion.
 Duties, obligat ions and restrict ions of partners.
 Distribut ion of profit and losses
 Duration of the firm
 Salaries and withdrawals o f partners
 Procedures for disso lut ion of the partnership etc.

II. CONTRIBUTION

The contribut ion made to this form o f ownership of business by each partner can be in
the form of cash (money), liabilit y, fixed assets, other property or experience,
knowledge, abilit y etc. If it is not clearly stated on the memorandum of associat ion and
agreed up on by each member, the contribut ion that has to be made for the business
should be on an equal basis. The money (capital) for the business may be raised by
borrowing fro m outside financial inst itutions depending on the strength of the busines s
and the personal property of the partners. Partners can use their personal property as
collateral to borrow large amount of money from outside financial inst itutions.

40
III. MANAGEMENT SITUATIONS

In this form o f business, every partner has the right to actively part icipate in the
management of the firm and responsible for the performance of the organizat ion. The
partnership agreement provides the assignment of dut ies and responsibilit ies of each
partner, and how the partners will manage the partnership based on their capit a l
contribution, educat ional background, knowledge and experience.

IV. DURATION OF THE PARTNERSHIP.

The partnership will be terminated if one of the partners withdraw, die, imprisoned,
insane, or if the business is bankrupt. That means the life of the business depends upon
the life o f the partner. However, if the remaining partners agree to continue the business
in the previous form, style and name, the firm will not be disso lved.
In some situations, the partnership can also be dissolved if
 The purpose for which it is established is achieved
 It can not achieve the purpose or
 Wit h the agreement of the partners before the expiry of the term.

V. OTHER LEGAL FEATURES.

 Implied agency
This means each and every partner is liable for every fault and wrong he/she does while
taking part in the management activit y. When acting on his/her given specified areas,
every partner has an authorit y to act on behalf o f his/her fellow partners and the firm in
the ordinary course of the business. Thus, he/she is an agent of the firm and other
partners. The relat ions between partners are one of agency so that every partner binds
the other partner by an act in the name of the partner, by an act in the name of the
partnership firm and in the ordinary course of its business. This indicates that the fir m
is responsible for every mistake or fraud committed by the partner in the course o f
business and his/her knowledge will be treated as knowledge o f the firm because he/she
is an agent of the firm and other partners. Outside parties, which enter into a contract
with partners, are entit led to believe that the firm also agrees to the contract.

41
 Utmost good faith
It means that there must be high standard of honest y among the partners. That means
every partner must disclose all facts that believed to be necessary and one should not
get any secret benefit behind the other. There must be mutual trust and confidence
among the partners.

 No separate legal entity

Just like the sole proprietorship form of ownership, the law recognizes partnership form
of business and the owners as one and the same. There is no dist inct ion between the
owners and the business and the firm has no independent legal existence apart from a
person who constitutes it.
 Restriction on transfer of interest
In the partnership form of business, the partner cannot transfer his share or give his/her
ownership to other third part or outsides without the consent or agreement of other
partners.
 Unanimity of consent
If change intended to be introduced to the business, it requires the agreement of a ll
partners. No partner can act out of the specified rules and regulat ions. If a partner
makes major and special decis io n, he/she requires the consent or agreement of a ll
partners before the decisio n will be implemented.

2.4.2 Types of Partnership

Partnerships are classified as eit her general or limit ed.

 General partnerships

General partnerships are the most commo n t ypes of partnerships. Whenever the term
partnership appears by itself, the reference is always to the general partnership in whic h
all partners participate actively in the business and share all responsibilit ies, including
unlimited liabilit y. A general partnership is really a so le proprietorship mult iplied by
the number of partners. There is no legal limit to the number of partners.
The general partnership consists partners who are jo int ly, severally part ially and fully
liable as between themselves and to the partnership undertaking and all partners have

42
unlimited liabilit y i.e. if the business asset is not sufficient to cover the liabilit y, debt
coverage goes to the extent of his/her personal assets.

 Limited Partnerships

Limited partnership must contain at least one general partner who must assume
unlimited liabilit y for all business debts. The purpose of limited partnership is to allow
a person to provide capital, on which he/she expects a normal return, with out assuming
liabilit y for debts beyond the amount of his/her investment. In this type of organizat ion,
one or more partners may have limited liabilit y as lo ng as at least one other partner who
has unlimited liabilit y.

-The withdrawal, death or retirement of the limited partner does not dissolve the firm,
but if the general partner should withdraw, or die, the partnership would be
terminated.
- Limited partners do not participate in the active management of the business. Limited
partners are attracted to this form of partnership because it offers them an opportunit y
to invest their capital without being invo lved in active management. Limited partners
do offer general partners the possibilit y o f raising addit ional capital wit h out giving
up managerial control of the business.

2.4.3 Types of partners

Partner’s duties and responsibilit ies may vary with respect to such factors and
management practice, sharing of profits, and extent of liabilit y. General and limit ed
partners may also be secret, silent, dormant or nominal partners.
a) Secret partners are those partners who are active in the business, but are not known
to the general public.
b) Silent partners. Silent partners are known to the general public but are not active in
management of the business.
c) Dormant partners- Dormant partner is neither active in management nor known to
the public. This t ype of partner is often limited partner.

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d) Nominal partner- Nominal partners invest no capital in a partnership and thus are not
true partners. Instead they often provide experience, special skills or other non-
mo netary factors of value to the business.

2.4.4 Advantages of Partnership

 Ease of organization- although more difficult to organize than the sole

proprietorship, all that is essent ially needed in the partnership is an agreement
between the partners. While it is desirable that article of co partnership be prepared
in writ ing wit h legal assistance, it is not mandatory and an oral contract would be
acceptable. The disso lution of the partnership is also a simple matter. But according
to the commercial code of Ethiopia the agreement must be made in writ ing.

 Capital availability. The partnership form of ownership has more than one owner,
therefore, providing more sources of fund than the so le proprietorship. Financia l
inst itutions are also more willing to lend money when two or more people are
responsible for the repayment of the borrowed capital.

 Ease of expansion. Since there is the greater chance of getting large amount of
capital, the partnership could expand more easily than the so le proprietorship. Also
the other point to be considered is the fact that mult iple owners can supervise more
emplo yees and larger facilit ies than could a single individual.

 Management benefits. Since there are always at least two partners, no one
individual is forced to handle all the diversified activit ies. Each partner may control
different funct ions of the firm such as internal as well as external relat ion of the
firm. This pooling of talent is of tremendous value to the business as it enables the
partnership to operate with a variet y of specialists.

 Highest credit standing. The partnership usually enjo ys the highest credit standing
as compared with the sole proprietorship and the corporation. In case of the sole
proprietorship the personal assets of one owner may not be suffic ient to satisfy the
business debts. But in the partnership there are two or more owners combining their
personal assets and can borrow large sum o f money. In case of the corporation, the

44
 owners do not risk their personal wealt h to satisfy business obligat ion and therefore,
do not warrant a high credit standing.

 Tax benefits. Just as in the so le proprietorship the partners are taxed as individua l
and there is no double taxat ion, as found in the corporate form of business.

2.4.5 Disadvantages of Partnership

 Unlimited liability. If the asset of the partnership is not sufficient to pay its
obligat ion, the creditors have the right to claim the personal property of any or all o f
the partners to satisfy the debt. Not only are partners liable for debts incurred by
jo int decisio n, they are also liable for any debts made by a partner when act ing for
the firm.
This incurs high cost for individual partner with large personal asset as he/she ma y
find himself/herself obligated to repay the ent ire debt of the partnership fro m
his/her personal assets.

 Delay in Decision Making. Under this form of business, the authority of control
and management of partnership is equally delegated to general partners. It is
obvious that decisio ns made by several partners are often better than those made by
one. However, having two, or more people deciding on so me aspect of the business
can also be difficult. The partners will not always agree with each other, as ever y
partner would try to assert his/her positions and tries to promote his/her persona l
interest. As a result poor decision may be made and important decision-making
beco mes more time consuming hindering the business fro m seizing advantages o f
new business opportunit ies. If disagreement should occur on a vital decisio n, the
only so lution to the problem maybe to disso lve the partnership.

 Lack of Continuity. The partnerships can be terminated by the agreement of the

partners themselves, by court order, or in the event of the death, insanit y o f any
partner or bankruptcy of the business. Therefore, it is obvious that the more people
invo lved in the firm, the greater the chance of dissolut ion causing the partnership to
be the least permanent form of business ownership.

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 Investment withdrawal difficulty
A person who invests money in a partnership may have a hard time wit hdrawing the
investment. It is much easier to invest in a partnership than to withdraw. The mo ne y
invested is so me times called frozen investment because it is tied up in the
operation of the business.

2.5 PRIVATE LIMITED COMPANY

Private limit ed companies are formed from partnership or family business and beco me
incorporated business firm. These are under the control of small number of people or
family members who are both directors and majority shareho lders. Private limited
company shares so me characterist ics from the partnership and so me features fro m
corporation.

2.5.1 Definitions and Nature

According to the commercial code of Ethiopia (1960) private limited company is

defined as a co mpany whose members are liable only to the extent of their contribut ion.
The members of the private limited co mpany should not be less than two or more than
fift y and the business is always co mmercial in form. The co mpany is prohibited to issue
transferable securit ies in any form. If the members reduced below the legal minimu m
number, the organizat ion will be disso lved.

The capital requirement for establishment of private limited co mpany should not be less
than 15,000 Birr. The company is required to issue shares and the value of each share
will not be less than 10 Birr. The company cannot be invo lved in the activit y o f
banking, insurance or any business of similar nature.

2.5.2 Formation of Private Limited Company

The company must have name, which is fo llowed by private limited company. It is
inst ituted in the form o f memorandum of associat ion, and signed by all members or by
persons acting on their behalf and is authent icated. According to the commercial code
of Ethiopia, the memorandum o f associat ion should contain the fo llowing terms.

46
 the name, nationalit y and address of the members
 the company name, head o ffice and branch, if any
 the amount of capital
 the value of contributions made by each member
 a statement that the capital is fully paid
 the number of shares held by each member
 the procedure for distribut ion of profits
 the number of managers, their powers and the agents, if any
 the period of time for which the company is established etc.

When members make contribut ion in kind, the value should be accepted by the other
members and the method of valuat ion should be accepted by all members.

2.5.3 Management of the Company

One or more managers manage the private limit ed company. If there are more than
twenty members, the decisio n is passed at the meeting o f the members and auditors
appointed by the members, but when there are twent y or less members, the decisio n
may not require the meet ing of all members. In this form of business, managers other
than members may be appointed by the members or by the memorandum o f
associat ion.

2.5.4 Dissolution of Private Limited Company

Just like other forms of business organizat ions, the private limited co mpany is disso lved
by the court order at the request of any member where the term of the co mpany has not
been fixed. The death of a member, bankruptcy, or inso lvency of a member will not
cause disso lut ion of a company.

2.6 CORPORATIONS (JOINT STOCK COMPANY)

Corporation is one of the most important forms of business organization. Corporation

offers an easier way to finance itself by means of dividing its ownership into many
small units that can be so ld to a wide economic range of customers. A corporation also

47
offers a limited liabilit y to the person interested in the enterprise and has unlimited life
span not affected by the death of any particular owner or by the transfer of the shares o f
any particular owner.

2.6.1 Nature of the corporation

Corporation is an ent irely different organizat ional structure from the sole proprietorship
or Partnership. Corporation is an artific ial being, invisible, intangible and exist ing only
in contemplat ion of the law. In other words, the corporation is an artific ial person
having no existence except in the eyes o f the law. It is a legal person that is created by
the governmental act ion. This means that the property of the corporation is not owned
by the persons who own shares in corporation, but by the corporation itself.

2.6.2 Characteristics of the corporation

Corporation has the fo llowing important characteristics.

 Separate legal entity. A corporation beco mes a legal ent it y and is granted many o f
the same rights as individuals. Like any person, the corporation has the right to
manage it s own affairs, the right to produce and sell products to customers, the right
to buy, own, and transfer property, the right to make contracts, sue and to be sued.
A corporation is formed by obtaining approval of a certificate of incorporation,
article of incorporation or charter from the state.

 Limited Liability. The liabilit y of shareho lder is generally limited. This means that
the shareho lder is not personally responsible for the debts and liabilit ies o f the
corporation. Since the corporation has separate legal ent it y, the debts of the
corporation are the debts of this artificial person and not of the people running the
corporation or owning the shares of stock in it. The capital contributed by the
shareho lders may be exhausted by the claims of the creditors but if there is unpaid
balance the personal property of the shareholder will not be affected.

 Corporation has unlimited life span. The corporation has the power to continue as
a unit forever or for stated period of time regardless of changes in stock ownership.
If no period is fixed for its duration, the corporation will exist indefinitely unless it
is legally disso lved. It can be disso lved in only three ways.

48
 i. By court order
ii. By the approval of the majorit y o f the stockholders
iii. By the expirat ion of the corporate charter. The corporation is not
affected or interrupted by the death, withdrawal of any shareho lder or
director or by inso lvency of the company.
 It is empowered by the government to carry on specific line of business.

 Transferability of shares. The shareho lders have the right to transfer or sale their
shares to others with out consent of other members.

 Separations of management from ownership. The shareho lders or owners do not

have the opportunit y to manage the day-to-day operation of the business. The
corporation is managed by paid individuals who have specialized capacit y and
experience.

 Common seal. A corporation is not a natural person and therefore cannot sig n
document by itself. There should be a common seal designed in the name of the
corporation (company) and used as a substitute for its signature.

2.6.3 Classifications of Corporation

Corporations may be classified in terms of their relationship to the public and the nature
of their activit ies.

I. Public corporations
A public corporation is a company whose stock is widely held and available for sale to
the general public. These are businesses owned by large number of public investors.
These investors buy stock on the open market, thereby providing public corporations
with large amounts of permanent capital. In return, the shareho lders receive the chance
to share in the profits if the corporation generates profit.

II. Private corporations (closely held corporation)

A private corporation is a business whose stock is held by small group of individuals

and is not available for sale to the general public. Private corporations withho ld their

49
stock from the public sale, preferring to finance any expansio n with out their own
earning or to borrow fro m so me other source. Many such corporations are small firms,
which in the past would have operated as proprietorships or partnerships but are
incorporated to obtain the advantages of limited liabilit y and other corporate benefits.
Some times the controlling group may be a family, emplo yees or the management
group.

III. Special service corporations. These are corporations formed for transportation,
banking, insurance, savings and loan operations and similar specialized funct ions. The
state laws and the administrate agencies regulate on detail the manner in which busines s
is conducted.

IV. Non- for profit corporations. Not all corporations are profit-making inst itutions.
There are many non-profit corporations as well. For instance corporations are organized
for educational, religious and charitable purposes. Any inco me result ing fro m the
operations of the firm is used for the specific purpose such as educational and religious
purpose not distributed to its owners.

2.6.4 Corporate Structure

From the pract ical po int of view, the shareho lder of the large public corporation cannot
run the corporation because they are too many to serve as an efficient managing body.
Instead, they elect a board of directors to represent them. The directors, in turn, select
and mo nitor the top officers who actually run the company. T herefore, there are three
bodies that constitute the corporate structure: the stockholders, the board of directors
and the officers of the corporation.

I. The Stockholders
- The stockholders are known as the owners o f a corporation. They are individuals who
buy share of stock that show proof of ownership.
- They do not own property as the proprietor or partners do in the other form o f
business.
- They also do not possess title of the company property, but have direct claim on the
property in the event of liquidation after creditors and preferred stockholders.

50
Types of stocks
Corporations can raise money by selling shares to investors who are known as
stockholders or shareho lders. Business profits are distributed among the stockholders in
the form of dividends. Corporate stocks may be preferred stocks or common stocks.
Preferred stocks are shares whose owners have first claim on the corporation’s assets
and profit s but who usually have no voting right in the firm. Preferred stock guarantees
those who own it a fixed dividend, much like the interest payment earned in a saving
account. Preferred stock holders have priorit y or preference over co mmo n stock holders
as to dividends and also to assets if a business is liquidated after creditors or bond
ho lders. In contrast, commo n stock usually pays dividends only if the corporatio n
makes a profit.

Commo n stocks are shares whose owners usually have last claims on the corporation’s
assets (after creditors and owners of preferred stocks) but who have voting right in the
firm. Dividends on commo n stock are paid on the per-share basis. Thus, stockholder
with hundred shares receives hundred times dividends paid per share. Preferred
stockholders do not have voting rights, but commo n stockholders always have voting
right with each share o f co mmo n stock, which is usually issued by big corporations.
Every corporation whether it is big or small must issue co mmo n stock.

According to corporate charter each stockholder receives one vote for each share of
stock owned, Because of the large size of the corporation, usually hundreds o f
thousands of stockholders have the right to vote, although most of them do not always
attend annual meet ings. Therefore, corporations provide each absentee stockholder wit h
special form (document) known as proxy. The proxy is the power of attorney that
transfers to third party the stockholder’s right to vote. It does not transfer the lega l
ownership of the share and is usually valid only for specific meet ing. In this manner,
stockholders who are unable to attend meet ing are able to vote and make their wishes
on issue o f importance.
Since stockholders are the owners of the corporation, they have certain group as well a s
individual rights.
Some of the group rights are the right

51
 - to vote and amend the by-law.
- to elect directors.
- to change the charter
- to vote on the disposal of corporate asset
- to disso lve the corporation

Individual rights are:

- to buy, sell and transfer his/her stock
- to receive dividends in the proportion to the number of shares owned.
- to inspect and review co mpany records.
- to vote at stockholders meet ing
- to receive evidence of ownership (stock certificate).
- To share in the distribut ion of assets in the event of disso lut ion.

By elect ing the board of directors, the stokeholds delegate their authorit y and usually
exercise indirect control over the affairs of the business.

II. The Board of Directors.

Usually the numbers of board of directors in many co mpanies are not less than three
members and not more than twelve members. Most states permit the number of
directors to be fixed by the by laws. Representing the shareho lders, the boards of
directors are the chief governing body of the corporation. Since the board of directors
are elected by the shareho lders, they are responsible for the fo llowing act ivit ies.
a. They choose the president (chief execut ive o fficer) and other officers and
delegat ion of authorit y/power to run the day-to-day act ivit ies of the business.
b. They decide on major issues and problems including expansio n of the business
closing up or retraction of the unpro fitable branch or change of product line.
c. They also are responsible for declarat ion of dividends. This invo lves such
decisio ns as the percentage of the earnings to be retained and the method of
dividend payment.

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III. Officers

The officers of the corporation are elected by the board of directors and are direct ly
responsible to them for the carrying out of business object ives. They act as agent of the
firm because they have the power to bind the corporation contract.

The chief execut ive officer (C.E.O.) may also be the chairman of the board, the
president of the corporation or both. The chief executive officer and the board, usually
appoint officers below-top rank including most vice presidents.

We have seen that the corporation is formed by the approval of the certificate o f
incorporation or charter by the government. This corporate charter is written by the law
of the company and it contains

 Name address and locat ion of the corporation

 For what purpose it is going to be established
 The amount and kind of stock to be authorized (i.e. how much commo n stock or
preferred stock)
 Privileges and voting powers of each stock and duration of the corporation.
 After the charter is approved by the government three way contract may be
created between
 the state and the stockholders
 the stockholders and the corporation
 the incorporators and the state
In cooperators are persons who make the applicat ion for the certificate of incorporation.

2.6.5 Advantages of Corporation

 Limited Liability: The creditors cannot look beyond the assets of the corporatio n
to settle their debts because the corporation is a separate entit y. The stockholders
liabilit y is limited to the extent of the face value of the share held by each of the m
and their personal property cannot be affected.

 Capital formation. Since the corporation can divide its ownership in to shares o f
small deno minat ion, it can attract capital fro m thousands of individuals o f varying

53
 inco me. In addit ion to this, corporation can also easily borrow large so me of mo ne y
because the amount needed gives interests to those agents that market securit ies.
The company can raise a large amount of capital by issuing shares as long as
investors are willing to purchase addit ional shares of stock.

 Transfer of Ownership. In a matter of mo ments, stockholders are able to buy or

sell shares through brokers in organized market known as stock exchange/market.

 Continuity or stability. Since the corporations are not disso lved by bankruptcy o f
the company or insanit y, withdrawal, death of stockho lders change of management
or dispute over the ownership, they possess perpetual life.

 Staffed with management specialists. Because the corporation is larger than the
proprietorship, partnership and private limited company, it can be staffed wit h
skilled and experienced specialists to a greater degree.

 Possibility of expansion. Since the corporation uses a large capital invest ment, it
would be possible to use latest equipment and machineries in order to carry out its
operation at large scale. This would decrease the cost of production and increase
profit and leads to big reserve that serves for expansion of the co mpany.

 Diffused or spread of risk. Because there are a number of stockholders, the risk is
spread or divided over several members and is reduced for each member. This
would attract more investors to take risk of new opportunit ies.

2.6.6 Disadvantages of Corporation

 High cost of organization. The corporation must get government approval and
legal assistance in forming this type of ownership. The time interval for organizing
the corporation is long because it may take many mo nths, even years before the
firm is formally recognized. Also the high cost of legal procedure and invest ment in
time will not encourage small business to enter in this form of ownership.

 Double taxation. The corporate form of organization must pay tax in the same
manner as individual and result in double taxat ion of corporate inco me. Double

54
 taxation developed first fro m the taxing o f the net profits o f the corporation i.e. the
corporation, as a legal ent it y should pay profit tax. Second from the portion of the
profits distributed to the stockholders as they receive individual inco me fro m the
corporation

 Lack of owner’s personal interest. Since corporations have thousands of owners

who usually own a very small part of the business, each one has litt le interest in the
management of the firm.

Normally their interest is in the amount of dividends they will receive and increase
the value of their stock. Paid individuals manage the corporations and directors who
may not be expected to have intense inters in the success o f the business.

 Delay in decision-making. In the corporate form of business, there may not be

flexibilit y and promptness of decisio ns. Sometimes decisio ns on key issues
requiring the general meet ing of stock holders may be delayed because o f the time
in terval between the meet ings, difficult y of getting the required number o f
members to pass the decisio ns and the presence of diverse interest, which may lead
to disagreement and time consuming.

 Lack of secrecy. The publicat ion of the required financial reports of a corporatio n
beco mes a matter of public record. Therefore the large corporation is unable to keep
confident ial on certain areas that they do not wish to reveal (profits or losses, sales,
salaries to individuals or dividends paid to stockho lders) allowing co mpet itors to
change their plans on the corporation’s open book.

 Rule by few or oligarchic fraudulent management. The power of managing the

corporation may concentrate in the lands of very small group known as oligarchy.
That means so me dishonest managers may succeed by misleading and cheat ing the
stockholders as they wish.

55
Progress Check Questions
1. What is so le proprietorship? Define it ?
________________________________________________________________
________________________________.
2. List examples of the so le proprietorship form of organizat ion.
________________________________________________________________
________________________________________________.
3. What are the advantages and disadvantages of owning the sole proprietorship o f
business organizat ion?
________________________________________________________________
__________________________________.
4. Why is a so le proprietorship form of organizat ion socially desirable?
________________________________________________________________
________________________________.
5. Dist inguish the various characterist ics of partnership form of organizat ion.
________________________________________________________________
_______________________________________________________________.
6. What different iate partnership form of business fro m the so le proprietorship
form of business?
________________________________________________________________
_____________________________________________________________.
7. What is the difference between partners and partnership?
________________________________________________________________
________________________________.
8. Describe the difference between general partnership and limited partnerships.
________________________________________________________________
______________________________________________________________.
9. What is the ro le of limited partners in the limited partnership form o f
organizat ion?
________________________________________________________________
_______________________________________________________________.

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10. List the advantages and disadvantages of partnership form o f busines s
organizat ion.
________________________________________________________________
_________________________________.
11. Explain the difference between limited liabilit y and unlimited liabilit y.
________________________________________________________________
_________________________________________________.

12. Describe the content of memorandum of associat ion.

________________________________________________________________
__________________________________.
13. What different iate private limited co mpany fro m other form o f ownership?
________________________________________________________________
_____________________________________________________.
14. How much capital is required for establishing the PLC?
_____________________________________________________________.
15. How can PLC managed?
_______________________________________________________________.
16. Describe how PLC would be disso lved.
________________________________________________________________.
17. What different iate corporation fro m the other forms of business organizat ion?
________________________________________________________________
_____________________________________________________.
18. Ident ify the characterist ics of corporation.
________________________________________________________________.
19. How can corporation be disso lved?
_______________________________________________________________.
20. List the different types of corporation.
_______________________________________________________________.

57
 21. What is the difference between commo n stocks and preferred stocks?
________________________________________________________________
___________________________________________________________.
22. Explain about the major groups that const itute corporate structure.
________________________________________________________________.
23. What is proxy? (Explain)
____________________________________________________________.
24. What are the responsibilit ies of the board of directors?
________________________________________________________________
_______________________________.
2.7 SUMMARY

In this unit, you have studied about the different forms of ownership of businesses. We
have been that there are four main forms of organizat ion for a business unit. It may be
organized by an individual as so le proprietorship, by mutual agreement of two or more
persons as partnership, by agreement of a group of individuals or family members in
the form of private limited company and by a number of persons as a jo int stock
company or corporations.

Sole proprietorship is business form in which an individual uses his/her own

knowledge, skills, capital and effort so that he/ she is responsible for the result of the
operation of the business. Establishing and operating form o f ownership o f business has
a number advantage such as ease and low cost of organizat ion and disso lut ion,
ownership of all profit earned by the business, payment of single tax when compared
with corporation, retention of business secrets etc. It has also its own limitat ions such as
unlimited liabilit y, difficult y o f management, look of continuit y, lack of opportunit y for
emplo yees etc.

Partnership is another form of business organization in which two or more individuals

jo in together and contribute some amount of capital in order to carry out economic
activit y for the purpose of generating profit. It is possible to establish genera l
partnership or limited partnership form of organization

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Another form of business organizat ion is private limited company, which is formed by
two or more persons but not more than fift y members. The minimum amount of capita l
for organizing private limited co mpany is birr 15, 000

Corporation is another form of business organizat ion, which has separate lega l
personalit y (ent it y) apart fro m its shareho lders, officers and directors who are not as a
general rule liable for the corporation’s debt and obligat ions. Corporation is established
for unlimited life span unless it is legally disso lved by the state order.

There are different types of corporations such as public corporations, private

corporations, special corporations and non for profit corporations and their structure is
constituted by three groups known as stockholders, board of directors, and the officers
of the firm.

Corporation can raise money by issuing of two types of stock sip referred stocks and
commo n stocks.

2.8 ANSWERS FOR CHECK YOUR PROGRESS QUESTIONS

1. Sole proprietorship is a business form, which is created and run by a single

individual.
2. Restaurant, Private College, hotel, Shop etc.
3. Advantages: Ownership of 100% profit, ease of organizat ions, single tax
payment, personal satisfact ion, keeping business secret etc.
Disadvantages: Unlimited liabilit y, limit ed financial resources, lack o f
continuit y, difficult y o f management.
4. Because the wealth of the nat ion will not concentrate on a few hands.
5. Organizat ion, contribut ion of capital, agreement between persons, duration,
implied agency, utmost good fait h, no separate legal ent it y, unanimit y o f
consent etc.
6. Partnership is a business form, which is organized by the agreement of two or
more persons.
7. Partners are individual members whereas partnership is the business.

59
8. In the general partnership, all partners are active participants in the management
of the firm and responsible for the result of that firm. Only general partners
form general partnership. But more general partners and one can form limited
partnership or more limited partners.
9. The role o f limited partners is to contribute capital for the firm wit hout
participat ing in the management of the firm and without assuming liabilit y.
10. Advantages: ease of organizat ion, capital availabilit y, management benefit,
highest credit standing, tax benefit etc.
Disadvantages: Unlimited liabilit y, lack o f continuit y, delay in decis io n-making,
etc.
11. Limited liabilit y means the investor losses only what he/she invests in the
business but in the unlimited liabilit y if the assets of the business do not cover
its liabilit y, then the owner may pay fro m his/her personal property.
12. Memorandum o f associat ion is a document, which indicates the agreement of
two or more persons in the partnership associat ion.
13. The limitat ion of the liabilit y to the extent of the investment of the owner to the
firm.
14. 15, 000 Ethiopian Birr.
15. By one or all members o f the company i.e. their agreement determines.
16. Just like other forms of ownership it will be dissolved by the court order not to
be terminated by the bankruptcy of the business or the death of the owner.
17. Separate legal ent it y
18. Limited liabilit y, unlimited life span, separation of management fro m
ownership, separate legal ent it y, having co mmo n seal etc.
19. By court order, by approval o f the majorit y of shareho lders, by the expiry o f the
corporate charter.
20. Public corporations, private corporations, special service corporation, non-profit
corporations.
21. Preferred stocks guarantee the owners the preferent ial right to claim the profit
and assets of the business but commo n stocks are shares whose owners have last
claims on the assets and profit of the business.

60
 22. Stockholders, board of directors and officers.
23. Proxy is the power of attorney that transfers the decisio n making power of the
shareho lder to the third party.
24. To declare dividends, to select managers and to decide on major issues and
problems of the organizat ion.

2.9 REFERENCES

 R. KSHARM AND SHASHI K,Gupta: Business organizat ion and Management,

1988.
 SHARMA, N Business Management, RBSA, 1996.
 Anderson (fox) Twomy, Business law Principles, Cases, environment, 5th ed.
 Commercial code of the Empire Ethiopia of 1960.
 Sp Iyengar – B/C Goyal Business law, published by G.S sharmey, proprietor,
Richard and Co.
 BACERTEE. M Business Organization and Management, Kalyania, Pub, 1984.

61
UNIT 3: MARKETING

Contents
3.0 Aims and Object ive
3.1 Introduction
3.2 Definit ion
3.3 Basic Concepts
3.4 Marketing Management
3.4.1 Marketing Management Philo sophies
3.5 Funct ions of Market ing
3.5.1 Exchange Funct ions
3.5.2 Physical Supply Function
3.5.3 Facilitat ing function
3.6 Marketing Environment
3.6.1 forces in Co mpany’s Microenvironment
3.6.2 Forces in Co mpany’s Macro-environment
3.7 Marketing Ethics
3.8 Market Segmentation
3.8.1 Polit ical, Economic Socio-cultural and Techno logical
3.8.2 Geographic
3.8.3 Psychographics
3.8.4 Behavioral
3.9 Classificat ions of Market
3.10 Marketing Mixes
3.10.1 Product
3.10.2 Placement
3.10.3 Promotion
3.10.4 Price
3.11 Summary
3.12 Answers to Check Your Progress Questions
3.13 Reference

62
3.0 AIMS AND OBJECTIVES

When you read this unit, you would be able to:

 understand the definit io n and meaning of marketing;
 know the basic concepts in market ing;
 understand and define market ing management;
 clearly know the different market ing management concepts;
 know the basic funct ions o f market ing;
 understand what market segmentation and the basic means or factors of
segmenting a market;
 clearly know the marketing mixes or the four Ps;
 describe the different types of promotional mixes and other marketing mixes.

3.1 INTRODUCTION

In the previous units, we have tried to discuss about the general definit ion, divis io n and
sub-divisio ns of business in unit one, and the commo n types or legal forms o f
ownership o f business in unit two. In this unit, we will also define market ing, discuss
the core concepts of market ing such as needs, wants, demands, products, consumer
value and satisfaction, transaction, exchange etc. Furthermore, we will discuss
market ing funct ions, market segmentations based on various factors and market ing
mixes such as product pricing, promotion, placement (distribut ion).

3.2 DEFINITION OF MARKETING

Marketing is a social and managerial process by which individuals and groups

obtain what they need and want through creating and exchanging products and
value wit h others. Broadly speaking it is the ant icipat ion, management and
satisfact ion of demand through the exchange process.

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As the basic marketing saying puts it ‘customer is a king.’ And this is the duty o f
market ing; to identify the need and want of customers and sat isfy it. Marketing
basically tries to manipulate product, price, promotion and placement (the four Ps) so
that it can attract and satisfy customers wit h a certain need, want and demand.

In order to know more about market ing we will explain basic concepts & words in
market ing.

3.3 BASIC CONCEPTS IN MARKETING

The fo llowing are some of the most important market ing terms that marketers use
regularly.
Need- It is a general drive or felt deprivat ion that people require for survival. Need for
cloth, safet y, food, social, belo ngingness etc are some of the basic needs that
people require.
Want- It is a specific need shaped by individual culture and personalit y, or the deeper
part of need is want. Eg. If you need food, you may want to eat, bread or biscuit
or ‘Doro wat’ or ‘Kit fo’ etc. If you need drink, you may want to drink water or
Ambo water or Coca or Merinda, depending upon your internal feeling.
Demand. It is the abilit y and willingness to buy a product. Demand is there when an
individual has both the capacit y and willingness to buy the products or services.
Demand depends upon the financial capacit y o f individuals. As people get more
mo ney, they demand more goods or services to satisfy their needs and wants.
Therefore, businesspersons must measure not only how many people want their
product, but also how many would actually be willing and able to buy it.

Product is any thing that can be offered to a market, which does have demand, by
consumers. People sat isfy their needs and wants with product. It includes
physical objects, service, person, place, organizat ion and idea.

Customer value- it is the difference between the value the customer gains from owning
and using a product and the cost of obtaining that product. A customer makes a cost
benefit analys is and gives value to a product if the benefit is greater than the cost or

64
gives no value to a product if the cost of obtaining the product is greater than the
benefit that the customer gets.

Customer Satisfaction- A customer is sat isfied when purchase or use of a product

gives posit ive felling to the user. And a customer is dissat isfied when purchase or use
of a product gives negat ive felling to the user.

To put it simply if
i) Product performance > expectation a customer is over satisfied
ii) Product performance = expectation a customer is sat isfied
iii) Product performance < expectation a customer is dissat isfied

Exchange- It is the act of obtaining a desired object fro m so meone by o ffering

something in return. For and exchange to take place, at least two parties should interact
and they should have so mething o f value to one another. And it is based on the free will
(willingness) of the two parties.

Transaction- a trade between two parties that invo lves at least two things o f value,
agreed upon condit ions, a time of agreement and a place o f agreement.

Market- It is a set of actual and potential buyers of a product. And these individuals or
groups share a particular need or want that can be satisfied through exchange.

3.4 MARKETING MANAGEMENT

Marketing management is the analysis, planning, implementation and control o f

programs designed to create, build and maintain beneficial exchanges with target
buyers for the purpose of achieving organizat ional object ives.

It is the process of applying the different approach of management; there are different
market ing management concepts that are followed by different organizat ions.
Marketing management can occur in an organization in connect ion wit h any o f it s
markets. The next discussio n will look their concepts in brief.

65
3.4.1 Marketing Management Philosophies
Philosophy is a principle, which is guided by a logical reasoning. And the different
Marketing management philo sophies have their own belief or principle to sell their
products to customers. There are five alternat ive concepts under which businesses and
other organizat ions can conduct their marketing activit ies.

I. The Production Concept- This concept believes that consumers will prefer products
that are widely available and affordable. Distribution and production are given hig h
priorit y under this concept. This concept is applicable when demand is greater than
supply. As long as there are enough volunteers and capable buyers the organizat ion is
expected to concentrate on production and distribution efficiency. A good example is
petroleum Co mpany, where its demand is high and the only thing expected fro m
petroleum refining co mpany is to produce as much as possible and to intensify it s
distribut ion channels.

The production concept is also applicable for those consumers who are price sensit ive
(who prefer low priced products). Chinese products (cloths and shoes) so led in Ethiopia
are good examples.

II. The product Concept- This concept gives priorit y to qualit y, performance and
inno vat ion. They assume that as long as a product has good qualit y there is so me one
who will buy it. i.e buyers admire well-made products, can appraise product qualit y and
performance, and are willing to pay more for product.

Electronics companies such as Sony and Philips follow this approach.

III. The selling Concept- This concept assumes that consumers will not buy enough o f
a certain product unless a strong promotion is used.

In a perfect compet it ive market (where there are many buyers and sellers), for
consumer goods (soaps, food items etc.) or for unsought goods (where people do not
think of much such as insurance) are well marketed by this concept.

The basic concept of this approach is to sell what they produce rather than to make
what the market want. They use a push strategy (strong promotion such a s

66
advert isement). This concept also assumes that selling is the end of market ing. It
focuses on creating sales vo lume and transact ion than building lo ng-term relation wit h
customers.

IV. Marketing Concept- This concept puts customers at its center; “Customer is a
king”. Market ing concept tries to ident ify the need and want of customers before
producing/ delivering a product/ service. While selling concept starts from producing
market ing concept starts from the market. i.e target customers

And the corporate missio n of this co mpares put customers at the center. For example,
Ethiopian Air Lines puts its promotional statement as “Go ing to great length to please
you.”

V. Societal Marketing Concept- In addition to serving the interest of customers, this

concept goes one step forward to think about the well being of the society in which it
funct ions.
The main belief or stand of each concept or philo sophy is summarized as fo llows.

Mkt. Mgt. Philo. Concept

i. Production Concept - Providing of goods in a
Wide and affordable way
ii. Product Concept - Providing of qualit y,
inno vat ive and good
performing products.
iii. Selling Concept - Using of push strategy or
strong promotion to
increase sales.
iv. Marketing Concept - Identifying to the need
and want of customer
(customer centered)
-Use of pull strategy

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 v. Societal Market ing Concept - In addit ion to satisfying
customers it thinks about
the well being of society

3.5 FUNCTIONS OF MARKETING

Marketing as a concept puts customers at its center and in do ing so it has the fo llowing
basic funct ions.

Marketing in general has two major duties

ident ifying the need and want of customers and
satisfying o f utilit ies /Form, Time, Place and Possessio n)
The funct ion of marketing revo lves in satisfying these basic utilit ies.
Marketing has three basic funct ions. There are
Exchange Function
Physical Supply and
Facilitat ing Funct ion.
Each one will be discussed below

3.5.1. Exchange Function- The exchange funct ion of market ing deals wit h the buying,
selling and assembling o f goods and services.
Marketing as a department or body is responsible for the purchase of the proper
qualit y and quant it y of goods, the assembling of this inputs in such a way that
they would provide form ut ilit y and sell the value added good to customers.

 Buying- Buying is the est imat ion of needs, finding the source of supply, making
business connect ions and negotiat ion of prices and other terms and condit ions.
During the purchase of different supplies the marketing departments funct ion, in
this regard, is to make sure that the supply bought should match with customer’s
expectation, willingness and abilit y.

 Assembling- This function o f market ing is concerned wit h the collect ion and
concentration of goods of the same types fro m different sources of supply to central
locat ion for economical transportation.

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Assembling mainly gives emphasis to the value adding of goods in such a way that it
would be accepted by customers or to be in a better form than competitors offering.

 Selling- It is the transfer of ownership from producers to consumers.

Selling as a funct ion of marketing need to develop good product planning and
development of product line where by marketers make sure that a certain product meets
the requirement of a certain market. It is using this information that a product line is
developed. For example detergents such as OMO came to know that for a country like
Ethiopia the product line should design (pock) the product in small quant it y since the
buying abilit y of most of Ethiopian population is low.

The next stage after developing a product line is creation of demand using different
means of promotional techniques such as personal selling, advert ising, sales pro motio n
and publicit y. So to summarize the above, modern selling invo lves in product line,
demand creat ion, negotiat ion and contractual argument to transfer tit le of a goods.

3.5.2 Physical Supply function- This is a funct ion of market ing that is to favorable
time and place ut ilit y; i.e. the provisio n of a product/service at the right time and place.
Not, only the production of goods is enough, but the product should be distributed to
where customers are available. Basically this function has two part; transportation and
warehouse.

 Transportation- Land, water, air and rail wary are the favorable ways o f delivering
a product to the place of customers. The provision of the appropriate type of
transport and making sure that the product has been delivered center customers, are
the duties o f a marketing body. For example perishable (easily spo iled goods) such
as fish or flowers need fast transportation even if it is expensive to use like airplane.
Transportation invo lves delivering the product before it gets out of use.
Different types of transportation could be rated as fo llo ws using certain criteria’s.

 Storage and warehousing- Storage and warehouse is helpful to provide products

(to make them available) whenever the customer wants them. A market ing bod y
should be sure that a warehouse is well stocked and properly kept so that customers
could get the stocks they want it at the right time, place and at the right condit ion.

69
3.5.3 Facilitating function- The other funct ion of marketing is to make sure that the
smooth flow of business is well facilit ated. Marketers should be sure to maintain the
goods and standard of goods /service or should be sure to collect relevant and necessar y
informat ion to maintain and facilitate the running of a business.

 Financing- Market financing is the process of finding the sources of finance in

order to cover the cost of marketing funct ions. Market financing invo lves financing
of the business enterprise and the ult imate consumer. This means the busines s
should be able to sell its products and need to generate profit so that the cost of
organizat ion is maintained. And market ing body should choose for possible
financial sources to strengthen the backbone of the business.
Some of the possible sources of finance are:
- Owned invest ment and borrowing (short or long term borrowing) from financia l
inst itutions such as banks.

- Accounts receivable financing are enables a firm to get cash advances fro m financia l
inst itutions.

 Marketing risk- As the who le business has risk, a marketing body has the
responsibilit y of taking calculated risk in terms of clearly putting the need, want,
attitude, interest etc. of customers or the movement of compet itors in terms of
ident ifying their response, would minimize the possible threat that may happen.
Marketing risks could result fro m
- Change o f market condit ion, situation o f demand (enough purchase o f a product),
suppose polit ical or economic change could co me up with a marketing risk.
- Natural /man made disasters such as rain., wind, earth quakes etc. also have their own
impact on the performance of a business.

So, insuring of effects and clear understanding o f a certain environment using accurate,
timely and relevant dates would help to minimize the above risks.

70
 Market information- Market informat ion includes all facts, estimates, opinio ns
and other informat ion’s co llected using market research and intelligence are used to
make marketing decis io ns.
 Standardization and Grading- Standardizat ion is the process of establishing
agreement on a uniform ident ificat ion of definit e on a uniform ident ificat ion of
definite characterist ics of qualit y, design performance, quantit y, service etc.
Standardizat ion is used for qualit y measurement. Standards reduce verit ies and
create consistencies. Grading is the process of ranking goods according to their
qualit y it is dividing goods into groups, which have approximate of the same
characterist ics.

In doing so the market ing body as a facilitated, should clearly define the problem to
be so lved, collect relevant, accurate and timely date, and use this informat ion to
come to a solut ion.

3.6. MARKETING ENVIRONMENT

One of the major responsibilit ies of company marketer is to monitor and search the
environment for new opportunit ies, in bad as well as good years. It also spins out new
threats-such as energy crisis, a sharp rise in interest rates, a deep recession and firms
find their market ing collapsing.

Company marketers need to constantly mo nitor the changing scheme. B y

erecting early warning system, they will be able to alert marketing strategists to
meet new challenges and opportunit ies in the environment. The market ing
environment comprises two variables: controllable and non-controllable factors
and forces-in response to which organizations design their marketing strategies.
We can dist inguish between the company’s microenvironment and macro-
environment within the external environment. However, the company’s interna l
environment, which is considered as internal environment or marketing mix is
also the other focus of attention for the section.
3.6.1. Forces in Company’s Microenvironment: The microenvironment consists o f
the actors in the company’s immediate environment that affects its abilit y to serve its

71
customers. The common variables are suppliers of the company, marketing
intermediaries, customers, compet itors, and the publics.

 Suppliers: Suppliers are business firms and individuals who provide resources
needed by the co mpany to produce the particular goods and services. Development
in the suppliers environment can have substant ial effect on the Company’s
market ing operations. Marketing managers need to watch price trends of their ke y
inputs. Managers are equally concerned wit h supply availabilit y. Supply shortages,
labour strikers, and other events can interfere with the fulfillment of deliver y
promise to customers and lose sales in the short run and damage customer goodwill
in the lo ng run.

The company: The market ing department is responsible for developing market ing
plans for all exist ing products and brands as well as developing new products and
brands. Marketing management, in formulat ing marketing plans must take into account
the other groups in the co mpany, such as top management, finance, account ing, etc.
This can be considered as part of the internal environment.
Top management sets the company’s object ives, broad strategies, and polices. The
market ing manager must make decisio n within the context set by top management.
Further more, the marketing proposals must be approved by top management before
they can be implemented. The market ing manager must also work closely wit h the
funct ional departments. Financial management is concerned wit h the availabilit y o f
funds to carry out the market ing plans, the efficient allocation o f these funds to
different products, brands, and market ing activates; the likely rates of return that will
be realized; and the level o f risk in the sales forecast and market ing plan. Account ing
has to measure revenues and costs to help marketing know how well it is achieving it s
profit object ives. Production department deals with conversio n o f the input to output.
The human resources department deals wit h manpower aspects of the organizat ion.

 Marketing Intermediaries: - Marketing intermediaries are firms that aid the

company in promoting, selling, and distribut ion of goods to the final buyers. The y
include middlemen, phys ical distribut ion firms, market ing service agencies, and

72
 financial-intermediaries. The middlemen also perform the basic funct ions o f
market ing.

 Customers: Customers are group of people that purchase the product of a fir m
repeatedly. They affect the sales vo lume of a firm through their changing preference
and tastes.

 Competitors: - Compet itors are firms, which sell or purchase similar products side
by side wit h other firms. They affect the firm through their pricing policy and
others.

 The Public: - A public is any group that has an actual or potential interest or impact
on an organizat ion’s abilit y to achieve its object ives. Public can facilitate or impede
the abilit y of an organizat ion to accomplish its goals. It includes such as the media.

3.6.2. Forces in the company’s macro-Environment: The macro-environment

consists of the larger societal forces that affect both the micro environmental elements
and the company to serve the market that include such as demographic, economic,
physical, techno logical, po lit ical/legal, and social/cultural forces. Some of these factors
are already discussed in chapter two of this teaching material.

 Demographic: - The first environmental factor of interest to market is populatio n

because people make-up markets. Marketers are highly interested in the size of the
world’s populat ion, its geographic distribut ion, densit y, mobilit y trends, age
distribut ion, birth, marriage and death rates, racial, ethnic and religious structure.

 Physical Environment: - Marketers should be aware of the threats and

opportunit ies associated with trends in the physical environment impending
shortage of certain raw materials, increased cost of energy, increased, level o f
pollut ion, and strong government intervent ion in natural-resource management.

Marketing management needs to pay attention to the physical environment, in terms

of obtaining needed resources and also of avoiding damage to the physica l
environment.

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 Technological environment:- The most dramat ic force shaping people’s dest iny is
techno logy. Techno logy is the sum total of knowledge we have, of ways to do
things and includes invent ions, techniques and vast store of knowledge. But its
main influence is on ways of doing things on how we design, produce, distribute
and sell goods as well as services.

The impact of techno logy is seen on new products, new machines, new tools, etc.
Every new technology is a force for creative destruction. Transistors hurt the
vacuum-tube industry and chip that of transistors.

3.7 MARKETING ETHICS

The concept of ethics in this part of the teaching material is related to marketing and
can serve as supplementary reading of students to what has been discussed in unit one
of this material. Conscient ious marketers face many moral dilemmas. For instance, the
marketers should perform their duties efficient ly and effectively to their organizat ions.
On the other hand, marketers should be guided by broad ethical references. But
references to Ethical theories/decisio ns/ have been limited to the citation o f simple
ethical maxims as listed below.
 The golden rule: Act in the way you would expect others to act toward you.
 The utilitarian principle: Act in a way that results in the greatest good for the
greatest number.
 Kant’s categorical imperative: Act in such a way that the action taken under
the circumstances could be a universal law or rule or behavior.
 The professional ethics: Take only act ions that would be viewed as proper by
a disinterested panel of professio nal co lleagues.
 The TV test: A manager should always ask, ‘ would I feel co mfortable
explaining to a national TV audience why I took this act ions’?

Yet, the best thing to do is often unclear. Because not all managers have fine mora l
sensit ivit y, co mpanies need to develop corporate marketing ethics policies-broad
guidelines that everyone in the organization must follow. These po licies should

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cover distributor relat ions, advertising standards, customer service, pricing, product
development, and general ethical standards.

But what principle should guide companies and marketing managers on issues o f ethic s
and social responsibilit y? One philosophy is that such issues are decided by the free
market and legal system. Under this principle, companies and their managers are not
responsible for making moral judgments. Companies can in good conscience do
whatever the system allows.

A second philosophy puts responsibilit y not in the system, but in the hands o f
individual companies and managers. This more enlightened philo sophy suggests that a
company should have a ‘social conscience’ Co mpanies and managers should apply hig h
standards of ethics and moralit y when making corporate decisio ns, regardless of’ what
the system allow’. To give practical example, the following code of Ethics is given.

 Responsibility of the Marketer

Marketers must accept responsibilit y for the consequences of their activit ies and make s
every effort to ensure that their decisio ns, recommendat ions, and act ions, funct ions to
ident ify, serve, and sat isfy all relevant publics, customers, organizat ions and societ y.

Marketers’ professio nal conduct must be guided by:

1. The basic rule of professio nal ethics: not knowingly to do harm;
2. The adherence to all applicable saws and regulatio n.
3. The accurate representation of their education, training and experiences;
4. The active support, practice, and promotion of this code of Ethics.

 Honesty and fairness

Marketers shall upho ld and advance the integrity, and dignit y o f the marketing
professio n by:
1 Being honest in serving consumers, clients, employees, suppliers, distributors,
and public;
2. Not knowingly part icipat ing in conflict of interest without prior notice to al
parties invo lved and;

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 3. Establishing equitable fee schedules including the payment or receipt of usual,
customary, and/or legal co mpensat ion for market ing exchanges.

 Rights and Duties of Parties in the Marketing Exchange Process

Participant in the market ing exchange should be able to expect that:

1. Products and services offered are safe and fit for their intended use;
2. Communicat ions about offered products and services are not deceptive;
3. All parties intend to discharge their obligat ions, financial and otherwise, in good
fait h; and
4. Appropriate internal methods exist for equitable adjustment and/or redress o f
grievances concerning purchase.

It is understood that the above would include, but is not limited to the following
responsibilities of the marketer:
 Disclosure of all substant ial risks associated with product or service usage;
 Ident ification o f any product component subst itution that might materially
change the product or impact on the buyer’s purchase decisio n;
 Ident ification of extra cost-added features.
In the areas of promotions
Avo idance of false and misleading advertising;
Reject ion of high pressure manipulations, or misleading sales tactics;
Avo idance of sales promotions that use deception or manipulat ion
In the Areas of Distribution
 Not manipulat ing the availabilit y of a product for purpose of explo itat ions;
 Not using coercion in the market ing channel;
 Not exerting undue influence over the reseller’s choice to handle a product
In the areas of pricing
 Not engaging in price fixing;
 Not practicing predatory pricing;
 Disclosing the full price associated with any purchase.

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In the areas of Marketing Research
Prohibit ing selling or fundraising under the guise of conducting research;
Maintaining research integrit y by avo iding misrepresentation of pertinent
research data;
Treating outside clients and supplies daily.

 Organizational Relationships
Marketers should be aware of how their behavior may influence or impact on the
behavior of others organizational relat ionships. They should not demand, encourage, or
apply coercion to obtain unethical behavior in their relat ionships wit h others, such as
emplo yees, suppliers, or customers.
1. Apply confident ialit y and anonymit y in professio nal relat ionships wit h regard to
privileged informat ion;
2. Meet their obligat ions and responsibilit ies in contracts and mutual agreements
in a timely manner;
3. Avid taking the work of others, in who le, or in part, and represent this work as
their own or directly benefit fro m it without compensation or consent of the
originator or owner;
4. Avo id manipulat ion to take advantage of situations to maximize persona
welfare in a way that unfairly deprives or damages the organizat ion

3.8 MARKET SEGMENTATION

The basic funct ion of market ing has been discussed in the above section. In satisfying
different utilit ies marketers should be sure to ident it y clearly which group/individuals
they are serving. Market segmentation is helpful in ident ifying those groups, which is
going to be satisfied by marketers. Market segmentation is the process of dividing the
total market into several ho mogenous groups, where any group can be selected as a
target market that can be reached with a dist inct marketing mix.

Practically speaking, it is difficult for a certain business to satisfy a who le country or

region by offering a single product. People also have different interest, attitudes,

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personalit y, culture etc that makes them to have a positive, natural or negative felling
towards a certain product/service. So a marketer should use different segmenting
variables in order to ident ify, provide and satisfy a certain product to a certain group of
individuals wit h similar need and want.

There are five co mmo nly used bases for segmenting a certain consumer market.

3.8.1) PEST (Political, Economic, Socio-Cultural and Technological) factors are

helpful ways, mainly to have a general informatio n about a certain country’s macro
performance. For example the buying abilit y o f individuals could be known as the
general term, by analyzing different macro-economic indicators.

3.8.2) Geographic Segmentation- This is the process of dividing an overall market

into homogenous (similar) groups on the base of populat ion location, topography,
climate and other geographical variables. For example in Sahara region when the
climate is hot a businessperson could sell light clothes that could have no demand in a
dry cold climat ic region.

Geographic segmentation is used in order to know regional variat ions in consumer

tastes and also to determine and supply goods appropriate to a certain geographica l
region or climat ic change.

3.8.3) Demographic Segmentation – It is the dividing of an overall market into

ho mogenous group based on populat ion characterist ics such as age, sex, and inco me
level, occupation, education, stage in family lifecycle and etc.

Demographic indicators are usually used since they are easy to ident ify and are
associated with the sale of a product and service.

For example Johnson and Johnson, a body shop, company used to sell body lotion to
bodies in the U.S. but because, of the demographic change i.e. since the populat ion in
U.S. starts having small or no children at all, the company was forced to shift its market
to Africa and Asia where the birth rate is high. So given different demographic
indicators, informat ion to marketers as to what to sell and not to sell.

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3.8.4) Psychographics segmentation- This type of segmentation tries to use behaviora l
profiles developed from the analysis of act ivit ies, interest and life-st yles of consumers.
It is simply the understanding of personalit y and psycho logy of consumer behavior in
order to know what to offer to a certain market. Preference of the purchase of a certain
product could be known through the study o f life st yle. Understanding of the need,
interest, feeling, attitude etc of customers is a psychographics segmentation variable to
ident ify group of customers with similar needs and wants.

3.8.5) Behavioral Segmentation- This type o f segmentation tries to understand the

purchasing behavior of customers and to know its trend. Product usage rate, volume o f
usage, price sensit ivit y etc are used as a way o f segment ing and sat isfying a certain
market. Using this variable, users and non-users could be ident ified. And those that use
a certain product could be further divided as heavy, moderate and light users.

So by using the above segmentation variables an appropriate type of market ing mix is
used for a certain specific segment.
The next topic will discuss how to satisfy a certain market by using the controllable
tools of a marketing body (the 4 P’s or marketing mixes).

3.9 CLASSIFICATION OF MARKETS

3.9.1 On the basis of free intercourse

Markets have been classified as perfect and imperfect markets on the basis o f free
intercourse. A market is said to be perfect market when all potential buyers and sellers
are prompt ly aware o f the prices at which transactions take place and all the o ffers
made by other sellers and buyers and where any buyer can purchase fro m any seller

Under such condit ions, the prices of materials would be the same all over the market. A
market is imperfect when so me buyers and sellers or both are not aware of the offers
being made by others. Perfect compet it ion in the market is found very rarely in the rea l
world. The modern compet it ion and market is an example of perfect market.

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3.9.2 On the basis of time Classification

Very short period market- this is applicable to highly perishable articles like
vegetables, milk and fruits.

Short Period markets- time is given to adjust the supply to meet the demand. The time
given is not enough and influence of demand is greater than that of supply.

Long period markets- suffic ient time is given for the changes in supply to adjust the m
to the change in demand. Under these circumstances supply influences demand.

3.9.3 On the basis of the position of sellers

Primary Markets: In this market the primary producers sell all farm products to
who lesales in the village itself. This market deals in sales of fruits
vegetables etc.
Secondary Market: -Here wholesalers supply their good to the retailers for selling
them to consumers.
Terminal Markets: -The goods are finally disposed of direct ly to consumers. i. e
retailer finally sell these goods to the ult imate customers.

3.9.4 On the basis of the characteristics of the customer

Markets are broadly classified as consumer or industrial markets. These classificat ions
are based on the characterist ics of the individual and organization wit hin each market.

Consumer markets consist of purchases and/or individual househo ld members who

intend to consume or benefit from the purchased products and who do not buy products
to make profits.

Industrial markets, also called business-to-business markets, are grouped broadly into
producer, reseller, governmental, and inst itutional categories. These markets purchase
specific kinds of products for use in making other products, for resale, or for day to day
operations. Producer markets consist of individuals and business organizat ions that bu y
certain products to use in the manufacture of other products. Reseller markets consist of
intermediaries such as who lesalers and retailers that buy finished products and sell

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them for a profit. Governmental markets consist of federal, state, country, and loca l
governments. They buy goods and services to maintain internal operations and to
provide cit izens with such products as highways, education, water, energy, and nat iona l
defense. Inst itutional markets include churches, not for profit private schools and
hospitals, civic clubs, fraternit ies and sororities, charitable organizations, and
foundat ions. Their goals are different from such typical business whose goals are profit,
market share, or return or return on invest ment.

3.10 MARKETING MIXES

Marketing mix is the set of market ing tools that the firm uses to pursue its marketing
object ives in the target market. There are a number of market ing mix tools. These tools
are known as 4P’s such as product, placement, (distribut ion), promotion and pricing.

Marketing mixes can also be defined as the mixture of controllable variables that can be
manipulated by the management of an organizat ion.
Each market ing mix is discussed as fo llows.

3.10.1 Product: it includes a bundle of physical, service and symbo lic attributes
designed to produce consumer want satisfaction. Product provides form utilit y to those
individuals who would purchase the product.

Products can be classified in different ways.

 One approach is to dist inguish between goods and services.
Goods are basically objects that can be touched, stored, transported and mass-
produced. Service is any activit y or benefit that one party can offer to another and is
essent ially intangible and not result in ownership of any thing.
- Goods are tangible objects that can be perceived with sense. They can be depicted
in advertising. But services are often intangible invo lving act ions and opposed to
objects.
- Goods can be stored. If demand is weak, the producer can ho ld items in inventory
unt il they so ld. But services are perishable. The provider must match supply to
demand since unused capabilit y cannot be saved unt il later.

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- Goods can be transferred fro m producer to seller and can pass through the hands of
intermediaries. But services cannot be transported through intermediaries. The
provider must interact direct ly wit h the buyer.
 The other approach is to classify products into consumer products and industria l
products.
- Consumer products are products bought by final consumers for personal
consumption. There are different types of consumer products.
I. Convenient products.
These are consumer products and services that consumer buys frequent ly,
immediately and with a minimum co mparison and buying efforts. They are low
priced products and are readily available when consumers need them. Examples,
soap, sugar, candle, newspapers, batch box etc.
II. Shopping products
- They are less-frequently purchased consumer products and services that
consumers compare carefully on suitabilit y, qualit y price and style. Here consumers
spend relat ively much time and effort in gathering informat ion and making
comparison. Examples, Furniture, clothing, hotel services, medical services, etc.
III. Specialt y goods
These are products and services wit h unique characterist ics or brand ident ifications
for which a significant group of buyers are willing to make special purchase effort.
Eg. Luxury items like special brand cars, high priced photographic equipment,
special watches etc.
IV. Unsought goods
There are consumer goods that the consumer either does not know or does not think
of buying. Example- a new product like the digital audiotape player is unsought
unt il the consumers beco me aware of it through advert ising, encyclopedias etc. B y
their nature unsought goods require a lot of advertising, personal selling and other
market ing effort.

Industrial goods are those products purchased for further processing or for use in
conducting a business. Industrials products are grouped as raw materials and parts,
capital items and supplies and services.

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 Consumers and producers ident ify one product from the other using brands. To
ident ify their products from others marketers create, maintain and products fro m
others marketers create maintain and protect brands of their product and services.
Brand is any name, term, symbo l, signs design or a unifying combinat ion of these
that identifies and dist inguishes one product from the other.

A brand name is the verbal part of the brand consist ing of words or letters that
contains the name used to ident ify the firm’s product from other compet itors.

A brand mark is a non-verbal of symbo l or sign part of the brand.

Trademark is a legally protected brand name or brand mark. The owners o f the
trademarks have exclusive rights to their use.

Branding enables consumers to ident it y and dist inguishes the product they like for m
the ones they do not like.

Product Life Cycle

A product, like a human being, passes through different stages. At each stage of a
product life cycle a markets should use different strategies in the introduction, growth,
maturit y and decline.

Maturit y

Growth Decline

Introduction

Product Life Cycle

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Each stage of the product life cycle is discussed below.

1) Introduction Stage- in this stage the product is new to a certain market and the main
duty of the business is to stimulate demand. Promotional campaign should give
informat ion about the new product.
The basic features of this stage are listed below: -
 Customers are hesitant in buying the product
 Productivit y is low since demand is low
 Sales vo lume is low.
 High amount of money for promotion i.e high expense
 It is the least profitable stage.
So during this stage a company should try as much as possible to promote its
product and get known by customers.

Growth stage- Sales vo lume increases in this stage as new customers make purchase
(use the product) of a certain business. A product, which gets an acceptance by
customers, is lucky enough if it reaches this stage.
The basic characterist ics of this stage are: -
 high growth rate in sales and profit
 customers are aware of the product/service
 compet itors might enter to the market to share the profit gained by the growing
business.
Promotion is st ill high in this stage but a reminding type of advertisement should be
used.
So the company should capitalize this stage by increasing its distribut ion channels and
provide the product on time for customers who are showing a posit ive response to the
product or service.

Maturity Stage- This is a stage where sales and profit reach climax (the maximum)
level. This stage is characterized by: -
 large number of co mpet itors in a market
 available products exceed customer demand

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  sales and profits are at their highest growth.
 Reduction in price may occur so as not to slip to a declining stage.
At this stage promotion should be used but the advertisement shown should be a
reminding t ype of advert isement. The company should develop a strategy to maintain
sales and profit of the business before it goes down to a declining stage.

Decline Stage- Consumers shift to other products and sales and profit show a negat ive
trend. The characterist ics of this stage are: -
 Sales is low,
 Profit is declining and could be negat ive
 There should be a differentiat ion o f a product (modificat ion) or a total change o f
model or product.
So depending on the different life cycle o f a product, a marketer should be alert enough
to take the appropriate measure in order to maintain the acceptabilit y o f the product,
satisfact ion of customers and the profitabilit y o f the business.

The product life cycle assumes that profit and sales go in a certain pattern. The lengt h
of the life cycle is different for different products.

While a new fashio n may have a total life span of one calendar year, with an
introductory stage of two months but the automobile has been in maturit y stage for
more than twent y years.

3.10.2) Placement (distribution)

The second market ing mix that solves the problem of supply wit h transportation and
warehouse by providing a product at the right time and place is distribut ion.

There are a number of possible ways of distribut ion channels. These channels help to
deliver a product from center of production to customers. The commo n channels o f
distribut ion are the fo llowing:

1) Producer Customer: - a producer may sell its product directly to customers wit h
out any intermediaries.

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2) Producer Retailer Consumer: - there is one intermediary (middle person) in
order to provide the product produced to customers.

3) Producer Who lesaler Retailer Consumer: - the marketing of many products

is used under this channel. For example Wonji sugar factory may sell (auct ion) its sugar
to wholesalers who may bring it to ‘Merkato’ or bulk. And this who le seller would sale
to retailers who would provide the sugar in local shops and stores to customers.
4) Producer Agent (Broker) Wholesaler retailer consumer
Here agent entered the distribut ion channel. The different between agents and
who lesalers is that
i) The agent does not take the title of the product while the who lesaler does
ii) Agents take commissio n fro m the produces while who lesalers generate profit of
their own.
Retailer is a businessperson who sales to the ultimate (final) consumer.
Who le seller is a businessperson who by products for resale purpose to other who le
sellers or retailers but not to final users.

Factors that affect choice of channels of distribution

In choosing intermediaries a business should make sure that intermediaries are capable
of taking the responsibilit y of delivering the good to consumers.

Physical distribut ion is a key in terms of delivering a product to consumers at the right
time and at the right place. So the following key issues should be taken into account in
choosing cho ice o f channel.

 Product consideration- the type (nature) of a product determines whether to have a

lo ng or short channel of distribut ion. For example fast transport and short channe l
of distribut ion is essential for a perishable product to avoid delays and too muc h
handling

Company Consideration-A companies strength in financial capabilit ies would

determine whether to narrow elongate, increase or decrease its distribut ion channel &
out lets. A co mpany’s product mix influences its channel pattern. The wider the

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companies’ products mix the greater the abilit y of the co mpany to deal wit h it s
customers direct ly. A Toyota car producing company, for example has a long
 channel of distribution that goes to the extent of providing after sales service suc h
as maintenance, and this is because o f the fact that it is producing (product mix), the
different brand cars.

 Middle person consideration- choosing of a middle person that could work on

behalf o f the company and just like the company is another factor that affects
cho ice of channel. A co mpany would be forced by polit ical factor, For example, not
to have an outlet in a certain country. In this case it should find an agent who would
market its product in that region or country. For instance Glorious is an agent
chosen by Sony to distribute its product in Ethiopia.

 Cost is another factor that has effect in choosing a suitable distribut ion channel.
Internal cost of a company, compet itors cost on channel o f distribut ion,
environmental condit ions such as legal and economic factors have impact on choice
of distribut ion of channel.
So, depending on the estuation a company could use select ive distribution channe l
(extensive) or more distribution channel.

3.10.3) Promotion
Promotion is a persuasive co mmunicat ion designed to sale products services or ideas to
actual or potential customers. It is a part of marketing mix concerned with select ing
appropriate technique or tool for selling a product to a customer.

Promotion as a co mmunicat ion tool and a market ing mix has it s own sub. Promotiona l
mixes. Those are Advert isement, Sales promotion, Personal selling and publicit y. Eac h
one will be discussed below:

 Advertisement
Advert isement is the process of using written, visual, and oral or the combinat ion of the
above in order to inform or remind customers about a product or service using a certain
medias.

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The main object ives of advert isement are: -
To provide informat ion- when a product is new to a market (at the
introduction stage of the product life cycle)
To increase demand
To different iate a product- by telling the unique features of a certain
product
To maintain current sales vo lume
To counteract compet itor’s promotion- when compet itors show an
advert isement to sale a product similar to the business. The business should develop
new advert isement system to counteract to neutrals the effect of co mpetitor.
To remind customers. Mainly when a product is on the growth and maturit y stage of the
product life cycle.

Advert isement could use different medias of channels of co mmunicat ion to transmit its
message. Some o f the possible ways of sending informat ion to customers are: -
newspapers, magazines, televisio n, radio; Internet, billboard, banners etc. But the ma in
point is to use a channel that is accessible by front line customers. For example
advert ising of soap for rural population using televisio n in Ethiopian might not get the
customers intended. So the appropriate type o f channel accessible by customers should
be used.

 Personal Selling
A promotional technique invo lving use of person to person to communicat ion to sell the
product. In the case o f advertisement, it advantage is the marketers can interact with a
large number of audiences at a single instance. But the communicat ion is one way (not
interact ive). In the case o f personal selling the customer and the seller are face to face
and they can exchange informat ion on an immediate, two way and interactive manner.
The disadvantage of personal selling is that it is the most expensive form o f
promotional mix.

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Steps in personal selling
1. Prospecting- ident ificat ion of potential customers.
- Dist inguishing of those customers that are true buyers and those who
do not.
2. Approach- Contact with sales person and potential customers.
- Finding of possible informat ion about customers.
3. Presentation- describing of a products feature to a customer.
- Presentation should be clear, short and posit ive.
4. Demonstration- showing how the product operates funct ions etc. If it is a n
electronic item, for example show by planning it or using who operates it.
5. Objection- receiving the opinion, answer of the customer about the product
being demo nstrated.
6. Closing- init iat ing of purchase order. This is a stage where the sales person
influences the customer to buy or use the product shown.
Fo llow up- After the goods are to customers, so led the sales person should make sure
that the customer will make repeated purchase by providing after sales service or by
giving gifts etc. since ‘selling is not the end of marketing but rather it is the beginning.’

 Sales Promotion
Is a promotional technique invo lving short-term incent ives to encourage purchase
goods and services. Sales promotion is very important mix because it increases the
chance that the customer will try the product. It also enhanced the recognition of the
product. Examples of sales promotions.

Giving of free samples, sale discount, showing of trade series, giving of warranty, after
sales service, lottery (like the one done by coke, Pepsi and beer Co mpanies on the
corky) etc. are examples of sales promotion. While advert isement and personal selling
provide reasons to buy a product or service, sales promotion o ffers reasons to buy now,
For example a co mpany may give a free Co mpact Disk (CD) for a customer who buys
the CD player or TV.

 Publicity: - Offers several unique qualit y which is very believable, more real new s
story to consumers than advertising. This promotional technique is unpaid media

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 coverage of news and a source of free advertisement. But the message transmitted is
not the control of the organization. Example ‘Siket programe’ transmitted in
Ethiopian Televisio n. These are act ivit ies done by the public relat ion officer in
order to provide informat ion about the performance, nature and overall performance
of a business to a public.

It aims on building good relat ion with customers and public, creating o f good image
and handling of unfavorable rumors (word of mouths), stories and events are the
duty of the public relat ion officer. The major functions of public relat ion are press
relat ions, product publicit y, public affairs relation, and development of good image.
So in general promotional mixes are way o f contacting wit h customers in order to
promote the purchase / use of the deferent promot ional mixes, the appropriate
choosing of media, timing and related issue are some of the factors that need to be
considered well during promotional act ivit ies.

3.10.4 Pricing- Price is the only marketing mix element that generate revenue while the
rest (product, placement and promotion) are costs. Price is the value given to a product
or service. It may go by many names; rent of a house, tuit ion for education, fee for
dent ist or doctor, taxi fair etc. are all values attached to the use / purchase of a service /
product. It is simply the amount of money charged to a product or service.

Price is not only a revenue-generating item but it is the most flexible marketing mix.
Since it is flexible and the only revenue generating item during setting o f a certain price
to a product or service different factors should be taken in to account.

 Factors to be considered when setting prices

There are internal factors (within the co mpany) and external factors (beyond the
business) that affect the pricing decis io n of a certain firm.

1) Internal factors. These are factors in the company itself that include cost of the
organizat ion, object ive of the business or market ing mix strategy
i) Marketing object ives- companies have different object ives depending on
their position and interest. Survival, current profit maximizat ion, market

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 share leadership product qualit y leadership are the possible marketing
object ives that a firm could have.

Some co mpanies want to get a reasonable profit and wish to stay long in
a market so they will set an average or reasonable price while others
want to set a high price and take what they could take in short period of
time. So depending on the object ive of a firm price could change as well.
ii) Cost- Cost set the floor or lower limit for the price that the company ca n
charge for its product or service. For a business to stay compet it ively, at
least it needs to cover its fixed and variable costs. A business charges a
price higher than its cost to stay co mpet itive in a market. And this is why
cost is internal factor in setting price.
iii) Organizat ional Consideration- management decides who within a n
organizat ion should set price. Depending on the size of a company, price
could be set at different ial levels. Sales or marketing depart ment might
set price in lo yal co mpanies while price is also find by top leve l
management in small co mpanies st ill in very large companies pricing
design is given to divisio nal or product line managers.

2) External factors- these are factors, which are outside the boundaries of the
organizat ion market demands, compet ition, macro-environmental issues, customer
perceptions of value etc are some of the commo n factors that could set upper price
limits.

i) Market and demand- while cost selects the lower limit, demand (market)
sets the upper limit of price. If a market is willing and able to buyer use a
product, then the price of that item would be higher as well. The supplier as
to sets scarce items like petroleum, with high demand by how much price
they would be so led. Whereas goods with little demand will have low price
as well.

ii) Co mpet itors Price- a market ing intelligence is needed to know about the
cost and pricing strategy of competitors. Mainly for a new product entering

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 the market, it necessary to evaluate the exist ing price of co mpet itors than
setting new price. For example, when Shewps entered to the soft drink
producing marketing Ethiopia, it fo llowed in Ethiopia its had fo llowed the
already exist ing price o f coca and Pepsi, so as to avo id any price user. So the
pricing strategy of compet itors is another factor that should be examined
carefully before select ing a certain price.

iii) Consumer Value and Perception- consumers are the final people that use
a product. So they decide at what price they should by an item. A marketer
should make a research to know how consumers regard this service/product
and set a parallel price.
The company should also consider consumers perception o f price and how
their perceptions affect consumer’s buying decisio ns.

iv) The polit ical & econo mic situation of a country is also important in
selling a product. For example co co is being so ld at a price of eight to
ten Birr in Europe and North America while it is soled at less than two
Birr in Ethiopia. The economic condit ion of a country has effect on a
pricing strategy as it has seen in the above example.

Imported products are usually discouraged by government by imposing high tax (tariff)
on them & this will how a direct relat ion on the price set by a company.

Therefore, different internal and external factors should be considered before setting a
certain specific price.

In the coming part different pricing strategies that could be used by business will be
discussed.

 Approaches in Pricing
There are three major approaches for setting price after taking into account the differed
internal and external factors of pricing. These are cost based, buyer based and
compet ing-based pricing.

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I. Cost Based Pricing
Cost plus pricing- it is a way o f marking up or adding a certain values on the unit cost
of a company

Break-even analysis & target profit pricing-Setting price to a break even on the cost
of making selling a product. Break-even po int is a point in a graph were total cost is
equal wit h revenue. I.e. the company is just on the point of covering its unit and
variable cost. As lo ng as the co mpany longer it does this, it could sustain for a certain
period of time.

II. Value based pricing- this method takes into consideration the perception, value and
orientation of customers to a certain goods/services to set price. This method starts
fro m the market to get informat ion as to by how much would the customers want to
purchase the product/service.

III. Competitors based pricing- in this case; consumers compare the price of one
product with another and make decisio n to by that produce. In this case a firm should
know the pricing strategy of compet itors and its pricing strategy accordingly.

Depending on the intensit y o f competit ion, there could be two commo n methods o f
pricing using co mpet it ion, going rate and sealed-bid pricing.

Going-Rate pricing- a firm bases its price largely on co mpet itors price, with less
attention paid to its own costs or to demand. Firm might charge the same, more or less
price than it s compet itors depending on its strategy.

Sealed-Bid pricing- computation based pricing is also used when firms bid for jobs.
Using sealed-bid pricing a firm may fix its price on how it thinks compet itors will price
other than on its own cost and demand. The bid is based on offering the lowest price
that competitors.

IV. New Product Pricing

When marketers (business) center to a market, they might set different type of prices
(higher or lower) depending on internal & external factors.

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Market-Skimming Pricing- if a co mpany sets a higher price in the introduction stage
of its product life cycle it is known as price skimming. In this case the co mpany ma y
make very few sales but it is more profitable sales since products are old wit h high
price more profitable sale. This kind of strategy is done for skimming products
(expensive) goods.

Market Penetration Pricing- it focuses on setting lower price for a new product to
attract a large number of customers & market share. Higher sales vo lumes result in
filing costs and even a decline in price.

Progress Check Questions

1. Define marketing.
__________________________________________________________________
_________________________________________.
2. Explain how marketing management is a process
__________________________________________________________________
________________________________________________.
3. Explain the difference between need and want.
__________________________________________________________________
________________________________________________________________.
4. Which marketing management would you choose? Why?
__________________________________________________________________
_________________________________________________________.
5. Discuss the physical distribut ion function of marketing.
__________________________________________________________________
_____________________________________________________.
6. Briefly discuss how topography is used as a geographic segmentation variable?
__________________________________________________________________
_______________________________________________________.

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 7. What makes a product to move fro m growth stage to maturit y?
__________________________________________________________________
______________________________________.
8. What is the advantage of advertisement?
__________________________________________________________________
_______________________________________________.
9. How is personal selling better than advert isement?
__________________________________________________________________
___________________________________________________.
10. What is the difference between P.R. and publicit y?
__________________________________________________________________
___________________________.
11. What does it mean when we say price is the most flexible marketing mix?
__________________________________________________________________
______________________________________.
12. Discuss the internal factors that affect pricing strategy.
__________________________________________________________________
___________________________________________________.

3.11 SUMMARY

Marketing is one of the most important part of a business which makes a direct
interact ion wit h customers in terms o f understanding the need and want to guide a
product /service.

Marketing basically is the identificat ion of need, want and demand; and satisfact ion of
utilit y (form, time, place and possessio n)

The major funct ions o f market ing are exchange, physical distribut ion and facilitation.
According to the different believes, there are five different market ing management
philosophies: these are production, product, and selling, marketing and social marketing
concepts.

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Market segmentation is a way of identifying a group of consumers with similar interest
and behavior. Geographic, psychographics, behavioral and demographic factors are
helpful to identify a ho mogeneous groups (consumer)

Marketing mixes are the controllable tools of a marketing body that help to provide and
win customers by manipulat ing them. Market ing mixes are consider as 4 P’s:

Product Personal selling

Price Advert isement
Place Sales Promotion
Promotion Public relat ion

3.12 ANSWER TO CHECK YOUR PROGRESS

(2) It is a managerial process since the activit ies done under marketing should be
properly planned, organized, Implemented and controlled. Resources are scares and
they should be properly used by applying management.

(3) Need is a general drive while want is a specific need.

(6) Topography is the geographical characterist ics of a country whether it is

mountainous, plateau, land locked etc which have their implicat ion of individuals
behavior, way of life and transportation to be used.

(7) A product goes from growth to maturit y because of these reasons: -

Situation of market. i.e. Consumers have bought enough of a product or market had
enough of it.

Take over by competitors- the increase in sales and profit of the growth stage will tract
compet itors to take the share of the exist ing market moving fro m growth to peck
(maturit y).

(9) Personal selling is better than advertisement since it has an immediate two-way
communicat ion with customers.

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(11) It means we can easily increase, decrease or manipulate it in a better way than the
other P’s (market ing mixes).

3.13 REFERENCES

 C.B MAMORIA, Marketing Management, 11th ed, Kitab, Muha, 1997

 Kotler, P. Marketing Management, 5th edition, prent ice hally 1984.
 Kotler, Philip, Marketing Management, 9th ed, printice. Hall, 1998.
 R.K MALHATYRO, Marketing Management 18th ed, Anmo l, Pub. 1997.
 DIWAM, P. Marketing Management, Print ice. Hall, 1998.
 William J. Stanton, Fundamentals of marketing, 10th edit ion.

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