BCOMSCM Business Management 1 Module Guide PDF

BUSINESS MANAGEMENT 1 BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT BUSINESS MANAGEMENT 1 MODULE GUIDE Copyright © 2021 REGENT BUSINESS SCHOOL All rights reserved; no part of this book may be reproduced in any form or by any means, including photocopying machines, without the written permission of the publisher. BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 1 BUSINESS MANAGEMENT 1 Table of Contents INTRODUCTION TO BUSINESS MANAGEMENT 1.....................................................3 CHAPTER 1: Introduction to Business Management......................................................................... 10 CHAPTER 2: Development of Management Theory.......................................................................... 23 CHAPTER 3: Environmental Analysis................................................................................................ 41 CHAPTER 4: General Management................................................................................................... 65 CHAPTER 5: Production/Operations, Purchasing and Logistics Management.................................. 93 CHAPTER 6: Marketing Management.............................................................................................. 108 CHAPTER 7: Human Resources Management................................................................................ 118 CHAPTER 8: Financial Management............................................................................................... 136 CHAPTER 9: Public Relations Management.................................................................................... 145 BIBLIOGRAPHY AND RECOMMENDED READINGS............................................... 154 BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 2 BUSINESS MANAGEMENT 1 INTRODUCTION TO BUSINESS MANAGEMENT 1 1. Introduction Welcome to the Bachelor of Commerce Degree programme and the Business Management 1 module. This study guide has been devised in line with your syllabus and the latest developments in the field of management. The structure of the guide is simple and user-friendly. 2. Module Overview This module introduces the students to the fundamental concepts and functions of management. It describes the functional areas of management and their related activities. The guide assists students with a concise understanding of the general management functions and the business environment. 3. Aim of the Module This module aims to successfully demonstrate a suitable understanding of management concepts and functions. Effectively identify and apply a comprehensive knowledge of the business environment 4. Essential (Prescribed) Reading Your essential (prescribed) reading comprises the following: 4.1. Prescribed Reading Erasmus, B., Strydom, J. W., and Rudansky-Kloppe, S. (2016). Introduction to Business Management – 10th Edition. Oxford University Press BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 3 BUSINESS MANAGEMENT 1 4.2. Recommended Reading Hellriegel, Slocum et al. (2017). Management, 5th ed. South Africa: Oxford University Press Nieman and Bennet. (2014) Business management - A value chain approach, 2ND ed. South Africa: Van Schaik publishers Smit, Cronje et al. (2011). Management Principles, 5th ed. South Africa: Juta Van Rensburg, L.R.J. (ed). (2008). Business Management, 2nd edition. South Africa: Van Schaik publishers 5. How to use this Module This module should be studied using the recommended and prescribed textbook/s and the relevant sections of this module. You must read about the topic that you intend to study in the appropriate section before you start reading the textbook/s in detail. Ensure that you make your own notes as you work through both the textbook/s and this module. You will find a list of objectives and outcomes at the beginning of each section. These outline the main points that you need to understand when you have completed the section/s. The purpose of this guide is to help you study. It is important for you to work through all the tasks and self-assessment exercises as they provide guidelines for examination purposes. 6. Navigational Icons Think Point When you see this icon, you should think about and reflect on the issues/challenges/themes presented. Tasks When you see this icon, you will know that you are required to perform some kind of task to gauge how well you remember or understand what you have read or how good you are at applying what you have learnt. BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 4 BUSINESS MANAGEMENT 1 Definitions This icon will alert you to a specific definition related to the topic under discussion Case Studies Case studies are often used to illustrate a concept within the setting of a real life scenario. Answer the questions that follow to ensure that you have a proper understanding of what has been discussed. 7. Specific Outcomes and Chapter Alignment SPECIFIC PROGRAMME OUTCOMES CHAPTER ALIGNMENT Describe the fundamental concepts of business SO 1: 1,2,3,4,5,6,7,8,9 management in an organisational environment. Provide an elementary understanding of the evolution SO 2: 2 of management theory in relation to current business practice. SO 3: Effectively determine the relationships between the 3 organisation and external environmental factors. Describe the different internal and external factors that SO 4: 3 may affect a business organisation. Constructively apply factors of the business SO 5: 3 environment to a variety of business contexts. SO 6: Demonstrate a sound understanding of the four basic 4 management functions. Display a basic knowledge of management adapting SO 7: 4 from traditional management methods to the digital age. Clearly define the terms and concepts relating to supply SO 8: 5 chain management. BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 5 BUSINESS MANAGEMENT 1 SPECIFIC PROGRAMME OUTCOMES CHAPTER ALIGNMENT SO 9: Effectively discuss the roles, responsibilities and 5 activities pertaining to each of the key functions during the different stages of the supply chain process. SO 10: Have a rudimentary knowledge of the importance of 5 supply chain management to the business function. SO 11: Explain how marketing management creates value in 6 the organisation by providing clear insight into the components of the marketing strategy Describe the rudimentary functions and concepts SO 12: 7 pertaining to human resource management within a business. Provide an elementary understanding of the scope and SO 13: 8 responsibilities of the financial manager. Critically discuss types of financial decisions available SO 14: 8 and determine the evolution of finance through the digital era. Provide a fundamental understanding of the role, SO 15: 9 functions and process that encompasses the public relations management function 8. Specific Outcomes and Assessment Criteria SPECIFIC PROGRAMME ASSESSMENT CRITERIA OUTCOMES The student should demonstrate the ability to have: SO 1: Describe the fundamental Clearly discuss the fundamental concepts of concepts of business management; explain the importance of management in an management to business. organisational environment. BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 6 BUSINESS MANAGEMENT 1 SPECIFIC PROGRAMME ASSESSMENT CRITERIA OUTCOMES The student should demonstrate the ability to: SO 2: Provide an elementary Discuss the evolution of management theories understanding of the in theory and apply knowledge to current evolution of management business practices within various theory in relation to current organisations. business practice. SO 3: Effectively determine the Describe in detail the composition of the relationships between the business environment. organisation and external environmental factors. SO 4: Describe the different internal Explain the relationship between the internal and external factors that may and external environments; apply knowledge affect a business of the factors of the business environment. organisation. SO 5: Constructively apply factors Demonstrate an understanding of of the business environment environmental analysis to a variety of business to a variety of business scenarios. contexts. SO 6: Demonstrate a sound Demonstrate a sound understanding of the understanding of the four four management functions: apply knowledge basic management of each of the functions to a variety of functions. business operations. SO 7: Display a basic knowledge of Discuss a basic understanding of the evolution management adapting from from traditional to digital management. traditional management methods to the digital age. SO 8: Clearly define the terms and Define and discuss the key roles, functions concepts relating to supply and activities associated with supply chain chain management. management. BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 7 BUSINESS MANAGEMENT 1 SPECIFIC PROGRAMME ASSESSMENT CRITERIA OUTCOMES The student should demonstrate the ability to: SO 9: Effectively discuss the roles, Define and discuss the key roles, functions responsibilities and activities and activities associated with supply chain pertaining to each of the key management. functions during the different stages of the supply chain process. SO 10: Have a rudimentary Demonstrate knowledge in determining the knowledge of the importance importance of the supply chain management of supply chain management within best business practice. to the business function. SO 11: Explain how marketing Demonstrate a basic and applied knowledge management creates value in of marketing the function and concepts in the organisation by providing relation to the value and significance provided clear insight into the to an organisation. components of the marketing strategy. SO 12: Describe the rudimentary Discuss detailed knowledge pertaining to the functions and concepts function and scope of the Human Resource pertaining to human resource department by explaining the various goals, management within a challenges, and activities of HR management business. within a business. SO 13: Provide an elementary Identify and discuss the role and understanding of the scope responsibilities of a financial manager. and responsibilities of the financial manager. SO 14: Critically discuss types of Apply knowledge of financial decision-making financial decisions available to a business and understood the evolution of and determine the evolution finance function through the digital era. of finance through the digital era. BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 8 BUSINESS MANAGEMENT 1 SPECIFIC PROGRAMME ASSESSMENT CRITERIA OUTCOMES The student should demonstrate the ability to: SO 15: Provide a fundamental Define and explain the role and responsibilities understanding of the role, of public relations managers; differentiate functions and process that between marketing and PR functions and encompasses the public discuss the functions and processes of the relations management public relations management for the benefit to function. business organisations. BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 9 BUSINESS MANAGEMENT 1 CHAPTER 1: Introduction to Business Management Chapter Outcomes On completion of this chapter, you should be able to: Clearly discuss the importance of studying of business management Identify and discuss the functional areas of business management Effectively describe an organisation’s value chain model Successfully identify and discuss the factors of production required to start a business Describe the fundamental concepts of business management in an organisational environment Clearly understand and apply the roles, skills, and levels of management within an organisational context 1.1. Introduction As a subject, Business Management is relevant for every person in society. Although many people are not actively involved in “business” as such, they are still involved in the economic life of the country. The moment they are employed in the workplace, or make use of a service, or buy a product, they are involved in economic life. Better knowledge and improved understanding of what a business is and how it functions increases understanding and appreciation. A thorough understanding of a business, its workings and its management is essential for every business manager. Managers need training on various matters relating to business, to generic management and to a number of related subjects. The subject of business management encompasses all activities that are related to the management of all types of organisations. This chapter introduces students to the scope as well as some of the core principles of BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 10 BUSINESS MANAGEMENT 1 Business Management-in particular, the value chain model, factors of production, managerial roles and skills and types of business ownership. 1.2 Functional Areas of Business Management The management of a business involves various functional areas of management, each of which should receive careful consideration. The extent to which a particular functional area of business is important in a particular business depends on several factors, for example the type of product or service, the location which enables businesses to transform so-called inputs into outputs, as well as the size of the organisation. The following functional areas are identified and discussed: Production and operations management Marketing management Financial management Human Resources management Public Relations It is important to note that these functions can be identified as separate functions and can be studied on their own. However, in practice, these functions cannot be separated; t hey wo rk t og e th e r to achieve the goals and objectives of the business. Tasks Take any business as an example (e.g. a café). Think about the business activities of this business and classify these as part of the various functional management areas. BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 11 BUSINESS MANAGEMENT 1 1.3 Factors of Production Business Management is concerned with the management aspects of the inputs, the conversion process, and the outputs. Traditionally, the production factors (inputs) are summarised a s fo llows : Land Capital Labour Entrepreneurship Land is now considered to include all natural resources used as raw materials. Capital represents the financial means for acquiring other forms of production factors, for example buildings and machinery. Labour refers to all physical and mental abilities of human resources. Entrepreneurship refers to the initiative of putting together a range of production factors in various combinations in diverse businesses to satisfy the numerous needs of consumers. The optimal combination of factors requires various other aspects such as internal and external communication. These aspects and functions are linked in a value chain where each activity needs to note the influence it may have on every other aspect of the business. The application of the economic principle must be visible throughout the entire organisation. 1.4 Adding Competitive Value: The Value Chain At every stage of the conversion process, one has to examine how value can be added to the process in the most efficient way. The entire chain of linked activities and processes, from the most rudimentary raw material to the most sophisticated end product, must be guided by adding value. This value concept is broad, not only in terms of financial or monetary value, but also of adding value in terms of place, time and form utilities. By adding value to these utilities, the products and services become enhanced need-satisfiers and can therefore demand higher monetary value as well. If a particular activity does not add value to the end product, then why have that activity? BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 12 BUSINESS MANAGEMENT 1 The concept of the value chain was used in accounting analysis for some years before Michael E. Porter of Harvard University suggested that it could be used as a tool for identifying ways of creating customer value. As such, the value chain can be used as a systematic means of examining all of the organisation's functional activities and their effectiveness in creating customer value. The idea behind value chain analysis is to identify the value that is added with each activity in the process of providing products and/or services and to compare a business's performance with the performance of competitors. The knowledge obtained in this way will help management to make decisions and follow them up with effective action to provide value for their customers. However, competitive advantage is obtained on overall value added, not through superior value added with each activity. Hence, a business that sees itself as behind in one activity can make up its shortfall in another, and emerge competitively in the end. Therefore, analysing a business's value chain can draw attention to the organisation's strengths and weaknesses. A typical value chain divides activities within the business into two broad categories: primary activities and support activities. Primary activities (sometimes called line functions) are those involved in the physical creation of the product, marketing and transfer to the buyer, and after sales support. Support activities (sometimes called staff or overhead functions) assist the business as a whole by providing infrastructure or inputs that allow the primary activities to take place on an ongoing basis. The value chain includes a profit margin since a mark-up above the cost of providing a firm's value-adding activities is normally part of the price paid by the buyer. The value created should exceed cost so as to generate a return for the business's effort. BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 13 BUSINESS MANAGEMENT 1 Figure 1.1: The Value Chain Model The primary activities are: Procurement and inbound logistics These are areas concerned with sourcing and receiving goods from suppliers, storing them until required by production/operations, and handling and transporting them within the organisation. Production/Operations This is the production area of the business. In some businesses, this might be split into separate departments, such as design furniture, make furniture, and quality inspection in a furniture manufacturer, or receipt and payment of money, keeping records of accounts, and safekeeping of valuable articles for a bank. In a service business, where there is no production of tangible goods, this refers to the technical core, or the backstage area where service support activities are carried out, such as the mail sorting and distribution facility of a post office, and the servuction system, that is the client service area such as the lobby of a hotel or the check-in counter of an airline. BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 14 BUSINESS MANAGEMENT 1 Outbound logistics These distribute the final product to the customer. They would clearly include transport and warehousing but might also include selecting and wrapping combinations of products in a multi-product business. For a bank or other service business, this activity would be reconfigured to cover the means of bringing customers to the bank or service, including service centres (branches) or Internet access to the organisation's services. Marketing and sales This function analyses customers' wants and needs and makes customers aware of those products or services that the business has to offer for sale. Customer service Before or after a product or a product has been sold, there is often a need to arrange financing, installation, or after- sales service. There may also be a need to train customers, answer their questions, and so forth. Each of the above categories adds value to the organisation in its own unique way For the business to undertake its task more efficiently than its competitors, these activities must ensure lower production costs, faster and cheaper outbound delivery, higher standards of service etc. By this means, they provide the areas of competitive advantage of the organisation. The support activities, according to the value chain, are: Financial management All activities, costs and assets related to the acquisition, utilisation and control of the money the organisation required to finance its activities. Human resource management Activities, costs and assets associated with the recruitment, training, development and compensation of all types of personnel and labour relations activities. Communication Activities, costs and assets associated with communicating with all the internal and BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 15 BUSINESS MANAGEMENT 1 external publics of the organisation. Information management and e-business Information management is the management of organisational processes and systems that acquire, create, organise, distribute, and use information. E- business (electronic business) is the conduct of business processes on the internet. These e-business processes include buying and selling products, supplies and services, servicing customers, processing payments, managing production control, collaborating with business partners, sharing information, running automated employee services, recruiting, and more. These support activities add value, just as the primary activities do, but in a way that is more difficult to link with any one particular part of the organisation. This is also the case with general management and leadership that is required to plan, direct and control all activities and functions at all levels within the organisation management plan, direct and control. 1.5 Definition of Management With regard to a definition of management, on the whole, a considerable degree of consensus exists within the literature. Definitions include: “the process of planning, organising, leading and controlling the resources of the organisation to achieve stated organisational goals as productively as possible” (Cronjé, et al., 2004: 10). “the process of getting things done through the efforts of other people” (Mondy, Sharplin & Premeaux, 1991: 3). “the process of planning, organizing, leading, and controlling the work of organisation members and of using all available organisational resources to reach stated organisational goals.” (Jones, George & Hill, 1998: 5). An analysis of the above definition’s points to the essential components which should be included in a definition of management: BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 16 BUSINESS MANAGEMENT 1 For an organisation to effectively and efficiently achieve its goals, its management must involve a process in which … the management functions of planning, organising, leading and controlling are executed; organisational resources are utilised; and work is achieved through the efforts of other employees. 1.6 Levels of Management Three levels of management within an organisation may be identified: Top Management Middle Management Lower / First Line / Supervisory Management TOP MANAGEMENT MIDDLE LOWER MANAGEMENT MANAGEMENT RESPONSIBILITY Overall responsibility for Responsible for specific Responsible for the organisation departments departmental sections / subsections MAIN FUNCTION Strategic management Implementation of Application of rules & policies, plans & procedures to achieve strategies high levels of productivity TIME Long Term Medium Term Short Term ORIENTATION POSITIONS HELD Board of Directors, Departmental heads, Section/subsection Managing Director, CEO, e.g. Marketing Manager, heads, e.g. Product, Management HR Manager Sales & Promotion Committees Managers within the Marketing Department Table 1.1: The levels of management 1.7 The Role Distribution of Managers The manager’s relation to the organisation can be further explored from a role distribution perspective. BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 17 BUSINESS MANAGEMENT 1 Figure 1.2: Henry Mintzberg’s managerial roles According to (Erasmus, et al, 2016), each manager must fulfil a specified role, irrespective of the managerial level or area he or she occupies. After all, a manager will perform certain roles, meet certain needs and assume responsibilities. Mintzberg (1990) presents the three categories of managerial roles in a sequential manner. As illustrated in Figure 1.2, the sequence begins with the status emerging from the formal authority vested in the manager’s position. This status allows for the formation of interpersonal relationships and the execution of Interpersonal Roles. The interpersonal relationships in turn provide the manager with access to information and the consequent carrying out of Informational Roles. This information consequently enables the manager’s decision making, and his execution of Decisional Roles. Interpersonal Roles ❖ Figurehead Role: the manager is involved in the performance of ceremonial duties, such as officiating at a long-service award evening. ❖ Leader Role: the manager works with and through his/her subordinates to achieve the work of his/her department. For example, the manager appoints, trains, motivates, and promotes his/her subordinates. ❖ Liaison Role: the manager makes contacts outside of the vertical chain of command to maintain good relationships within and outside the organisation, BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 18 BUSINESS MANAGEMENT 1 such as the forming of a sound relationship with a supplier or distributor. Information Roles ❖ Monitor Role: the manager is involved in constantly seeking pertinent information through, for example, scanning the environment and receiving information from his or her network of contacts. ❖ Disseminator Role: the manager passes on information received to individuals within the organisation who would benefit from it, such as subordinates and colleagues. ❖ Spokesperson Role: the manager communicates information to people outside the organisation, for example, the Marketing Director may ensure that the media is kept informed about the organisation’s social responsibility initiatives. Decision-Making Roles ❖ Entrepreneur Role: the manager seeks to maintain and extend the unit’s/ organisation’s sustainability through adapting it to changes within the environment. For example, the CEO and the management team may decide to change strategy and reengineer the organisation as a result of influential changes within the organisation’s environment. ❖ Disturbance Handler Role: the manager is involved in involuntarily responding to pressures and solving problems. For example, the HR Director may be required to address an unexpected situation within the company which may lead to strike action. ❖ Resource Allocator Role: the manager decides what quantities of resources such as people, equipment and money each part of the department/ organisation should receive. For example, during the company’s budgeting period, the CEO approves a budget for the Information Technology department which is considerably larger than the other departments’ budgets. ❖ Negotiator Role: due to his/her authority to allocate resources and his/her access to information, the manager is involved in negotiations within the company. For example, a supervisor may negotiate changes to job specifications with his/her subordinates. In closing, it needs to be noted that although Mintzberg (1990) distinguishes ten BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 19 BUSINESS MANAGEMENT 1 managerial roles, he argues that all ten roles form an integrated whole and cannot be easily separated. It needs to be noted that Mintzberg (1990) emphasises that although he breaks down the manager’s work into ten different roles, his focus is on the Gestalt (whole) approach, and he argues that the roles are not separable. In so doing, the complex nature of managerial work is acknowledged. Mintzberg (1990) argues that the managerial role approach contributes to more effective management in that, unlike the traditional POLC approach, it provides managers with insight into the pressures and complexities of their work. 1.8 Managerial Skills Certain managerial skills are required For managers to effectively perform their duties. Erasmus et al (2016) identify three categories of skills that managers at all levels of the organisation are identified to possess: Conceptual Skills: which refer to the manager’s ability to view the operation of the organisation and its parts holistically e.g. analytical thinking, strategizing or being innovative. Technical Skills: which refer to the ability to use discipline specific skills to complete a particular task e.g. programming, engineering, fashion design, operating systems and machinery. Interpersonal Skills: which refer to the manager’s ability to communicate and work effectively with others e.g. delegation and conflict resolution. Obviously, managers at different hierarchical levels within the organisation will employ these skills to varying degrees. For example, the nature of the work which top management performs requires a greater reliance on, and employment of, conceptual skills. BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 20 BUSINESS MANAGEMENT 1 1.9 Conclusion This chapter focused on the core concepts of business management as well as the functional areas of business management. All organisations are systems where inputs are transformed into outputs. To survive, organisations must add value to their processes either by raising the value of their output or by lowering the costs of their inputs. The importance of understanding the various interactions of management levels and determining their roles and skills in an organisation. Tasks With the aid of a labelled value chain model diagram, illustrate the value chain model for a business of your choice. Case Studies Martin Brink is a co-owner of a family business located in the Eastern Cape. The business, Brink & Brink, manufactures wooden furniture for both the local and international markets. Recently, Martin read the following in an article in a journal for the South African wood furniture industry: “The use of the Internet in facilitating and enhancing the access to global markets is becoming increasingly important to South African producers of wooden furniture as they become integrated into the global economy and are exposed to the demands of more sophisticated markets. Failure to adopt e-commerce technologies could marginalize producers of wooden furniture and isolate them from the international markets that they wish to supply.” After reading this article, Martin realised that Brink & Brink, although it had up to now not invested in e-technology, should consider doing so. He decides to prepare a proposal for the next management meeting to suggest this. Assist Martin to prepare for the meeting by answering the following questions. BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 21 BUSINESS MANAGEMENT 1 Questions 1. Explain how enterprise’s e-technology activities can be represented in its value chain. 2. Explain how the adoption of e-commerce technology can add value to a furniture manufacturing enterprise such as Brink& Brink by referring to the value chain concept. 3. “The management of e-technology is not only an important value chain activity but is also a critical supply chain enabler”. Explain this statement. 4. Formulate three arguments, derived from the questions above, that Martin can use to convince Brink & Brink’s management team to invest in e-technology. BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 22 BUSINESS MANAGEMENT 1 CHAPTER 2: Development of Management Theory Chapter Outcomes On completion of this chapter, you should be able to: Highlight the significance of learning management theory Display a basic understanding of the factors that have contributed to management theory Provide an elementary knowledge and understanding of the theorist contributions and findings of the Classical Management Approach, Behavioural and Human relations Approach, Quantitative Approach and Contemporary theories 2.1 Introduction This chapter examines the Evolution of Management Theory. Management theory is argued by some to have originated with Nicolé Michiavelli, while others argue that the Egyptians were the first management thinkers (Micklethwait and Wooldridge, 1996). However, while Michiavelli and the Egyptians may well have been management thinkers, it is only during the last century that management has undergone systematic investigation and has been established as a formal discipline. This section of the module examines the body of management knowledge which has emerged since the early 1900s. 2.2 Why Study Management Theory? You may wonder why the study of management theory is necessary. The study of management theory is critical in developing a holistic understanding of the discipline and professional competence.. BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 23 BUSINESS MANAGEMENT 1 Think Point Think about your experience in your current organisation and /or organisation for which you have worked in the past: 1. Identify two managers, with whom you have dealt with who have demonstrated vastly different management styles (for example, an absolute autocrat vs. a democratic manager). 2. Identify the one manager as “Manager A” and the other as “Manager B”. From your experience and observations, what principles do you think underlie Manager A’s view of and approach to management? S t o ne r a n d Freeman (1992) point out that the study of management theory is important in that the theories serve to: Guide management decisions Shape the manager’s view of organisations Make the manager aware of the business environment Provide the manager with a source of new ideas 2.3 Understanding Management Theory In studying management theory, it is important for you to have an understanding of the concept of theory, as well as the factors that influence the development of theory. Tasks Define the concept “theory”. What factors do you think influence the development of a theory? BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 24 BUSINESS MANAGEMENT 1 Comment on Activity Definition of Theory Stoner and Freeman (1992) define a “theory‟ as a “coherent group of assumptions put forth to explain the relationship between two or more observable facts and to provide a sound basis for predicting future events”. Another definition of “theory‟ is “a supposition or system of ideas explaining something”. In essence, therefore, a theory is a framework of principles. From the management perspective, it may be argued that each management theory provides a framework of principles that guide not only the managers understanding of management issues, but his/her management-related actions as well. Factors Influencing the Development of Theory Management theories do not develop in a vacuum but within, and as a result of, the dynamic environment. The environmental forces which impact on the development of management theory are depicted below: Figure 2.1: Environment forces that shape management thought Source: Smit & Cronje (2011) Evolution of management theory A study of the evolution of management schools of thought reveals that theories tended to emerge in tandem with, or just after, notable environmental changes (See Chapter 3 for an understanding of environmental forces): BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 25 BUSINESS MANAGEMENT 1 The Classical Management School that emerged in the early 1900s was influenced by the economic, technical and cultural changes which were brought about as a result of the industrial revolution and the introduction of steam. The Behavioural Management School emerged in the 1920s and 1930s and was influenced by the Great Depression and decline in prosperity as well as failure of the Classical Management School to provide for workplace harmony. The Quantitative Management Approach t hat emerged in the 1940s was influenced by World War II during which both the British and the Americans utilised mathematical approaches and technology to solving war-related problems. The Contemporary Management Theories began to emerge during the 1950s and were influenced by the rapid and ongoing change which characterised the business environment after World War II (Cronjé,et al 2004). 2.4 Theories of Management We will explore the following schools of management: 2.4.1 The Classical Management Approach The emergence of the Classical Approach was influenced by the steam-engine which was a product of the Industrial Revolution. Steam power provided for efficient production which in turn led to a shift from farm work to factory work where the principle of mass production was upheld. This shift from the agrarian mode to the factory system brought about a number of organisational problems, such as poor motivation of workers. The classical theories emerged to address these problems. Scientific Management Theory Scientific Management Theory arose partly due to the need to increase productivity. Fredrick Taylor, Henry Gantt and Frank and Lillian Gilbreth are best known for their contributions to the field of Scientific Management. BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 26 BUSINESS MANAGEMENT 1 Frederick Taylor was a manufacturing manager (originally a mechanical engineer) who sought to increase the productivity of the individual worker by increasing specialisation and job division of labour. He developed four principles to increase efficiency in the workplace: Examine the way in which workers perform their tasks and experiment with ways of improving the way in which the task is performed Record the new methods of performing the task as rules and standard operating procedures Ensure that workers’ skills and abilities match the needs of the task, and train them to perform the task according to the written rules and standard operating procedures Determine an acceptable level of performance for each task and develop a remuneration system which rewards performance which exceeds the acceptable level Frank and Lillian Gilbreth built on the work of Taylor and focused on work simplification. Their approach included: Analysing each individual action required to perform a task Identifying better ways of performing each action Increasing the efficient performance of the whole task through reorganising the individual actions (Jones et al., 1998). Henry Gantt redesigned the incentive system developed by Taylor by providing not only for the payment of a bonus to the worker who exceeded the daily standard, but to the worker’s supervisor as well. He also devised a chart for production scheduling, the Gantt Chart, which is still in use today (Stoner & Freeman, 1992). The Scientific Management Approach succeeded in its endeavour to increase productivity. However, the approach, in focusing on work and productivity, neglected to address the “human‟ element, which ultimately resulted in worker dissatisfaction and distrust of management. BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 27 BUSINESS MANAGEMENT 1 Administrative Management Theory While Scientific Management Theory focused on the productivity of the worker, Administrative Management Theory essentially focused on how to increase productivity at the level of the organisation. Henri Fayol and Max Weber made significant contributions to this view of management. Henri Fayol, recognised as Europe’s greatest management pioneer, adopted a process approach to management. He identified 14 principles which he argued could increase the efficiency of the management process. Many of these principles (e.g. Division of labour, authority and responsibility, unity of command, unity of direction, team spirit) form the basis of management and research today (Erasmus, et al, 2016). Fayol also identified five basic functions of administration: Planning Organising Commanding Coordinating Controlling Max Weber: developed a theory of bureaucratic management and emphasised the need for a hierarchy governed by lines of authority. Administrative Management Theory has made a significant contribution to the field of management in that a considerable number of its principles are still being used in management research and applied in management practice today. However, this theory is criticised because it is more applicable for the stable organisations and predictable environments of the past (Peak; 2020). 2.4.2 The Behavioural and Human Relations Approach While the focus of the Classical Management Approach was either the productivity of the worker or the productivity of the organisation, the Behavioural & Human Relations BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 28 BUSINESS MANAGEMENT 1 Approach focuses on the needs of the worker. Indeed, the Behavioural & Human Relations Approach emerged in part in reaction to the ‘inhumane” view of the Classical Approach. Mary Parker Follett, Elton Mayo and Douglas McGregor are recognised as having made significant contributions to the Behavioural & Human Relations Approach Mary Parker Follett: Much of Follett’s writing emerged in reaction to Taylor’s scientific approach. Indeed, Follett argued that it is the worker who knows most about his/her job and therefore the worker should be involved in the job analysis and work development process. She also anticipated the current management interest not only in self-managed teams and empowerment, but in horizontal (as opposed to Fayol’s and Weber’s vertical) power and authority. Elton Mayo: An experiment, which investigated the relationship between the level of lighting in the workplace and workplace productivity at the Hawthorne Works at the Western Electric Company near Chicago during 1924 – 1933, showed that productivity improved not only when lighting was improved, but when lighting conditions were made worse as well. Elton Mayo, a Harvard psychologist was called in to investigate this phenomenon. It was argued that management’s interest in, and concern for, the workers’ well-being had served to enhance worker performance. This phenomenon has come to be known as The Hawthorne Effect. The findings of the Hawthorne experiment precipitated an interest in research in the area of managerial behaviour and leadership, and thus emerged the Human Relations Movement. Douglas McGregor: McGregor argued that two different sets of assumptions determine how manager’s view their subordinates and manage their departments. He argued that Theory X managers assume that employees are inherently lazy and therefore need to be closely supervised and controlled. On the other hand, Theory Y managers adopt a positive view of employees and believe that it is the manager’s task to create a climate in which employees can effectively perform their work. The Behavioural and Human Relations Approach has contributed to the field of management in that it has stressed the employee’s social needs, which in turn has led BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 29 BUSINESS MANAGEMENT 1 to a focus on the development of people-management skills, as opposed to technical skills alone. Further, it has provided insights into issues such as individual motivation, group behaviour and interpersonal relationships at work. A limitation of the Behavioural & Human Relations Approach lies in the fact that human behaviour is complex in nature, which presents challenges to its study. Tasks Consider the organisation for which you currently work. What particular organisational and managerial practices show evidence of a Behavioural and Human Relations Approach? Comment on Activity Organisational and managerial practices that exhibit a Behaviour & Human Relations Approach could, for example, include: Allowing for self-direction in employee work Participative decision-making Self-managed work-teams Knowledge sharing at, and between, all levels Training and development initiatives for employees 2.4.3 Quantitative Approach According to Technofunc (2020), the Quantitative Approach, also referred to as the Management Science Approach, is essentially an extension of Taylor’s Scientific Management Theory. It focuses on the use of rigorous quantitative techniques that enable managers to achieve productivity through the most effective and efficient use of organisational resources to produce goods or services. Management science is an approach that aims at increasing decision effectiveness through the use of sophisticated mathematical models and statistical methods. Whenever management has a problem, it calls on relevant disciplines which analyses business problems and frames a mathematical model by collecting the relevant data (like BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 30 BUSINESS MANAGEMENT 1 cost of machine, cost of raw material, selling price of the product etc.) and tries to maximise the output and minimise the cost. Computers have simplified application of these models to deal with various problem-solving situations. By changing values of variables in the model, different equations can be solved through computers and it makes it possible to find the effect of each change on the dependent variable to arrive at the optimum and rational solution to managerial problems. The Quantitative School includes the following approaches, all of which provide the manager with tools and techniques to increase the effectiveness of his/her decision- making: Quantitative management (employs mathematical techniques such as linear programming, modelling, simulation & queuing theory) Operations management Total Quality Management (TQM); and Management information systems (MIS) 2.4.4 Contemporary Approaches A considerable number of contemporary management theories exist. The following contemporary theories will be studied in this sub-section: Systems Theory Contingency Theory Chaos Theory Other Theories 2.4.4.1. Systems Theory The Classical Approach, The Behavioural and Human Relations Approach and the Quantitative Approach have two major shortcomings which Systems Theory (also known as Organizational-Environment Theory) seeks to address: BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 31 BUSINESS MANAGEMENT 1 The influence of the environment is not considered; and One part or aspect of the organisation is focused on the neglect of all other parts and/or aspects. Systems theory views the organisation as a purposeful and unified system which is composed of interrelated elements. The principle of synergy applies in that the whole is regarded to be greater than the sum of its parts (Stoner and Freeman, 1992). The view of organisations as open social systems that must interact with their environments in order to survive is known as the systems theory approach. Organisations depend on their environments for several essential resources: customers who purchase the product or service, suppliers who provide materials, employees who provide labour or management, shareholders who invest, and governments that regulate. Characteristics of a System A system is defined to be a set of interrelated components. An open system is one which interacts with its environment, and in so doing becomes part of a greater system. Basic system characteristics include: Internal interdependence: where changes in one of the system’s components will result in changes or repercussions in the system’s other components. Capacity for feedback: information about the output can be used by the organisation to address problems. However, organisations do not always use the information available. Equilibrium: the system seeks homeostasis i.e. if an event leaves the system in a state of imbalance, it will react in such way so as to regain equilibrium. Equifinality: the system can achieve its outputs through a number of different ways or system configurations. Adaptation: a systems survival depends on it maintaining a state of balance within the greater system in which it operates, i.e. the environment. BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 32 BUSINESS MANAGEMENT 1 Figure: Organisational systems theory model Nadler and Tushman’s (1980) Congruence Model of Organisation Organisational Behaviour views the organisation as a system that takes inputs from the environments and transforms them within its system to produce outputs. The system (or organisation) is identified to consist of four main components, namely the informal organisation, task, individual and formal organisation. The effectiveness of the organisation’s performance depends on the achievement of congruence between all four components. 2..4.4.2. Contingency theory Systems Theory provides for a Contingency Approach (also known as a Situational Approach) to management. The basic premise of Contingency Theory is that there is no one best way to lead an organisation. There are too many external and internal constraints that will alter what really is the best way to lead in a given situation. In other words, it all depends on the situation at hand as to what will be the best course of action. Fred Fiedler is a theorist whose Contingency Trait Theory was the precursor to his Contingency Management Theory. Fiedler believed there was a direct correlation to the traits of a leader and the effectiveness of a leader. According to Fiedler, certain leadership traits helped in a certain crisis and so the leadership would need to change given the new set of circumstances. Fiedler's Contingency Theory proposes the following BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 33 BUSINESS MANAGEMENT 1 concepts: 1. There is no one best way to manage an organisation. 2. A leader must be able to identify which management style will help achieve the organisation's goals in a particular situation. 3. The main component of Fiedler's Contingency Theory is the least preferred co- worker (LPC) scale that measures a manager's leadership orientation. Think Point Consider the organisation in which you are currently employed. To what extent are the following approaches evident in the organisational and management practices within your organisation? The Classical Approach The Behavioural & Human Realtions Approach The Quantitative Approach The Systems Approach It is likely that you can identify practices within your organisation that demonstrate elements of all four approaches to management. Indeed, given the complexity of today’s management environment, it would be unwise for a manager to adhere to one particular school and neglect the others. Rather, given the dynamic environment in which organisations operate, it is the manager’s task to tailor his/her management approach to the particular situation – and this would require drawing on a range of management theories. 2.4.4.3. Chaos Theory For decades, managers have acted from the premise that organisational events can be controlled. However, Chaos Theory, is based on the premise that very rarely can events be controlled, and thus acknowledges the dynamic nature of the contemporary management environment. BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 34 BUSINESS MANAGEMENT 1 Tasks 1. Why is Chaos Theory appropriate to the present-day organisation? 2. What are the key characteristics of Chaos Theory? 3. How could management go about transforming the organisation for which you work into a chaotic organisation? Comment on Reading Activity Chaos Theory argues that relationships in complex systems, like organisations, are nonlinear, made up of interconnections and branching choices that produce unintended consequences and render the universe unpredictable. Chaos Theory and the Present-Day Organisation The industrial era of the past is fundamentally different to the information age of the present. During the industrial age, the environment was relatively stable and organisational work was routine. The information age to be characterised by the following: Technology that increases production, efficiency and consumer power Globalization Competition which, as a result of technology and globalization, has become more fierce Change, the pace of which is considerable Speed Complexity & Paradox which has emerged as a result of the above 5 factors and presents the manager with the challenge of conflicting choices and conditions. Key Characteristics of Chaos Theory Chaos Theory focuses on the “web of feedback loops present in every system” (Tetenbaum, 1998: 24). While feedback loops are linear in certain systems, they are non-linear in systems characterised by complexity, such as the business organisation. BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 35 BUSINESS MANAGEMENT 1 The characteristics of Chaos Theory include: Chaos as Order: Tetenbaum (1998: 24) asserts that “chaos describes a complex, unpredictable, and orderly disorder in which patterns of behaviour unfold in irregular but similar forms”. An example of such orderly disorder is the regular irregularity of a snowflake. Chaos as a Self-Organising Entity: Chaos Theory views systems to be self- organising in that they are self-adaptive and complex (Tetenbaum, 1998). Thus structure evolves and change emerges (this differs from the Classical Approach where structure is imposed). Visa is an example of an organisation that is managed according to chaos principles and which is thus self-organising. Visa has grown by 10,000% since 1970, consists of 20,000 financial institutions and operates in more than 200 countries. However, despite its size and growth, we do not know where it is located due to the fact that it is decentralised, non-hierarchical and evolving (Tetenbaum, 1998). Building a Chaordic Organisation Tetenbaum (1998) identifies the following characteristics of a chaordic organisation (i.e. an organisation that embraces the chaordic paradigm): Knowledge and information sharing Innovation and creativity Teamwork and project orientation Diversity Strong core values The role of management in facilitating the move to the chaordic organisation is to: Manage the transition Build resilience to change Destabilise the system Manage complexity and paradox i.e. order and disorder, the present and the future Create and maintain a learning organisation (Tetenbaum, 1998). BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 36 BUSINESS MANAGEMENT 1 2..4.4.4 Other Contemporary Theories Cronjé (2004) identify three further contemporary management theories: Total Quality Management (TQM) The Learning Organisation Re-engineering Total Quality Management (TQM) A core definition of total quality management (TQM) describes a management approach to long-term success through customer satisfaction. In a TQM effort, all members of an organisation participate in improving processes, products, services, and the culture in which they work Focuses the business on the achievement of quality through the prevention of mistakes. The central principles of TQM, which have emerged from the work of Deming, include: Strong emphasis on the customer Focus on continual improvement Quality improvement in all that the organisation does Accurate measurement Employee empowerment (Cronjé, 2002). The Learning Organisation approach, advocated by Peter Senge, is based on the Systems Theory and argues that organisations should overcome their learning disabilities through: Commitment to lifelong learning Challenging assumptions and generalisations Sharing the organisation’s vision Promoting active dialogue within the organisation Encouraging systems thinking (Cronjé et al., 2004). Re-engineering is an approach put forth by Hammer & Champy, and involves the redesign (re-engineering) of organisational processes so as to “create and sustain value for customers while managing costs”. BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 37 BUSINESS MANAGEMENT 1 Business Process Reengineering involves the radical redesign of core business processes to achieve dramatic improvements in productivity, cycle times and quality. In Business Process Reengineering, companies start with a blank sheet of paper and rethink existing processes to deliver more value to the customer. This chapter has explored various management theories. The theories that fall within the Classical School, the Behavioural & Human Relations School, the Quantitative School and Contemporary School have been examined. Tasks Read the following case study adapted from Stoner and Freeman (1992:52) and then answer the question which follows Case Studies Consolidated Automobile Manufacturers Inc. On Tuesday morning at 6 am, two young automobile assembly-line workers, disgruntled after failing to get their supervisor transferred, shut off the electric power supply to an auto- assembly line and closed it down at Consolidated Automobile Manufacturers, Inc. The electric power supply area, containing transformers, switches, and other high-voltage electrical equipment, was positioned near the centre of the plant in a 1.5-by-1.5 metre area. Enclosing this area was a 2.5-metre-high chain-link fence with a locked gate of equal height that formed a protective cage around the facility and provided a measure of security. The two assembly-line workers, Kagiso Mabuso and Ernest Raymond, gained access to the electric power supply area simply by scaling the fence. Once inside, they halted the assembly line by opening the switches and cutting off the electrical power. Mabuso and Raymond, who worked as spot welders, had taken matters into their hands when the union’s grievance procedure had not worked fast enough to satisfy them. Co- workers, idled by the dramatic protest and the motionless assembly line, grouped BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 38 BUSINESS MANAGEMENT 1 themselves around the fenced area, shouting encouragement to the two men inside. In response, Mabuso and Raymond were chanting, “When you cut the power you’ve got the power.” They were in the process of becoming folk heroes to their co-workers. Sam Nkosi, who supervised Mabuso and Raymond and who was the target of their protest, had been supervisor for only a short time. In explaining the events that led to the protest, Nkosi said that production on the assembly line had been chronically below quota before he took charge, and the plant manager had plainly told him that his job was to improve the production rate. Production had improved markedly in the short time that Nkosi had been supervisor. Nkosi advised the plant manager that his transfer would only set a serious long- term precedent. “The company’s action to remove me would create a situation where the operations of the plant would be subject to the whims of any employee with a grudge,” he argued. His contention was confirmed by the comments of a union steward who said there were other conditions in the plant that needed improving – such as cafeteria food and relief from the 40-degree heat in the metal shop. Moreover, the steward said, there was at least one other supervisor who should be removed. He implied that, if successful, the power cage protest would achieve two goals – namely employees could dictate the company’s problem-solving agenda and simultaneously undermine its power to determine decision-making priorities. The union steward’s final comment was that two men on an unauthorised, wildcat strike might accomplish the same thing as a full-blown strike. Each passing minute was costing the company a production loss of one automotive unit valued at R15 000; the cost of each lost production hour, therefore was R900 000. As he began a staff meeting to resolve the dilemma, the plant manager felt pressure to accomplish two objectives: (1) to restore production on the profitless assembly line (a solution about which he was uncertain) and (2) to develop policies for preventing future interruptions by assembly line workers. Article adapted from https://www.citeman.com/5089-theory-and-policy-encounter-power- and-motivation-%E2%80%93-a-case.html Answer the following questions: 1. Explain how the plant manager would go about resolving the dilemma and accomplishing the two objectives (stated in the last paragraph of the case study) according to: BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 39 BUSINESS MANAGEMENT 1 1.1 The Classical Approach 1.2 The Behavioural & Human Relations Approach 1.3 The Quantitative Approach 1.4 The Contemporary Approach 2.5 Conclusion This chapter provided an understanding of the evolution of management theory. The reasons for studying management theory were elucidated and the concept of management theory was examined. Various approaches to management theory, including the Classical Approach, the Behavioural and Human Relations Approach, the Quantitative Approach and the Contemporary Approach were explored. The next section examines the management environment that was alluded to in this chapter during the discussion on the contemporary approach. BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 40 BUSINESS MANAGEMENT 1 CHAPTER 3: Environmental Analysis Chapter Outcomes On completion of this chapter, you should be able to: Identify and discuss the salient characteristics of the management environment Distinctly discuss the composition of management environment in its entirety Comprehensively discuss and apply fundamental knowledge of the macro, market and micro-environment to a business context Clearly explain the importance of conducting an environmental analysis and scenario development in business Effectively acknowledge and understand the approaches management can adopt when relating to scenario development Have a perspicuous understanding of the elements of a SWOT analysis matrix 3.1. Introduction The value chain discussed in Chapter 1 suggests that businesses create value by performing a range of activities, some of which are considered primary and others supportive. These activities are largely controllable by the individual organisation. Outside the organisation, however, lies an environment that is largely uncontrollable by the individual business. This suggests that an organisation must continuously monitor events in its environment to remain competitive, and that the business and its environment are not closed, independent or mutually exclusive entities, but rather influence and depend on each other for their existence. This mutual dependence arises from the fact that society largely depends on business to satisfy its needs for products, services and employment. Conversely, a business depends on its environment for such resources as labour, capital and raw materials. In a certain sense, the business can be regarded as a creation of its BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 41 BUSINESS MANAGEMENT 1 environment in that its assets, income, problems, opportunities and continued survival depend on the environment. Because of changes in the environment, management is continually forced to make adjustments to its competitive strategy. There is a continual interaction between the organisation and its environment and this, to a large extent, determines how the organisation is structured and how it functions. In a dynamic environment management must strive to adapt timeously and effectively to current and anticipated changes in its environment. A thorough investigation or scanning of the environment is therefore essential. This enables management to avert threats in the environment timeously and to exploit opportunities. This chapter discusses the relationship and the interaction between the organisation and its environment. 3.2. The Environment Of The Organisation In Perspective The environment within which the business finds itself changes rapidly and this necessitates a thorough environmental awareness on the part of management, as well as adaptability with regard its approach to management. The democratisation of South Africa in 1994 normalised international relations, but at the same time exposed South African businesses to a borderless world in which they suddenly had to compete. Globalisation and the trend towards a world without barriers affect businesses in new ways, and some have responded by taking their investments out of the country. Accelerating urbanisation and increased poverty in southern Africa, the influx of immigrants, the high crime rate and the breakdown of law and order, and the impact of the COVID-19 pandemic have affected – and continue to impact - the environment in which South Africans must do business and make decisions regarding their investments. Thus, when planning strategically, it is critical for management to consider the interaction between the organisation and its environment. In so doing, long-term planning becomes geared towards the future. This makes planning more systematic and integrated. The number of environmental factors influencing organisations is i n c r e a s i n g , BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 42 BUSINESS MANAGEMENT 1 and this necessitates a new approach to future events. Appropriate methods of research frequently need to be developed and organisational structures and management aids must be revised to stay abreast of new challenges. The business uses inputs from the environment and in turn delivers outputs in the form of products or services for which there is a need in the environment. The management task cannot be carried out effectively and efficiently without taking external factors into consideration. The internal environment is also known as the decision-making or micro- environment. The micro-environment encompasses, among others, the strategy, business functions, and management tasks, setting of goals, resource abilities and expectations of interest groups that must be considered. Management must therefore make decisions that relate to the strengths and weaknesses of the business. Strength is defined as a unique capability of a particular organisation that gives it an advantage over competitors, while a weakness can be described as a deficiency, which, if not addressed, could negatively affect the organisation's position in the market. Management can control the elements of the micro-environment, and is therefore able to use its strengths to improve the position of the organisation in the market, or to rectify weaknesses to improve its competitive capacity. The market or task environment is the environment immediately outside the organisation. The market environment lies between the micro and macro business environments and, while influenced by both, serves as a buffer between the two. This environment includes factors such as suppliers, competitors, consumers, interest groups, intermediaries and strategic alliances (Erasmus, et al, 2016). The macro business environment encompasses all uncontrollable variables and the implications they have for management. Management must therefore make strategic decisions with regard to economic, social, technological, physical, political and institutional and international environments, based on the changes in the macro- environment. BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 43 BUSINESS MANAGEMENT 1 Changes in the market and macro-environment give rise either to opportunities or threats. An opportunity is defined as a favourable condition in the external environment that could be exploited to the benefit of the organisation by the deliberate actions of management. A threat, on the other hand, is defined as an unfavourable condition in the external environment, which, if not responded to by management, could seriously harm the organisation's position in the market. The organisation's management must be well informed of international events, especially with regard to economic, social, and political developments. 3.3 Characteristics of the Business Environment The business environment is characterised by the following: Interrelatedness of environmental factors Change in one of the external factors may cause a change in the micro-environment or internal factors, and, similarly, a change in one external factor may cause change in other external environmental variables. Increasing instability One of the consequences of interdependence in the environment is increasing instability and change. Although the general rate of change in the environment accelerates, environmental fluctuation is greater in some industries than others. Environmental uncertainty Uncertainty about the environment is, of course, a function of the amount of information about environmental variables and of the confidence that management has in such information. Complexity of the environment This indicates the number of external variables to which a business organisation has to react as well as variations in the variables themselves. BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 44 BUSINESS MANAGEMENT 1 3.4. The International Environment International business activities refer to profit-oriented activities across national borders. Organisations that operate within a country while drawing resources from or selling products to another country can be affected on both a national and an international level. Local organisations must keep up to date with international data on inflation, exchange rates, interest rates, recession, and shortages of natural resources, the gold price and especially international political events. Organisations involved in international trade quickly realise that success or failure greatly depends on knowledge of legislation, customs, ethics, economic systems and on the management practices that are followed. The professional manager must be conversant with the nature of international management and must be trained not only to recognise threats, but also to convert these threats into opportunities. 3.5. The Macro Business Environment The macro-environment includes all external influences that have a bearing on the business but do not fall within its direct sphere of influence. In the study of the macro- environment, the emphasis falls on the changes that uncontrollable macro-variables bring about, and their implications for the business. Remaining abreast of environmental changes to predict environmental changes is a difficult task. Certain changes are unpredictable owing to the speed with which they take place, while others are difficult to predict owing to a lack of information or knowledge. The main characteristics of these external factors are that their origin is outside the business, that they are largely unpredictable and that they change constantly, but they are nevertheless a determining factor in the survival of the business. Because of the uncertainty of the future, it is absolutely essential that environmental scenarios be developed for the business. BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 45 BUSINESS MANAGEMENT 1 3.5.1. The economic environment Economic factors such as the business cycle, inflation, and recession, influence the demand for goods and services by compelling consumers to reassess their priorities in terms of consumer products. Each significant economic change requires appropriate reaction by the business. It is the responsibility of management not only to try to determine the intensity of the business cycle for a specific industry, but also to try to forecast the possible cycle of the economy for at least the following year. In the following sections, we consider some of the most important economic factors to be considered by managers. 3.5.1.1 Inflation Price stability is an important part of the economic landscape. Inflation is described as a continual rise in the general price level. The two forms of inflation are demand inflation and cost push inflation. Demand inflation occurs when the demand for goods and services is higher than the supply, resulting in higher prices. Cost push inflation occurs when production costs of goods and services continually increase, resulting in higher selling prices. The organisation must counteract the influence of inflation as far as possible. Under condition of high inflation, the emphasis is, to a large extent, placed on the management of working capital, such as debtors, stock and creditors. 3.5.1.2 The business cycle This involves the pattern of expansion and contraction of economic activities around a long-term growth tendency. Western economies, including South Africa, are harassed by inflation as well as periods of recession that follow each other in quick succession, interrupted by short periods of economic growth. The business and the consumer must make certain value adjustments during the various phases of the business cycle to adapt to emerging economic realities. At the cycle peak, the economic activity is high in relation to the general trend whereas the lowest rate of economic activity is reached at the trough. A practical measure is to link the business cycle to the behaviour of the real gross domestic product (GDP), which BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 46 BUSINESS MANAGEMENT 1 provides a combined indicator of the prevailing economic climate of an economy. Exogenous factors such as wars, drought, natural disasters, inventions and drastic changes in consumer demands may lead to an increase or decrease in economic activities. These factors result in changes in the volume of production activities and the volume of bank credit, in interest rate patterns, in orders for and the installation of capital equipment, and in price increases or decreases. 3.5.1.3 Interest rates Interest is the price paid for money. The level of interest rates is largely determined by the demand for and the supply of funds. The Reserve Bank also uses interest rates to influence the money supply. The "repo" rate is the cost at which banks can borrow money from the Reserve Bank. The prime rate is the floor price at which banks make loans or overdraft facilities available to their clients. Personal risk leads to an increase in this rate for the individual and the organisation. Both current and expected interest rate levels are important since these have a marked influence on the cost of capital as well as on the expected minimum return on capital. Relatively high interest rates have the following implications: The use of debt financing becomes more expensive and places liquidity under pressure. High interest rates can dissuade the consumer from buying durable consumer products like furniture, cars or electrical household appliances. Many consumers purchase these items on a hire-purchase basis and an increase in interest rates discourages such purchasing. The same applies to interest on overdrawn bank accounts. 3.5.1.4 Provision of employment Unemployment is one of the biggest problems in the South African economy. In the early 1990s, unemployment spread beyond the unskilled labour force. An unemployment figure of 40 per cent of the economically active population has enormous social implications. Crime is on the increase and is a problem not only for homeowners who have to spend more of their disposable income on home security, but also for the business community. BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 47 BUSINESS MANAGEMENT 1 3.5.1.5 Productivity and profitability Even though productivity and profitability are not synonymous, there is a strong relationship between them. If productivity increases, profitability should also increase. Increased productivity enables the organisation to compete better in the market. The labour unit cost in South Africa is among the highest in the world. Owing to the conduct of labour unions, and because of a low work ethic, the situation continues to deteriorate, with serious consequences for the South African economy in general and for business in particular, as businesses find it difficult to compete on the basis of price with businesses in other parts of the world. It is clear that South Africa is locked into an increasing wage psychosis. There is no positive correlation between wage increases and productivity. South Africa is included among countries that have the highest disparity between labour productivity and wages, with a resulting increase in labour-unit cost and inflation. 3.5.1.6 The influence of trade unions Due to the activities of trade unions, many organisations have been forced to close their doors, resulting in a loss in employment opportunities. It is imperative that management knows how to deal with labour disputes. Trade union activities in South Africa are often characterised by acts of intimidation and violence. Until such time that government realises the seriousness of the situation and is willing to restore order in labour relations, South African and local businesses will pay a heavy price. 3.5.2 The technological environment Many of the recent changes within the business environment are the result of technological advances and innovation. Research and development provide the source of technological innovation and new products, processes, methods and approaches to management result from this. Because of the interaction between technology and other environmental factors, there is a continual tendency towards innovation in all spheres of the business community. Scientific research produces and systematises new knowledge, and when knowledge is applied in practice, new goods and services are developed. The economic environment BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 48 BUSINESS MANAGEMENT 1 largely determines the direction of technological innovation. Trading Developments in electronic communication, as manifested by the Internet, for example, have changed the business. This has created new business opportunities or capabilities, such as e-commerce, e-trading, e-marketing, e- supply and others. It has also created new types of businesses, such as cellular communication services, vehicle tracking services, sophisticated information supply services and on-board vehicle navigational systems. Labour-saving machinery, equipment and products. New and improved products, which satisfy specific needs, have been made available to the consumer, thanks to technological innovation. The research and development departments of manufacturers must continually pursue the improvement of existing products and the development of new ones. Administrative systems and equipment. New technology in the form of electronic and automated apparatus and systems has introduced a new area of competition among organisations. Especially in the areas of banking, retailing, tourism and recreation, entrepreneurs are forced to keep abreast of new developments regarding credit cards and computer- backed services. These services are primarily focused on the convenience of and service to the consumer. Increased productivity. This is probably the most outstanding result of advanced technology. Increased productivity demands or increases turnover of the organisation's products and services. It creates more intense competition and may reduce employment opportunities. 3.5.3 The social environment The organisation is a creation of the social environment. The role of an organisation in a dynamic environment is to adapt continually to changing circumstances and to meet the expectations of the society. There is also an overlapping of some of the elements in the social and the economic environments. The organisation is at the BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 49 BUSINESS MANAGEMENT 1 centre of changes taking place in the social environment. The organisation contributes to social change, but is also influenced by it. The organisation must therefore be aware of the culture, needs, preferences, purchasing patterns, nationality, religion and geographical location of consumers. 3.5.3.1. Distribution of income South Africa, with its heterogeneous population and geographical vastness, consists of many subcultures, each of which reacts differently to change. Increasing income levels and improved literacy among the country’s Black population in recent years has greatly influenced the market. The growth of the black consumer market and buying power is already of vital importance in many branches of industry. Management must establish where its biggest buying power is located and ensure that that market is exploited and served with high quality products and service. LANGUAGE INCOME RELIGION DISTRIBUTION SOCIAL CULTURE RESPONSIBILITY SOCIAL ENVIRONM ENT POPULATION HIV/AIDS GROWTH URBANISATION EDUCATION CONSUMERISM Figure 3.1: the social environment 3.5.3.2 Consumerism and employee interests The primary responsibility that the organisation has towards the consumer lies in protecting him or her, but the demands of society for greater social responsibility on the part of the organisation culminate in consumerism. This is also the link between the BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 50 BUSINESS MANAGEMENT 1 organisation and the social environment. Previously, social responsibility was limited largely to social and welfare services. The employer concerned himself only with the social well-being of his workers, without paying attention to the socio-economic and cultural fate of individuals. Nowadays, the totality of the employee's existence and experience is studied, and the expectations not only of his family but of the entire community demand attention. By neglecting the latter, the organisation will definitely elicit the criticism of the community, consumer groups and even of government. 3.5.3.3 Participation of employees and the community (social involvement) The new labour community is characterised by the principles of labour democracy. This implies that the worker has a greater say in the design, execution and evaluation of work. The employer provides additional educational services, like literacy training. Other areas of direct social involvement are transport, housing, financial assistance, clothing, medical services, recreational facilities, cultural facilities and general counselling. 3.5.3.4 Different languages In an effort to inform consumers about their products and services, organisations must communicate with their target market(s) in a language that they understand. This can be a challenging task, as South Africa is a multi-lingual country. 3.5.3.5 Level of education The low levels of productivity and skill in the South African labour force are, to some degree, attributable to the relatively low level of education of the broader society. This also makes it difficult to develop a sophisticated industrial and work ethic. Education is an important key to future socio- economic development. 3.5.3.6 The threat of HIV/Aids HIV/AIDS has become an extremely important factor in the process of strategy formulation. In Africa especially, there is much speculation as to the implications of this threat for the future. The first cases of HIV/AIDS in South Africa were reported in 1982. Since then, the number of cases has increased dramatically each year. BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 51 BUSINESS MANAGEMENT 1 Management must, as a matter of urgency, develop a personnel policy for dealing with HIV/AIDS in the workplace, and organisations should be prepared for the direct and indirect consequences of the disease. Costs associated with HIV/AIDS are reflected in the following areas: Loss of trained manpower Costs associated with the recruitment, training and induction of replacement personnel Loss of labour productivity Loss of efficiency due to the loss of skills and experience Direct and indirect costs associated with health care Interruptions in the production process Increased costs of employee benefits A decline in the consumer base A decline in the disposable income of consumers as a result of higher health care costs The handling of AIDS- related issues must be incorporated into strategic planning by management. A policy regarding HIV/AIDS must be formulated timeously and be incorporated into the existing health and security policies of the organisation. Tasks List the activities that have been carried out in your area to address concerns around HIV/AIDS. Do you think your community is doing enough to address the problem? BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 52 BUSINESS MANAGEMENT 1 3.5.3.7 Population growth The size of the market, the labour force and unemployment are closely related to population growth. By 1850, the world population numbered 1 b i l l i o n. By 1925, it was already 2 billion. Now in 2021, the world population is at a staggering 7.9 billion and counting (Worldometer, 2021). Population figures of Third World countries double every 32 years. Urbanisation The current population of South Africa is 59,990,356 as of Tuesday, June 1, 2021, based on Worldometer elaboration of the latest United Nations data (worldometer, 2021). Urbanisation, along with the expected population growth, has far-reaching social implications and consequences. Urbanisation greatly influences the economy, for example, purchasing power is increasingly concentrated in urban areas. 3.5.4 The physical environment (Ecological) The physical environment includes the availability, conservation, improvement and utilisation of the limited natural resources a country possesses. The business obtains its basic raw materials from the physical environment in order to place a product on the market in combination with other factors of production. The shortage of basic factors of production influences the supply of goods and contributes to large price increases and resultant high inflation. Consideration must be given to different and more sophisticated methods of production, and even a reorientation in marketing thinking. Each business should have a clear policy regarding its responsibility for the most judicious utilisation and conservation of the physical environment. Another factor that determines economic essential is the availability of sufficient suitable and qualified personnel and entrepreneurs. South Africa is experiencing a shortage of skilled labour, mainly because of the mass exodus of highly trained individuals that occurred in the last few decades. A dramatic increase in productivity by means of training can help alleviate the skills problem. BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 53 BUSINESS MANAGEMENT 1 3.5.5. The political environment The political environment encompasses complicated variables that are extremely difficult to control or predict. Management's responsibility is to acquaint itself with government policy with regard, inter alia, to the acceptance of a free market system as the key to economic activity. Management must ensure that it is informed on the general economic policy and specific policies with regard to underlying economic issues. Specific government policy standpoints are implemented by government ordinances. This includes monopolistic laws, environmental conservation, employment policies and taxation laws. Owing to the complexity of the political environment and the different ways in which it influences the management environment, it is probably the most unpredictable environment and consequently the most difficult to scan. In South Africa, the effect of political decision-making on the economy as a whole and on the organisation in particular must form part of strategy formulation in all organisations. The role of government is to create a conducive climate where business can flourish and develop. The government’s policy on the above factors could either foster or hinder such a climate. 3.5.6. The institutional environment The institutional environment encompasses all the government, semi- government and other institutions with which the organisation is directly or indirectly involved. Many associations protect the interest of organisations and branches of industry. 3.6 The Market Environment The ability of a business to be competitive is determined by the interaction between the business and its immediate environment, the market environment. The market environment surrounds the organisation, and it forms the link between the organisation and the macro-environment. The importance of environmental variables varies according to the influence that they have on the organisation via the market environment. Management is responsible for identifying the needs of the consumer within the market environment and identifying opportunities and threats, to convert threats into opportunities and to develop specific strategies to counteract competition. BACHELOR OF COMMERCE IN SUPPLY CHAIN MANAGEMENT 54 BUSINESS MANAGEMENT 1 Management by carefully analyse the following components within the market environment: 3.6.1. Interest groups These include institutions and groups who have an interest in the existence and future of the business. Each group will place a different emphasis on the activities of the business. These interest groups lack the power of government agencies, but they can exert considerable influence by using the media to their advantage. 3.6.2. Consumers Consumers have a major effect on the organisation’s performance by purchasing products and services. Effective managers realise the need to offer the consumer value for money. The creation of consumer value is the primary responsibility of the marketing department of the organisation. Through comprehensive and continual market research the business stays in touch with the needs, motives and behavio

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