Intro to Business Management 11th Edition PDF

CHAPTER 1 The business world and business management Peet Venter The purpose of this chapter This chapter discusses the role of business in society and explains how a business organisation in a market economy employs the various resources of a nation (its natural resources, human resources, financial resources and entrepreneurship) in order to satisfy the need for products and services. The chapter gives an overview of the prevailing economic systems in the world and explains how the business organisation functions in a market economy. Learning outcomes On completion of this chapter you should be able to: explain the role the business organisation plays in making available the products and services society must have to exist and thrive describe the needs of society and how a business organisation satisfies those needs in a market economy distinguish between the world’s three main economic systems explain the interface between a business organisation and a market economy describe the nature and purpose of business management as a science, where the enabling factors, methods and principles of the business are studied to ensure the efficient functioning of a business organisation comment on the development of business management as a science distinguish between and comment on the different management functions. 1.1Introduction In a market economy, the business world can be seen as a complex system that involves transforming resources into products and services. These products and services must meet the needs of people in exchange for a profit. This description of business emphasises four different elements: human activities production exchange profit. These elements are discussed in detail in section 1.2, but first consider the case study below. As the case study illustrates, the profit of a business is dependent on their ability to efficiently deliver goods and services that society needs. However, where the management of the organisation fails, and it is further influenced by players and factors outside of their direct control, such as regulators and customers, it can lead to disastrous consequences. Businesses also have to trade off the demands of divergent stakeholders, such as employees, government, regulators and suppliers to strive for sustainability and the best interests of the society they serve. CASE STUDY: PRASA ON THE BRINK OF COLLAPSE 1 The urban passenger rail services operated by the Passenger Rail Agency of South Africa (Prasa) have long been a backbone of the urban transport system, transporting millions of workers to and from their workplaces every day. But by 2018, Prasa was reported to be on the brink of financial collapse, and it was losing commuters who had lost confidence in its ability to deliver on its core mandate of providing an efficient, safe and timeous urban train service. The continued decline in operating performance by the rail unit has shown a corresponding effect on passenger patronage which dropped to 372 million passenger trips per annum‚ against 448 million passenger trips the previous year, negatively impacting on Prasa’s fare revenue and contributing to a loss of R928 million‚ up from a R554 million loss the previous year. Prasa’s acting CEO‚ Sibusiso Sithole‚ said the rail division’s disappointing performance‚ where only 33 per cent of its targets were achieved‚ posed a serious challenge in positioning rail as the mode of choice for the commuting public. In fact, commuters were so frustrated that they often reverted to violence, burning train carriages and further crippling the Prasa fleet. Prasa’s problems did not end there. Fruitless and wasteful expenditure incurred stood at R988 million for Prasa and R992,2 million for the group, pointing to the governance problems facing the entity. It was also facing a clampdown from the Railway Safety Regulator (RSR) due to not meeting safety conditions and even operating without a safety permit at one point. To add to its woes, the theft and vandalism of cables and components aggravated the challenges of maintenance, resulting in increased numbers of rolling stock unavailability and unreliability. This negatively affected the delivery of a safe‚ clean and secure train service. The board of Prasa faces a difficult challenge, and needs to urgently attend to the uncertainty relating to the growing concern by ensuring financial viability and sustainability of the agency, and addressing the governance and leadership instability characterising it. 1.2The role of business in society The business world is a complex system of individuals and business organisations that, in a market economy, involves the activity of transforming resources into products and services in order to meet peoples’ needs. These products and services are offered to the market in exchange for profit. This description of business emphasises four different elements: Firstly, business involves human activities. Business organisations are managed by people. While businesses may own property, machines and money, all of these are managed or operated by people. Secondly, business involves production. Production is the transformation of certain resources into products and services, as illustrated in Figure 1.1. This may be, for example, the conversion of flour, sugar and butter into bread, or the conversion of bricks, sand, cement, wood and steel into a house. Even services are produced. For example, in a hospital, beds and medicine are converted into a health service. An airline transports passengers to their required destinations, and as this happens, the passengers become part of the transformation process. Thirdly, business involves exchange. Businesses produce products and services, not for their own use, but to exchange for money or for other products and services. Finally, business involves profit. Few individuals or business organisations can continue producing products and services without earning a profit. Profit is the reward for meeting people’s needs, and it enables businesses to pay for resources and to make a living. However, profit has to be earned in a way that is fair and sustainable, and that is why the board of Prasa finds itself in the precarious position of trying to turn around a business facing challenges on many fronts. Figure 1.1: How entrepreneurs transform a nation’s resources into products and services Some businesses produce predominantly tangible products such as bread, cars, houses or bicycles. Other businesses produce predominantly services such as entertainment, communication, insurance or transport. Business is the means by which society endeavours to satisfy its needs and improve its standard of living by creating wealth. At the heart of all business activity are entrepreneurs, who start new ventures and thereby create jobs, economic growth and, hopefully, prosperity. No one invented the business world. It is the result of activities related to meeting the needs of people in a market economy. The most important characteristic of the business world in the developed countries of the West and Asia is the freedom of individuals to establish any business of their choice and to produce, within limits, any product or service the market requires. This system, in which individuals themselves decide what to produce, how to produce it and at which price to sell their product, is called a market economy (or market system). This is the prevailing economic system in South Africa. The market economy is a complex system comprising various types of small and large business organisations that collectively mobilise the resources of a country to satisfy the needs of its inhabitants. These businesses group together to form industries. Figure 1.2 shows the composition of the South African business world in terms of major industry sectors and their contribution to the economy. Figure 1.2: The composition of the South African business world in terms of sector contribution to GDP2 Source: Statistics South Africa. 2018. Gross Domestic Product: Second quarter 2018. Statistical Release P0441. Available at http://www.statssa.gov.za/publications/P0441/P04412ndQuarter2018.pdf [Accessed 17 October 2018]. The business world or economic structure of South Africa resembles that of many industrialised countries, with a formal and informal sector. In the formal sector, large businesses such as Standard Bank, Naspers, Vodacom, Anglo American, Tiger Brands and many other large public corporations – 375 of which are listed on the Johannesburg Securities Exchange (JSE) – are responsible for most of South Africa’s economic activity. As market economies develop, they tend to become less dependent on primary economic activities like mining and agriculture and more dependent on services. In 1920, for example, agriculture and mining combined contributed about 37 per cent to the gross national product (GNP), compared to the 32 per cent contributed by the service sector. As we can see in Figure 1.2, in 2018 the service sector contributed more than 50 per cent of the GDP, with the contribution of agriculture and mining combined shrinking to about 10 per cent. Large businesses in South Africa contribute to about 70 per cent of the country’s economic activity as reflected by turnover, while small, medium and micro enterprises (SMMEs), which are mostly family or individually owned, contribute to about 30 per cent.3 Many microenterprises form part of the so-called informal sector.4 They are not part of the formal economy because they are not registered and many people involved in these enterprises live primarily on a subsistence or survival basis. Moreover, such businesses often put pressure on the infrastructure of inner-city areas, as due to their informal nature they do not contribute to rates and taxes. It is estimated that these businesses contribute approximately eight per cent of the annual GDP.5 The variety of needs that a country has determines the complexity of its business environment. In First World countries, businesses are the primary source of products, services and employment. Figure 1.3 shows the importance of the South African business world in providing employment in South Africa, with the formal sector providing by far the most jobs. However, it is also clear that informal businesses, farms and private households are important providers of employment in a developing market economy. The high unemployment rate in South Africa of about 27 per cent in 2018 and the 2,8 million ‘discouraged work seekers’ is of great concern, as it suggests that the prevalent institutional arrangements and economic growth rate in the country are not supporting the establishment and growth of businesses. Figure 1.3: Sources of employment Source: Statistics South Africa. 2018. Quarterly Labour Force Survey. Second Quarter 2018. Statistical Release P0211. Available at http://www.statssa.gov.za/publications/P0211/P02112ndQuarter2018.pdf. Business creates wealth, is a catalyst for economic growth and is credited with bringing about the high standard of living in developed countries. Take, for example, the role business has played in the United States. In the space of two centuries, the United States went from being a relatively undeveloped nation to a leading industrial nation, which at that time owned nearly 40 per cent of the world’s wealth with only 6 per cent of the world’s population. Adopting a more market- and business-oriented approach has also been of great economic benefit to emerging economies such as China and India. In China, for example, the gross national income (GNI) per capita6 grew from about $1 100 in 2002 to $8 690 in 2017 – a growth of almost 700 per cent in 15 years.7 Business also serves the community indirectly by means of technological innovation, research and development, and improvements to infrastructure. It plays a crucial role in supporting, in various ways, education, the development of human resources, the arts, conservation, sport and other activities that improve the quality of life of a community. The business world and society both depend on and influence each other. This is the core of sustainability, the ability of a business to survive and prosper over long periods of time. If a business behaves in a way that allows its stakeholders (such as the communities it operates in and the environment) to benefit too, in exchange for a fair profit, it has a better chance of surviving in the long term. However, practices that strive to ensure excessive short-term profits and that are detrimental to stakeholders will most often not be sustainable and will be to the detriment of the business. In South Africa, we have seen the growth of corporate social responsibility, and the voluntary compliance of businesses with practices that are sustainable. This is discussed in more detail in Chapter 5. At the heart of the business world is the entrepreneur or businessperson. In the pursuit of profit, entrepreneurs constantly search for new ideas, new products and new technologies. In so doing, they initiate innovation and bring about change by virtue of their decisions on investment, production and employment, influencing not only the state of the economy, but also the prosperity of whole communities. Consider, for example, local entrepreneur Sarah Collins, inventor of the Wonderbag, a South African-made heat retention cooker. Made from traditional shweshwe Africanprint fabric, the Wonderbag resembles a beanbag filled with repurposed foam, and is used to keep a boiling pot cooking after it has been taken off the stove or fire. This environmentally friendly product is now sold in 52 countries, and already has 1,3 million users. The Wonderbag is manufactured in Tongaat, KwaZulu-Natal, employs local women and is then sold to South Africans and exported to countries like the United States and Australia. There are also satellite manufacturing sites in East Africa, West Africa and in Turkey. Collins said that the Wonderbag has led to 10 000 entrepreneurs starting ventures like selling Wonderbags or catering businesses.8 Conversely, society exerts its influence on the business world in a number of ways. If businesses fail to abide by the expectations and desires of the community, regulation and legislation to curb or control such practices can be instituted or enforced. In South Africa we have seen anti-competitive behaviour in several industries, such as the cement industry, the bread industry and the construction industry in the past few years. Getting together with other producers to allocate markets, fix prices and share information has only one purpose: to keep prices as high as possible. This kind of behaviour is to the detriment of smaller producers and to consumers, especially the poor, and is punishable by severe fines by the Competition Commission, a government body instituted to ensure fair competition. The Consumer Protection Act (No. 68 of 2008) also aims, among many other objectives, to prohibit unfair business practices and promote a consistent legislative and enforcement framework to protect consumers. However, the legal route is not the only route available to society. By means of stakeholder activism businesses can also be influenced to behave more responsibly. The Occupy Wall Street (OWS) movement targeted a number of issues relating to social and economic inequality, greed, corruption and the undue influence of large corporations on government. The slogan of OWS – ‘We are the 99 per cent’ – reflected the social and economic inequality in the United States and the goals of the organisation (‘we are the 99 per cent that will no longer tolerate the greed and corruption of the 1 per cent’). OWS was a leaderless organisation that used the Arab Spring tactic to achieve its goals. 9 The movement started in September 2011 with thousands of protesters camping in Zuccotti Park in New York’s Wall Street financial district. The movement gained a largely unrecognised victory in the momentum it built for a higher minimum wage when it motivated fast-food workers in New York City to walk off the job in November 2012, sparking a national workerled movement to raise the minimum wage to $15 an hour. This resulted in several states and cities voting for higher minimum wages in 2014.10 The e-toll system in Gauteng provides another example of the effect of societal pressure, with pressure groups such as the Organisation for Undoing Tax Abuse (OUTA) being one example of an organisation that has fought on all fronts (legal and otherwise) to prevent e-tolling in Gauteng. OUTA has expanded its activities to address other perceived tax abuses such as corruption in state-owned enterprises.11 The attitude of society towards the business world is by no means consistent, for in a changing environment the community will, at different times, have different expectations of the business world. If the business world fails to respond to the expectations of the community, the attitude of the community towards the business world is likely to change. Consider, for example, the issue of equity in South African organisations. When South Africa became a democracy in 1994, businesses were called on to offer redress to previously disadvantaged individuals (PDIs). These programmes required, inter alia, the appointment of PDIs, increasing PDI shareholding in businesses and preferential procurement from black-owned businesses. However, because businesses were slow to respond to this call, government instituted legislation that forces the business world to transform its organisations so that PDIs are included at all levels. The Employment Equity Act (No. 55 of 1998) and the Broad-Based Black Economic Empowerment Act (No. 53 of 2003) are examples of society’s response to the exclusion from business of PDIs, women and people with disabilities. (See Chapter 12 for a more in-depth discussion on the South African labour legislation framework.) Most Western countries have, over the years, come to regard the business sector as a valuable social institution because it has helped to realise society’s needs and also to raise the standard of living. In the closing decades of the 20th century, however, most Western nations realised that a high standard of living amid a deteriorating physical environment and inadequate social progress is not sustainable. The business world is thus under continuous and often increasing pressure to behave in ways that are sustainable. There are several themes related to sustainability. In this chapter we discuss five themes, namely social responsibility, employment equity, business ethics, consumerism and environmental sustainability. A discussion of these factors will follow. The social responsibility of business is a concept that originated in media revelations of malpractice by businesses and the resultant insistence of society on restricting such malpractice through regulation. Historically, the social responsibility of a business has been measured by its contribution towards employment opportunities and by its contribution to the economy. But while these factors remain important, many other factors are now included in assessing the social performance of a business. Businesses are nowadays under more pressure than ever to behave as responsible citizens (leading to the notion of corporate citizenship). Their role accordingly goes beyond financial success to include, inter alia, the provision of a responsible and safe workplace, the provision of housing, concern about health issues, involvement with community issues, environmental awareness and the empowerment of previously disadvantaged individuals, both economically and managerially. Social responsibility is discussed in more detail in Chapter 5. Businesses often contribute voluntarily and directly to social causes and community upliftment by way of corporate social investment. Employment equity is the notion that the composition of the workforce at all levels should reflect the composition of the community. It aims to create equal employment opportunities for all and redress the inequalities of the past by ensuring that workforces are composed in roughly the same proportions as the groups that make up the population as a whole. In South Africa, the Employment Equity Act became law in 1998. The stated intention of the Act is to eliminate unfair discrimination, ensure employment equity and achieve a diverse workplace that is broadly representative of the country’s demographic realities. The inclusion of previously disadvantaged individuals and other designated groups (such as the physically disabled) at management level is of crucial importance to South Africa’s economy to ensure that the government’s economic growth targets can be achieved. The South African government’s Accelerated and Shared Growth Initiative for South Africa (AsgiSA) strategy aimed for an economic growth target of 4,5 per cent per year for 2005 to 2009, and 6 per cent per year thereafter. However, while South Africa’s GDP grew by approximately 5,1 per cent in 2007, it only grew by 3,1 per cent in 2008, and then followed the rest of the world into recession. By June 2009, South Africa’s GDP had decreased by an annualised rate of 6,4 per cent and, while growth has recovered somewhat, it has remained at levels not nearly high enough to achieve our national growth targets; for example, only 1,32 per cent growth was achieved in 2017. 12 For the South African economy to grow at the much-needed level of 6 per cent or higher, there must be enough skilled managers to drive the economy. It is widely recognised that even a moderate real economic growth rate of 2,7 per cent per year will require an additional 100 000 managers each year for the foreseeable future. Since the traditional source of managers (the population of white males) has been decreasing in relative terms, most of the managers that are required will have to come from the black population. Since 1994, there has been a steady increase in the number of black managers. Despite this growth, the white population – especially the white male population – remains over-represented in management structures. However, these levels are changing slowly but surely. According to the Commission for Employment Equity, in South Africa in 2017, 22 per cent of senior managers were black (up from 9 per cent in 2001) and 56 per cent were white (down from 81 per cent in 2001). In 2017, females of all races accounted for only 39 per cent of senior managers (up from 20 per cent in 2001). Of professionally qualified employees in 2017, 42 per cent were black (up from 33 per cent in 2001) and 37 per cent were white (down from 56 per cent in 2001). Females represented 47 per cent of this category, up from 38 per cent in 2003.13 CASE STUDY: The growth of broad-based BEE in South Africa It is generally accepted that ownership is by far the most successful area of transformation, with billions being spent to transfer ownership to previously disadvantaged individuals. According to research by Intellidex, by 2014 BEE ownership deals done since 2000 had created R317 billion in total value attributable to beneficiaries. By 2017, R52 billion had gone to charities, with R32,6 billion of this ending up as endowments in 27 foundations created through such deals. A further indicator of the impact of broad-based BEE in South Africa, as highlighted by Empowerdex, is the number of black directors on the boards of JSE-listed companies. In 1992, South Africa had 15 black directors on the boards of JSE-listed companies. In 1997, there were 98. By 2003, this number had increased to 207 and in 2016, there were 1 043 black directors. However, The South African Institute of Chartered Accountants (SAICA) noted in a 2014 study that 8 per cent of all JSE-listed directorships were held by black women, 5 per cent by white women, 17 per cent by black men and 70 per cent by white men. In addition, growth in BEE appointments in directorships seems to be slowing, suggesting that a renewed focus on BEE may be required. In 2017, the top five performers on the JSE with regard to BEE were as follows: Sources: Intellidex. 2017. The Empowerment Report: Special Edition. Available at http://www.intellidex.co.za/wp-content/uploads/2018/03/MEC-2017-printed-version-editorial-only.pdf. [Accessed 22 October 2018]; Ziady, H. 2017. BEE deals — the surprising truth. Financial Mail. Available at https://www.businesslive.co.za/fm/fm-fox/2017-06-29-bee-deals-the-surprising-truth/. [Accessed 22 October 2018]; Dobbin, J. 2016. JSE-listed directors still mainly pale males — majorities grossly under- represented. Mail & Guardian. Available at https://mg.co.za/article/2016-08-31-00-jse-listed-directors-still- mainly-pale-males-majorities-grossly-under-represented [Accessed 22 October 2018]. Business ethics is a concept that is closely related to social responsibility, but where social responsibility focuses on the organisation, business ethics focuses specifically on the ethical behaviour of managers and executives in the business world. Managers, in particular, are expected to maintain high ethical standards, as they are often in positions where they can abuse their power, for example to award contracts. To make business ethics practical, many organisations nowadays have codes of business conduct to provide clear guidelines to managers on what is ethical and what is not. One common rule, for example, is that no business gifts may be accepted, or that all gifts over a certain value have to be declared. Chapter 5 will focus on social responsibility and business ethics. While there are business concepts regulating the business environment, its employees and society as a whole, specific reference should be made to the concept of consumerism. Consumerism is a social force that protects consumers against unsafe products and malpractice by exerting moral and economic pressure on businesses. In South Africa, the South African National Consumer Union acts as a watchdog for consumers and many avenues for consumer protection have already been instituted, while more legislation has also been instituted to protect consumers. Some observers have suggested that the Consumer Protection Act (No. 68 of 2008), signed into law in 2011, makes South African consumers among the best-protected consumers in the world. It forces the producers of goods and services to take full responsibility for ensuring that their products and services comply with standards, and the Act enforces certain minimum warranties and indemnities to protect the buyers of goods and services. Society has also become more concerned about environmental sustainability and increasingly stakeholder activism and legislation are forcing businesses to take the environment into consideration. Businesses are unfortunately frequently responsible for air, water and soil pollution, and for the resultant detrimental effects on fauna and flora. Citizens therefore often form pressure groups to protect the environment. Greenpeace is perhaps the best-known environmental pressure group globally. In November 2017 a group of 15 Greenpeace activists with nuclear barrels blocked the main entrance of the South African Department of Environmental Affairs. The protest was directed at getting the Department to withdraw the environmental authorisation for a proposed new nuclear power station at Duynefontein.14 The business world is so interconnected with society that it may be defined as a process that uses a country’s means of production to produce products and services to satisfy the needs of people. The primary purpose of business in a free-market system is, therefore, to make a profit while satisfying the needs of the people. A brief overview of the needs of communities, and of the means of satisfying these needs, is given below to explain not only the purpose of business in a market system, but also the extent of the field of business management, which is the focus of this book. 1.3Needs and need satisfaction 1.3.1The multiplicity of human needs The continued existence of humans depends upon the constant satisfaction of numerous needs, both physical and psychological. The work that every member of a community performs is directly or indirectly related to need satisfaction. Even in the most remote and uninhabited areas, certain products and services are needed. Needs may be very simple and few, as in the case of a rural and underdeveloped community in which individuals or families, with the help of nature, find the resources necessary to satisfy a simple need structure. For example, the traditional lifestyle of the San people of the Kalahari depends on the satisfaction of the most basic necessities for survival. However, in highly industrialised communities, needs may be numerous and may therefore require large and complex organisations to satisfy their needs. A need may have a physical, psychological or social origin, but no matter which form it takes, it requires satisfaction. The number of identifiable needs is infinite. Some needs, particularly those that are physiological, are related to absolutely basic necessities, such as the satisfaction of hunger and thirst. These needs have to be satisfied for the sake of survival. Other needs, particularly those that are psychological, relate to things that make life more pleasant, but that are not essential to survival. These needs include the need for holidays, cellphones, dishwashers, swimming pools, luxury cars, and innumerable products and services of a similar nature. Basic physical and psychological needs may also overlap. For example, people do not wear clothes merely for warmth and protection, but also to be fashionable. Some people enjoy expensive delicacies accompanied by fine wines in luxurious restaurants and, in this way simultaneously satisfy survival needs and psychological needs. Abraham Maslow (1908–1970) was an American clinical psychologist who explained variable and unlimited human needs by means of a hierarchy of needs. According to Maslow, human needs range, in a definite order, from the most essential for survival to the least necessary. The left-hand side of Figure 1.4 shows Maslow’s hierarchy of needs (see section 12.7.2.2 in Chapter 12 as well). It is clear from Figure 1.4 that the needs hierarchy is composed in such a way that the order of importance ranges from basic physiological needs, which have to be satisfied for survival, to psychological needs, with which the higher levels of the hierarchy are mainly concerned. Because humans are social beings who live in communities, they also have collective needs, such as protection and education. An individual, a family or a community first satisfies the most urgent needs, and then, when this has been done, moves up to the next level until the higher psychological levels are reached. With changing circumstances, individuals not only desire more possessions, but also continually want still newer and better products and services. For example, radio offers entertainment, but black-and-white television is believed to offer better entertainment, and colour television still better entertainment. Once these products and services have been acquired, however, the need arises for a DVD player, more television channels and content – as evidenced in the phenomenal growth of DStv and Netflix – and more and better programmes. As society satisfies one need, a new one comes into existence, and there is no end to the constantly increasing number of human needs. Table 1.1 below indicates some of the needs people (households) have and what they spend their income on. It is interesting to note that in 2014/2015, South African households spent, on average, about 13 per cent of their income on food, which satisfies one of the most basic needs. However, in higher-income households relatively less is spent on food, and more is spent on entertainment and other discretionary activities, while lower-income households spend comparatively more on food as a percentage of their income. It is important to keep in mind that the percentages given in Table 1.1 are of average household consumption. Since South Africa has a diverse population, it also has diverse needs and consumption patterns. From Table 1.1 we can also see how needs change over time for various reasons. For example, expenditure on housing, water, electricity, gas and other fuels has increased sharply, due, inter alia, to dramatic increases in electricity tariffs, higher estimation of house values leading to higher property taxes, and higher rental prices. Increased spending in one area leads to decreased spending in other areas, and we can see how relative spending on food, clothing and household maintenance have decreased. Table 1.1: Expenditure patterns for South African households Products and services bought Expenditure in 2005/6 as % of Expenditure in 2014 total expenditure total expenditure Food and non-alcoholic beverages 14,4 12,9 Alcoholic beverages and tobacco 1,02 0,9 Clothing and footwear 5,0 4,8 Housing, water, electricity, gas and other fuels 23,6 32,6 Furnishings, household equipment and routine 6,9 5,2 maintenance of the house Health 1,7 0,9 Transport 19,9 16,3 Communication 3,5 3,4 Recreation and culture 4,6 3,8 Education 2,4 2,5 Restaurants and hotels 2,2 2,1 Miscellaneous products and services 14,4 14,7 Other unclassified expenses 0,3 0,1 Total 100 100 Source: Statistics South Africa. 2017. Living conditions 2014/15. Statistical Release P0310. Available at http://www.statssa.gov.za/publications/P0310/P03102014.pdf. [Accessed 22 October 2018]. 1.3.2Society’s limited resources If one considers the multiple and unlimited needs of humans, especially in highly developed societies, it is clear that there are only limited resources available to satisfy all their needs. Although Western countries, most notably the United States, possess very impressive means of production, even they do not have unlimited resources. Water is a key resource to individuals and businesses alike, yet water scarcity is a potentially massive problem facing both South Africa and the world, as we can see in the case study below: ‘Keeping Cape Town’s taps running’. A country has only a certain number of people in its workforce to operate a certain number of machines, and a certain number of factories, hospitals and offices to produce a certain quantity of products and services. In other words, the resources of any community are scarce, and can easily be exceeded by its needs. Resources are therefore the basic inputs in the production of products and services, and they are also known as production factors. Figure 1.4 shows the resources that society possesses in limited quantities only and which it uses to satisfy its needs: natural resources, human resources, capital and entrepreneurship. These resources are discussed in more detail below. Figure 1.4: The needs and resources of the community Source: Compiled from information in the chapter. 1.3.2.1Natural resources Natural resources, also known as the production factor of land, include agricultural land, industrial sites, residential stands, minerals and metals, forests, water and all such resources that nature puts at the disposal of human kind. The most important characteristic of natural resources is that their supply cannot be increased. In other words, the amount of natural resources any one country possesses is given, and is in most cases, therefore, scarce. Moreover, human effort is usually necessary to process these resources into need-satisfying products – for example, in the transformation of forests into timber and paper or, in the case of the airline industry, the refining of oil to produce the jet fuels that aeroplanes need to fly. In the process, natural resources are depleted and may become even scarcer. 1.3.2.2Human resources Human resources, also known as the production factor of labour, include the physical and mental talents and skills of people employed to create products and services. People receive wages for their labour. The size of the labour force of any country and, therefore, in a sense, the availability of that production factor, is determined by, among other things, the size of the population, the level of its education and training, the proportion of women in the labour force and the retirement age. For the manufacturing processes of a country to be of any value, the country’s labour force has to be trained for certain periods and to certain levels of skill to be able to produce the products and services required. Training periods will differ depending on the skill being learnt. For example, the training period of a flight attendant will be considerably shorter than the training period of a pilot. The combination of human skills is of particular importance, for without this combination, natural and financial resources cannot be utilised productively. In South Africa we have a situation where there is an oversupply of unskilled labour and a shortage of certain types of highly skilled labour. CASE STUDY: Keeping Cape Town’s taps running In the summer of 2017, Cape Town faced a severe water crisis with dams drying up and predictions at one point suggesting that the metro was only days away from running out of water. The drought forced the city and its residents to seriously consider their water usage habits, and to start investigating other options for a sustainable water supply, such as the desalination of seawater. However, alternatives like desalination are expensive. For example, at the Adaptation Futures 2018 conference, Gisela Kaiser, the City of Cape Town’s Executive Director for Water and Waste, said that a small temporary desalination plant will take three months and cost R350 million to raise the level of Cape Town’s supply dams by just one per cent. The city is also trying to build resilience in Cape Town’s water supply, for example by reclaiming storm water - rainfall that usually runs into drains and out to sea. The availability of surface water in the Western Cape water supply system has been reduced by climate change (resulting in less rain) and the invasion by alien vegetation in water catchment areas. Cape Town is by no means alone in this crisis. Australian city Perth’s annual rainfall has been declining by 3mm a year on average, while average temperatures in the region have increased by 1°C in the last 40 years. Perth subsequently relies less on dams and more on desalination and groundwater for their water supply. Whilst the urban water problem might appear to be a Cape Town-specific problem, Hastings Chikoko, Regional Director for C40 Cities in Africa, has commented that one in four large cities globally are water stressed. Sources: Compiled from information in Gosling, M. 22 June 2018. Getting below the surface of the Cape Town water crisis. News 24. Available at https://www.news24.com/SouthAfrica/News/getting-below-the- surface-of-the-cape-town-water-crisis-20180622 [Accessed 22 October 2018]; Adaption Futures. 2018. 5th International Climate Change Adaptation Conference. Cape Town 18 - 21 June. Available at https://adaptationfutures2018.capetown/ ; Water outlook 2018 report. 2018. Department of Water and Sanitation. City of Cape Town. Available at http://resource.capetown.gov.za/documentcentre/Documents/City%20research%20reports%20and%20r eview/Water%20Outlook%202018_Rev%2030_31%20December%202018.pdf. 1.3.2.3Capital Capital is represented by the buildings, machinery, cash registers, computers and other products, produced not for final human consumption, but for making possible the further production of final consumer products. Capital products usually have a long working life – for example, office buildings, factories, machinery and other equipment may be used over and over again in the production process. In the airline industry, capital usually has an exceptionally long working life, but also comes at a very high price. The reason for the scarcity factor of capital is that a community takes years to build up its stock of capital. Every year it spends a certain amount on things such as roads, bridges, mine shafts, factories and shopping centres, and there is always a shortage of these things. The owners or suppliers of capital are usually remunerated in the form of interest or rent. 1.3.2.4Entrepreneurship Entrepreneurship is the fourth factor of production. It refers to the collective capacity of entrepreneurs, who are those individuals who accept the risks involved in providing products and services for their society. Entrepreneurs like Simbarashe Mhuriro (see box Entrepreneurship in solar power) take the risk of providing their knowledge and capital in setting up a business with the prospect of being rewarded with significant profits if they are successful. On the other hand, if they do not succeed, they may lose a lot. The production factor of entrepreneurship is scarce in the sense that not everybody in a community is prepared to take the risks that are inevitable when providing new products or services, or has the ability to manage an organisation successfully. Although the contemporary focus on entrepreneurship is mainly on small and medium businesses, entrepreneurs are not limited to these. A large or corporate business is also a place for entrepreneurship. (See Chapter 2 for a more detailed discussion on entrepreneurs and entrepreneurship.) Entrepreneurship in solar power Simbarashe Mhuriro is the founder and Managing Director of Oxygen Energy Private Limited, an independent power producer and renewable energy development company that specialises in utility scale power plants and industrial and commercial rooftop projects. In 2017, the African Development Bank (AfDB)-managed sustainable energy fund for Africa (SEFA) approved a US$ 965,000 grant to Oxygen Energy Private Limited. The grant will enable the preparation of a bankable business case for the development of a 20MW off-grid solar photovoltaic rooftop project on buildings owned and managed by Old Mutual Property Group, the largest property investment managers in Zimbabwe. When the project is completed, it will provide reliable and competitive solar power to hundreds of small- and medium-sized enterprises throughout Zimbabwe.15 1.3.3Need satisfaction: A cycle To be able to satisfy the needs of the community, entrepreneurs have to utilise scarce resources in certain combinations to produce products and services. Economic value is created in the course of the production process by combining production factors in such a way that final products are produced for consumers. A nation’s survival depends on the satisfaction of its people’s needs. Striving for need satisfaction with the limited resources available is an incentive for economic progress. Given its unlimited needs but limited resources, society is confronted with the fundamental economic problem: how to ensure the highest possible satisfaction of needs with these scarce resources. This is also known as the economic principle. Society cannot always get what it wants, so it must choose how it will use its scarce resources to the maximum effect to satisfy its needs. In short, it has to decide about solving the following economic issues: Which products and services should be produced, and in what quantities? (How many capital products should be produced? How many consumer products should be produced? Should railways or trucks, houses or flats be built? If flats are chosen, how many should be built?) Who should produce these products? (Should the state or private individuals take charge of production? Or should this responsibility be shared, as in the case of South Africa’s airline industry?) How should these products and services be produced, and which resources should be used? (There are various methods of production and types of resources that should be considered. For example, should a production-line method be chosen? Should a labour-intensive approach be used?) For whom are these products and services to be produced? (Will the products cater largely for the needs of the rich or the poor? Will services be aimed at business clients or families?) The answers to address the economic issues listed above are given by the community. The community decides which institutions should be responsible for the production and distribution of products and services, as well as the role that each institution has to play. In South Africa we are constantly seeing debates around nationalisation and privatisation, with some arguing that strategic sectors (such as mines and banks) should be controlled by government (nationalised), while others argue that key state assets such as Eskom can only reach its full potential if it is not controlled by the state but by private investors (privatisation). This is an example of a community seeking an answer to the question of who should produce these products or services – the state, private enterprise, or a combination of the two. Figure 1.5 shows how, against the background of its needs, and by means of its political process, the community determines the economic system in which the necessary need-satisfying institutions are established. In a market economy, need-satisfying institutions, including business organisations and government organisations, offer products and services on the market in return for profit. If the community is not satisfied with the way in which these organisations provide for its needs, it will change the economic system or choose a new need- satisfying system. The appearance of new businesses and the disappearance of others are examples of this cycle of need satisfaction in the community. Another example of this cycle at work that illustrates the community getting what it wants occurred in the form of South African businesses offering longer shopping hours from 1965 onwards. This change occurred because of the large-scale urbanisation of South African society and the participation of women in the labour markets. These women found the opportunity to shop on Saturday afternoons and Sundays very useful. Figure 1.5: The cycle of need satisfaction in a community Source: Compiled from chapter content. Over the years, different communities have developed different approaches in order to satisfy their needs, and different economic systems have been tried and tested. Each of these systems, as chosen by various communities to satisfy specific needs, has its own approach to the fundamental economic problem of which products and services should be provided by whom and for whom. The study of these systems constitutes the field of economics as a social science and examines the means used to satisfy innumerable human needs with limited resources. Business management, in contrast, is concerned with the institutions that are created in the economic system to satisfy the needs of a community, and these are mainly business organisations. To provide some necessary background to the study of business management and the role of business organisations in society, a brief overview of the different economic systems now follows. The changing need for communication The needs of society ultimately culminate in products or services that satisfy particular needs. A case in point is cellphones. People have a basic need to communicate and, where this is possible, to communicate with individuals over long distances. During most of the last century, the only way this could be done was by means of the telephone, where the caller first had to call a specific building (house or office) and then wait for the relevant person to answer, or to be found by whoever answered the phone. The cellphone was, therefore, a response to the need to communicate immediately with a specific individual, without the inconvenience of having to locate the person first or the frustration of dealing with inoperative telephone lines. As consumer needs have evolved, so did the design and functionality of cellphones and other mobile devices. Cellphones are no longer just a means of communication. The emergence of new mobile technologies in the form of smart phones (like the Samsung S- series and the iPhone) and tablets (such as the iPad and Samsung Galaxy Tab) have taken mobile communication to a new level. Nowadays, cellphones also serve as high-megapixel cameras, radios, music players, memory cards, email and Internet access devices, geographical positioning systems (GPS), and online banking devices. It is interesting to note that in 2018, the number of cellphones in South Africa exceeded the population. At the same time, the number of cellphones seems to be declining, while the use of smart devices like the iPhone is on the rise as consumer needs change and they exchange their mobile phones for smart phones or tablets. Internet access is on the rise, with about 56 per cent of South Africans using the Internet in some form. The importance of, and increase in data usage is reflected by the fact that more than 75 per cent of Internet traffic is generated by mobile devices. 16 1.4The main economic systems 1.4.1The community and its economic system Every community is engaged in a struggle for survival that is necessitated by scarcity. Therefore, each community needs to have a complex mechanism that is constantly dealing with the complicated task of ensuring that the production and distribution of products occurs. Each country is confronted with the fundamental economic problem of which economic system to choose to solve the problem of which products should be produced and marketed by which producers for which consumers. Each country must decide on some system to solve that problem. Over the years, countries and communities have approached need satisfaction in different ways. There are three main approaches that are still followed by present-day communities for the solution of their fundamental economic problems. They are the market economy, the command economy and socialism. While these economic systems are often incorrectly referred to as political ideologies, they should rather be described as economic systems influenced by politics. It is necessary to take a brief look at these systems to understand the origin and role of business organisations in society. As none of these economic systems is ever found in a pure form, the discussion that follows is merely an exposition of the basic premises of each system. 1.4.2The market economy One of the economic systems adopted for solving economic problems is the market economy, also known as the free-market economy or free-enterprise system. It is a system in which most products and services demanded by a community are supplied by private organisations seeking profits. It functions on the following assumptions: Members of a community may possess assets and earn profits on these. The allocation of resources is affected by free markets. Members of the community can freely choose between products, services, places of residence and careers. The state keeps its interference in the system to a minimum. In the market economy, particular value is attached to the right of individuals to possess property such as land, buildings, equipment or vehicles, including the right to earn an income from this property. This right is also the driving force of the market economy: it stimulates individuals and entrepreneurs to acquire more assets and to make a profit through the productive utilisation of their assets or their capital. In the pursuit of maximum profits, this capital, which is nothing other than the resources of the community, is applied as productively as possible. This aspect also affects the distribution of resources through free markets. The private possession of capital has an important influence on the manner in which resources are allocated or employed in a market economy, as the decisions about what products should be produced by which producers rest with those who own the resources. This means that farmers, factory owners, industrialists and individuals are free to do what they like with their assets. However, in their decisions concerning production and marketing, they have to take account of the tastes, preferences and other demands of consumers if they want to make a profit. Thus, the question of which consumers’ needs should be met (for whom?) is answered. Such decisions in a market economy are not taken by some central body but by a system of free markets, which indirectly puts a price on every production factor or consumer product. Free markets also imply the third characteristic of this system: freedom of choice. The producers are able to decide whether they can profitably produce their products at the prices set by the market. This is the producers’ free choice. Likewise, the consumer is free to choose whether to buy the product at that price. The consumer is also free to live where he or she wishes and to study and train for whichever career he or she wants to follow. A system of free markets therefore necessarily entails freedom of choice. Private owners of property are free to own what they like and to do with it as they please: rent it out, sell it, exchange it or even give it away. People with businesses are free to produce what they wish and to employ whomever they choose. Similarly, workers, who own their labour, can use this human resource as they choose. In this way, competition comes into operation in a system of free markets. The final characteristic of a free-market economy is minimum state interference in markets. The assumption is that the state should merely ensure the proper maintenance of the system without excessive regulation of, or even participation in, the business world. However, market economies are not all about good news. With the global financial crisis in 2008, free market economic systems (capitalism) came in for a lot of criticism, as the perception developed (with good reason) that bankers took huge and unsustainable risks based on little but greed, and when the system collapsed the state and ordinary people had to bear the cost. Capitalism has also been criticised for creating inequalities in society between rich and poor, the very aspect that movements like Occupy Wall Street opposed so strongly. More recently in South Africa, Adv Terry Motau SC and Werksmans Attorneys produced a damning report into fraud, probable money laundering and reckless business practices at VBS Mutual Bank, finding that more than 50 people unjustifiably and illegally received almost R2-billion between 2015 and 2018, leading to the collapse of the institution.17 The VBS Mutual Bank scandal has once again illustrated how corruption and greed led to massive losses for local governments (many of them serving poor communities) and lower income individuals who had their savings deposited at the institution. 1.4.3The command economy The second type of economic system is a command economy or a centrally directed economic system. Adopted by some countries as an alternative to a market economy, it was until recently known as communism. Its main characteristic is that the state owns and controls the community’s resources or factors of production. A command economy is a system of communal ownership of a country’s factors of production in which the individual owns no property, with the exception of private domestic assets. This means that individuals own no land, factories or equipment. The state assumes complete responsibility for the production and distribution of products and services, and all decisions about what should be produced – and about how, by whom and for whom it should be produced – rest with a central government. The choices of products and services are therefore limited to what the state offers; the design of these products falls entirely outside the control of ordinary individuals. It is the state that decides what the needs of the community are, how and where the desired products will be obtainable, and in which quantities they may be used. In the absence of free consumer choice, the profit motive is also absent, as is the competition factor, because, as mentioned above, the state owns the organisations that produce the products and services. In most countries that adopted a command economy, the system failed because it robbed individuals of the initiative to produce products and services, and it prevented the creation of wealth. The poverty of the Soviet Union and other Eastern European countries and their collapse in the late 20th century is evidence that the system did not create wealth. Command economies are, nevertheless, still officially adhered to in Cuba, North Korea and some African states. 1.4.4Socialism Socialism is the third economic system, and may be regarded as a compromise between a pure market economy and a pure command economy. Under socialism, the state owns and controls the principal (generally strategic) industries and resources, such as manufacturers of steel, transportation, communications, health services and energy. Less important and smaller matters such as trade and construction, as well as the production of materials and services of lesser strategic importance, are left to private initiative. In socialism, the fundamental assumption is that strategic and basic resources should belong to every member of the community. For the rest, businesses and consumers operate within free markets in which they are at liberty to make decisions without restriction. Although consumers in a socialist economy have greater freedom of choice than those under a command economy, the provision of the basic products and services by the state is a limiting factor in the creation of wealth. A free economy creates wealth The Heritage Foundation and Wall Street Journal’s 2018 Index of Economic Freedom18 measures how well 180 countries score on an analysis of 10 specific components of economic freedom. These components include business freedom, trade freedom, fiscal freedom, government size, monetary freedom, investment freedom, financial freedom, property rights, freedom from corruption and labour freedom. Taken cumulatively, these factors offer an empirical snapshot of a country’s level of economic freedom. Scores are given out of 100, where 100 and 0 represent the maximum and minimum freedom of an economy respectively. The results demonstrate beyond doubt that countries with the highest levels of economic freedom also have the highest living standards. Out of all the regions, sub-Saharan Africa scored the lowest on the 2018 Index of Economic Freedom, with an average of 54,4. Mauritius was the highest-ranking African country, scoring 75,1 (down from 76,4 in 2015), making it the 21st freest economy in the world (down from 10th in 2015). The leader in sub-Saharan Africa, Botswana (with 69,9) was second in the region and was rated 35th in the world. South Africa was ranked fourth in the region with a score of 63 and ranked 77th in the world – down from 61st in 2009. Given that South Africa slipped 5 places despite its rating remaining about the same as in 2015, it would seem as if there is a trend for economies to become freer in general. A comparison of 20 selected country economic freedom ratings is presented in Figure 1.6. The Heritage Foundation remarked that South Africa’s economic growth has decelerated because of declining global competitiveness, growing political instability and weakened rule of law. This caused the country’s investment-grade credit rating to be downgraded to junk status in 2017, denting investor confidence. South Africa is also plagued by rising public debt, inefficient state-owned enterprises and spending pressures, while the judicial system is increasingly vulnerable to political interference. The numerous scandals (such as the investigation into state capture) and frequent political infighting have severely undermined the integrity of government. Countries with high scores on the Index of Economic Freedom generally earn higher incomes per capita. For example, Hong Kong, which is listed as the freest economy in the world, had an average GDP per capita in 2018 of US$58 322. Countries with lower scores generally produce and earn much less. South Africans, for example, had a GDP per capita of only US$13 225 per capita in 2018. Figure 1.6: 2018 assessment of economic freedom of different countries Source: Heritage Foundation. 2018 Index of Economic Freedom. Available at http://www.heritage.org/index/ranking [Accessed 22 October 2018]. Reprinted by permission of the Heritage Foundation. 1.4.5Mixed economies None of the three main economic systems in use occurs in a pure form anywhere. They typically occur as mixed economies, with the dominant system incorporating certain characteristics of the other systems. Thus China, which officially has a command economy, employs private initiative, while growing state intervention in key industries in the major market economies of the world (especially after the global financial crisis) is no strange phenomenon. The USA is often regarded as a beacon of a free market economy, while it is in fact a mixed economy. Figure 1.7 shows the relative success of various countries with different economic systems. Citizens in high-income countries earned about $47 510 per capita in 2018, and are usually free market economies (such as Hong Kong and the USA) or developed socialist or mixed economies such as the USA, Sweden and the UK. In comparison, the poorest countries had a GNI of only about $2 085 per capita, and consist mostly of economies that are not free (such as North Korea) or are only just emerging from command economies (such as Ethiopia and Mozambique). The findings depicted in Figure 1.7 seem to support the notion that wealth is generally best created by a well- functioning market economy, while predominantly command economies have not succeeded in creating significant wealth. Countries such as South Africa, China and Brazil, with unique economic systems, rate about midway between the richest and poorest countries of the world. Several factors, including education, culture and work ethic, affect the prosperity of any particular country, but Figure 1.7 shows that countries with well-functioning market economies are generally wealthier than others. Figure 1.7: A comparison of the gross national income per capita in 2017 of people in a variety of economic systems Sources: Adapted from information obtained from the World Bank Doing Business data. Available at http://www.doingbusiness.org/en/data; www.doingbusiness.org and the World Bank data on GNI. Available at https://data.worldbank.org/indicator/NY.GNP.PCAP.PP.CD?locations=CU. [Accessed 24 October 2018]. 1.4.6The state and economic systems The fact that under both the market system and socialism the state intervenes to help solve the economic problem does not mean that there is necessarily a tendency to move in the direction of a command or centrally directed economy. There are two conflicting views of the role of the state in economic systems. A conservative perspective argues that the role of the state should be extremely limited. This view questions the government’s ability to solve social and economic problems and argues that the state’s role should be carefully limited to what is absolutely necessary. However, there are certain key shortcomings inherent in the conservative view and the free markets it advocates:19 Free markets are subject to economic fluctuations, unemployment and inflation. This view creates economic inequality as income is distributed unequally. Markets are not always subject to perfect competition and where monopolies or imperfect competition is present, resources may be allocated inefficiently. Markets deal poorly with the side effects of economic activity, such as pollution. There are certain public goods that the market cannot provide, such as national defence and the justice system. The liberal view points out these important limitations of the market system, and claims that governments can do a great deal to overcome these limitations, such as regulating private economic activity and providing goods and services of which the private sector produces too little. Examples of possible necessary government interventions may include the protection of natural resources by preventing pollution, the restriction of monopolistic practices by ensuring competition, and the protection of consumers against false or misleading information and exploitation. The state can also assist businesses by stimulating the economic system (for example, through promoting exports, encouraging the creation of small businesses, assisting research and granting subsidies). Essentially, government intervention in the economic system should aim to encourage economic growth and stability and effect greater equity in the distribution of income. A much-debated form of government intervention takes place when the state does not limit itself to the above-mentioned activities, but acts as an entrepreneur and business owner in its own right and even competes with other privately owned businesses. The state does this in the areas of transport services, electricity supply, arms manufacture, broadcasting and television services, and many other industries in South Africa. The main reasons usually advanced for government intervention is that the private entrepreneur is not interested in these activities and may not even be capable of carrying them out. This may be because of the enormous scale of the businesses that produce services such as transport and electricity, and the corresponding risks attached to them. It is also argued that some organisations are of such strategic importance to the community that they cannot be left to profit-seeking private entrepreneurs. However, these arguments do not entirely justify a regular and continuous entrepreneurial role played by government. If any such intervention by the state is carried to excess, the result is a bureaucracy that affects national productivity adversely by limiting private competition. For that reason, among others, public–private partnerships (PPPs) have become commonplace. Governments often use PPPs to develop large capital projects in partnership with private enterprise. They pool their resources to develop, for example, infrastructure, which the private enterprise then runs for profit. Toll roads are a typical example of a PPP, as is the Gautrain, the state-of- the-art rapid-rail project of the Gauteng Provincial Government. 1.4.7Final comments on different economic systems Different countries use different economic systems to meet their needs using their available resources. Each system thus has its own peculiar characteristics (as Table 1.2 shows) and each democratic country arranges its economic system in such a way that it solves its wealth problem as effectively as possible in accordance with the wishes of its inhabitants. Bearing in mind that pure forms of the different economic systems almost never exist, the most appropriate description of the prevailing economic system in South Africa is that it is a mixture between the market system and the socialist system. More precisely, the South African economic system can be defined as one that is moving towards a market-oriented economy, yet presently has a high degree of government participation in, and control of, the economy. Table 1.2: A comparison of the main economic systems Mobility: The key to future economic growth The Gautrain has been in operation since 2010, linking Sandton, the OR Tambo International Airport and the City of Tshwane with a high-speed commuter rail system. The Gautrain project is owned by the Gauteng Department of Transport and is a project of the Gauteng Provincial Government, but was built and is operated by the Bombela Consortium. The Gautrain has proved to be very popular with commuters, with 63 000 using the train every weekday. This multibillion-rand initiative, designed in line with global practice, is a good example of a successful public–private partnership, and aims to enhance and support economic growth in the Gauteng Province and generate employment. When looking at current Gautrain operations, the system contributed R1,7-billion a year to provincial GDP, while sustaining about 6 000 jobs in Gauteng in 2013. The system also increased government revenue by around R400 million a year, with around R200 million received by lower-income households, again mainly through wages and salaries. For every R1 spent on operating the Gautrain, the provincial economy gained another 96c, and the national economy 24c. The Gautrain has also improved the quality of life of the province’s residents, reducing road congestion by cutting car trips per day by 21 300. Around R10-billion was invested in new developments and upgrades to retail centres in a 10 km radius around Gautrain stations between 2009 and 2014. R1-billion was invested in office space, and residential property saw an increase in property value of R12,9-billion. Source: Venter, I. 9 July 2015. Gautrain boosts GDP, property development, says KPMG report. Creamer Media’s Engineering News. Available at http://www.engineeringnews.co.za/article/gautrain-boosts-gdp- property-development-says-kpmg-report-2015-07-09 [Accessed 22 October 2018]. Reprinted by permission of Creamer Media. The South African economy20 The economic systems of Western countries, with which South Africa associates itself, are typically combinations of a market economy and socialism. Despite the defects and shortcomings of the more-or-less free-market order in South Africa, most inhabitants believe that this economic system satisfies their needs better than any system that might be based on pure socialism or a command economy. Since 1994, South Africa has steadily moved to an increasingly market-oriented position with decreasing government intervention and control. This move has undoubtedly had a positive effect on the South African economy, as can be seen in the figures below. In 2004, South Africa’s GDP figure stood at R1 404 billion and GDP per capita was R30 129. Consumer price inflation was at its lowest level in 40 years (3,4 per cent) and producer price inflation was at a 58-year low (1,9 per cent). South Africa had become an important role-player in global exports and, hence, in the global economy. By 2007, economic stability was evident in South Africa. With GDP growth of 5,1 per cent for the year, the country’s economy was at its strongest in over two decades. However, South Africa was not able to avoid the effects of the global meltdown in 2008, when the country’s GDP grew by only 3,1 per cent. By June 2009, GDP had decreased by 6,4 per cent to -1,7 per cent, pulling South Africa’s economy into recession. Growth recovered somewhat in 2010 through 2014, although it did not reach the growth targets set by the government, and in 2017 and 2018 growth slowed considerably. The annual compound 5-year growth rate for South Africa is 1,3 per cent, compared to 3,4 per cent for Nigeria. By 2017, South Africa was the second largest African economy with a GDP of US$739,4 billion (second only to Nigeria with a GDP of US$1,1 trillion) and a GNI per capita of US$13 090 (compared to US$5 680 for Nigeria). Certain factors make South Africa a favourable investment destination and other factors deter investors from the country. Positive factors include: Sound macroeconomic policies; 100 per cent ownership permitted; A large, growing domestic market in South Africa; Modern transport and communication systems; Rich in natural resources; and Modern banking and financial services. Negative factors include: High rates of crime and corruption; Weak economic growth; Extensive exchange controls, although these are gradually being eased; Major skills shortages, particularly in management roles; and High levels of unemployment (currently at over 27 per cent). South African consumers enjoy a high degree of freedom to buy what they want and to shop where they want. In South Africa, individual entrepreneurs must judge which products and services consumers want, and then offer these at a price the consumer is prepared and able to pay. A complex network of organisations evolves out of the interaction between needs and the entrepreneurs who satisfy these needs. In a market economy, this network is termed the business world. 1.5The need-satisfying institutions of the market economy 1.5.1Business organisations The workings of a market economy are affected by its need-satisfying institutions, which are the private business organisations that, for the most part, satisfy the needs of the community. The business world therefore consists of a complex system of interdependent organisations that mobilise the resources of a country to satisfy the country’s needs at the risk of a loss and in the pursuit of profit. Such are the conditions under which a private business exists in a market economy. Under such a system, an organisation has to make a profit to be able to survive. This can happen only if it satisfies the needs or wishes of the consumer and, hence, the community. By meeting the needs of the consumer, business organisations solve the fundamental economic problem: which products and services should be produced, how they should be produced, and for whom. Figure 1.8 shows how businesses, as the main need-satisfying institutions under this system, use the resources of society to produce products and services for consumers. Figure 1.8: Products and services offered in the market system Source: Adapted from Samuelson, P.A. & Nordhaus et al. 1980. Economics. Eleventh edition. New York: McGraw-Hill Company, p. 41. Consumers’ needs culminate in the demand for consumer products and services offered on the market by businesses (in department stores, boutiques, car showrooms, pharmacies and so on). Therefore, consumer demand helps to determine which products and services need to be provided and for whom. To be able to produce products and services, business organisations need resources, so a demand arises for production factors, which are offered in the factor market by the community. Business organisations pay salaries and wages to the community in exchange for production factors, and consumers in turn pay for their products and services with that money. Competition in both markets determines how the products and services are to be produced so that the entrepreneur can continue to make a profit. In order to make a profit, the enterprise must therefore take the initiative and accept certain risks in mobilising the resources of the community before items can be produced. The owner of a bicycle factory, for example, has to erect or rent a building, install machinery, buy raw materials and components, and employ people to manufacture bicycles as productively as possible to satisfy the needs of consumers. The transport contractor has to transport products to places where there is a need for them. The retailer has to present a range of products conforming to consumers’ needs in as convenient a way as possible. A banker does not produce a physical article, but provides a service in the form of finance placed at the disposal of manufacturers, dealers and numerous other entrepreneurs and consumers. These are but a few examples of the innumerable activities carried out in the business world by business organisations – large and small, local and multinational – that play an indispensable part in South African society. Business organisations may be defined as those private need-satisfying institutions of a market economy that accept risks in pursuit of profit by offering products and services on the market to the consumer. Business organisations assume one of a variety of forms: a sole proprietorship, a partnership, a close corporation, a private company or a public company (as will be discussed in Chapter 3). While a business organisation is a private enterprise (one owned by private entrepreneurs), in a mixed-market economy there are government and non-profit- seeking organisations (such as organisations for charity) that satisfy community needs in addition to profit-seeking businesses, especially those needs that cannot be addressed profitably by business organisations. 1.5.2Government organisations In the discussion of the various economic systems, several principles of a market economy were identified. One principle was the condition that government should intervene as little as possible with market mechanisms and that when it does, it should confine itself to the protection and creation of collective non-profit-seeking facilities and services such as those concerned with healthcare, education, justice and defence. The government departments responsible for such state functions may also be regarded as need-satisfying organisations. However, because the profit motive is absent, and the services provided are collective, such government institutions fall under the subject of public administration rather than business management. The discussion of the various economic systems also mentioned that the pure market economy exists only in theory and that several mixed systems are in fact to be found, including the South African system, which was defined as a market-oriented economy with a high degree of state intervention. The intervention specifically indicates the large number of government organisations in South Africa, which are also known as state-owned enterprises (SOEs), parastatals or public corporations. Unlike the collective systems that produce products and services on a nonprofit-seeking basis, these public corporations offer products and services for profit, and sometimes in competition with other businesses in the market. Sometimes these public corporations may be regarded as business organisations, but with this difference: they are owned and controlled by the state and not by a private entrepreneur. Eskom, Transnet and South African Airways (SAA) are examples of such public corporations, and there are many others. These public corporations may also be regarded as need-satisfying institutions through which the state creates products and services believed to be of strategic, economic or political importance to the community, especially as regards self- sufficiency in transport, energy, military equipment and armaments. Despite early successes in privatisation (the state sold Sasol in 1979, in 1998 ACSA was privatised and in 2003 Telkom was listed on the JSE and the New York Stock Exchange), this process has seemed to stall more recently due, inter alia, to resistance from labour unions concerned about job losses. The effectiveness and efficiency of government organisations are often not comparable to that of private organisations. For example, the state has had to bail out state-owned enterprises like South African Airways several times in the past decade, while the performance of others, such as Eskom, the South African Broadcasting Corporation and Prasa is unsatisfactory. However, those that seek profits also fall within the scope of business management. 1.5.3Non-profit-seeking organisations Non-profit-seeking organisations are the other group of need-satisfying institutions that offer services, and, to a lesser extent, products not provided by private enterprise or government organisations. Amateur sports clubs, cultural associations and welfare organisations are all examples of non-profit-seeking organisations, as are associations of organised business such as the National African Federated Chamber of Commerce (NAFCOC) and Business Unity South Africa (BUSA). These organisations differ from other need-satisfying organisations in that they provide their services without seeking profit. The continued existence of such organisations therefore depends on the financial support of those members of the community who require their services or from charitable contributions. Although such organisations do not set profit-making as their primary objective, they often function on the same basis as a business organisation, seeking a surplus of income over expenditure, or at least a balance of income and expenditure. These organisations – especially the larger ones – therefore employ management principles. Despite their small share in the economy, the study of such organisations also falls within the field of business management. 1.6The nature of business management 1.6.1Economics and business management as related sciences A society is constantly faced with the problem of how to use its scarce resources to satisfy its needs as efficiently as possible. Economics is a social science that studies how humans choose different ways of using their scarce resources to produce products and services. It is therefore a study of the economic problem and related variables, with the improved well-being of the community as its preconceived goal. The variables that economics studies include prices, money, income and its distribution, taxes, productivity, government intervention and economic growth, as well as many other economic questions affecting the well-being of a country. Business management is an applied science that is concerned with the study of those institutions in a particular economic system that satisfy the needs of a community. In a mixed-market economy, as is found in South Africa, private business organisations are therefore the main area of study. While economics examines the entire economic system of a country, business management limits its studies to one component of the economic system: the individual organisation, whether it is a private business, a public corporation or, to a lesser extent, a non-profit-seeking organisation. For example, economics examines the problem of inflation against the background of its implications for the national economy, while business management is more concerned with the effects of inflation on individual businesses. Critical thinking Government organisations and private businesses: Servicing the needs of South Africans In the South African economy, both government organisations and private businesses act as society’s need-satisfying institutions. Students often ask, ‘How is it possible that government organisations act as need- satisfying institutions?’ and ‘How is it possible for government organisations and private businesses to service similar needs?’ The answer to the first question is that government organisations very definitely act as need-satisfying institutions in that they provide an array of both products and services to their citizens. In most cases, these products and services are exchanged for rates and taxes. The key difference between government organisations and private businesses lies, however, in the fact that private businesses seek to make profits through the fulfilment of society’s needs, whereas this is not the case with government institutions. Regarding the ways that government organisations and private businesses service similar needs, there are two examples that are particularly relevant in the South African situation. The first example is society’s need for a safe and secure environment. South Africa has a particularly high crime rate compared to the crime rates of other developed countries. In response to this, both government organisations and private businesses seek to address society’s security needs. The government does this through the provision of policing services, an efficient judicial system and effective facilities for correctional services. In doing this, the government seeks to address society’s needs, although not with a profit orientation. At the same time, many business organisations provide products and services to address the security needs of society. Examples of such products include electric fencing, burglar alarms and security gates, while examples of services include private security services, vehicle-tracking and short-term insurance. In contrast to the government organisations, businesses providing these products and services do so in exchange for profits. Another good example in South Africa is provided by the healthcare system. Both government and private businesses seek to address society’s need for healthcare. Government seeks to provide healthcare services to its citizens through public hospitals, clinics and emergency services, without a focus on profit. At the same time, private companies such as Netcare and Mediclinic seek to offer the same services, but with the goal of providing higher-quality services in exchange for profit. Many more examples exist in South Africa in the areas of education, transport and social security. 1.6.2The purpose and task of business management The discussion of the cycle of need satisfaction indicated that the primary human endeavour is to achieve the highest possible satisfaction of needs with scarce resources. This endeavour follows the economic principle, to which every economic system is subject. It follows that any component of an economic system, including a business organisation, is also subject to the economic principle. Where the individual business organisation is concerned, this entails achieving the highest possible output with the lowest possible input of production factors. The purpose of business management is to produce the greatest number of units of products or services at the lowest possible cost. From this emerges the task of business management, which is to determine how an organisation can achieve the highest possible output (products and services), with the least possible input (human resources, natural resources and capital). More specifically, the task of business management entails an examination of the factors, methods and principles that enable a business to function as efficiently and productively as possible in order to maximise its profits. In short, it is a study of those principles that have to be applied to make a business organisation as profitable as possible. It may also include a study of the environmental factors that could have an effect on the success of an organisation, its survival or its profitability. Examples of approaches, principles and methods studied by business management with the purpose of making an organisation function as productively as possible General approaches to management methods (see Chapters 6 to 10), which have been tested over the years, include the following: The mechanistic approach, introduced at the turn of the century, emphasises mass production, especially under the management of engineers. The human-relations approach originated in the 1930s and emphasises the motivation of workers. The contingency approach of the 1950s argues that the management approach is prescribed by the prevailing situation. Strategic management, the most recent approach, makes a special study of how management should act in an unstable environment. Various supplementary approaches and developments, such as organisation design, the management of change, information management, corporate culture and the management of diversity are still being studied. In the field of marketing management (see Chapter 13), research into experimentation with approaches and methods has also contributed to the more productive operation of businesses. These include the following: The marketing concept replaced the production approach in management philosophy to enable businesses to adjust their resources more effectively to the needs of consumers. Market research, as an instrument of marketing philosophy, has developed many methods of studying the needs of consumers. Methods of studying and determining consumer habits and segmenting markets, as well as strategic management aids, have also stimulated marketing management to higher productivity. Financial management (see Chapter 14) as an area of business management has also tested many methods, especially financial ratios. The following are some examples: Ratios to access the financial performance of businesses; Capital budgets and capital-budget techniques, in particular to evaluate potential investment possibilities; Approaches to dividend policy; and Approaches to and methods of financing growth and expansion as profitably as possible. In the same way, numerous methods, principles, approaches and problems in other areas of business management (such as production and operations, purchasing, human resources management and external relations – see Chapters 11, 12 and 15) have been researched and tested. The sum total of this sustained study of, and experimentation with, management approaches and methods, and research on management problems, constitutes the body of knowledge known as business management. The purpose and task of business management The economic principle consists of the human endeavour to satisfy unlimited needs with limited resources. All economic systems are subject to it. In a mixed-market economy, a business organisation as a need-satisfying institution is a component of the economic system, and is therefore also subject to the economic principle. According to the economic principle, a business organisation always has to endeavour to obtain the highest possible output (products and services) at the least possible input (lowest cost). This is the purpose of business management. The business organisation is the subject studied by business management. The task of business management is to examine factors, methods and principles that enable a business organisation to maximise its profits and achieve its objectives. The study of business management entails comprehensive and ongoing research and the examination of management problems, the testing of approaches and principles, experimentation with methods and techniques, and the continuous weighing up of environmental variables. The result is an applied science that indicates how business organisations can best be directed towards realising their objectives. Therefore, in the case of business organisations, the economic principle is defined as the endeavour to achieve the highest possible income in the market at the lowest possible cost, with profit as the favourable difference between the two. This principle is also applicable to government organisations and non-profit-seeking organisations. The only difference is that in the case of government organisations and non-profit-seeking organisations, the difference between inputs and outputs is not measured in profit, but rather in terms of surplus, savings or higher productivity. In a business organisation, the economic principle and the profit motive coincide, making profits the driving force, and so the task of business management becomes one of maximising profits. However, this does not mean that the task of business management is to maximise profits at the cost of everything else, especially the well- being of society. In today’s business environment, the objective is rather to maximise profits through good management and care of employees, customers, investors and society in general. To summarise, the task of business management is to study those factors, principles and methods that will lead a business organisation, as a component of the prevailing economic system, to reach its objectives. In a mixed-market economy, this primarily – though not exclusively – means making a profit. 1.6.3Is business management an independent science? Business management is a young subject and its scientific basis is still the subject of lively debate. There is no easy answer to the question of whether business management is an independent science, as there are many diverse opinions about what exactly constitutes a science. The most common definitions of a science emphasise different characteristics. Business management is continually being tested in the light of these characteristics to determine whether it merits the status of a science: The most outstanding characteristic of a science is a clearly distinguishable subject of study that forms the nucleus of a discipline.21 Business management completely satisfies this condition, particularly with regard to the business organisation which, as a component of the market economy, is its subject of study. A fundamental characteristic of a science, which supplements the one mentioned above, is that it should be independent of other sciences. As we have already pointed out, business management has its own identifiable subject of study, and from this point of view may be regarded as a science. However, it should be clearly understood that a business organisation can be studied by other sciences for other reasons. People are social animals who organise themselves into groups to fulfil purposes that are too big or too complex for a single individual. A business organisation comprises people who wish to attain certain personal and organisational goals. Business organisations may also, therefore, form a subject of study for sciences such as sociology, psychology and medicine. However, the way in which business management views an organisation is indicated by the purpose of the study. This is to examine those things that may guide businesses as effectively as possible towards their objective, which is primarily to make a profit. This essential characteristic also allows business management to qualify as a science because, unlike other sciences, it is concerned mainly with ways of maximising the profitability of a business. A third characteristic of a science is that it is a uniform, systematised body of knowledge of facts and scientific laws, and that its laws and principles are constantly tested in practice.22 In this regard, business management encompasses a great deal of systematised knowledge found worldwide in the comprehensive literature on the subject. It also contains numerous rules and principles that may successfully be applied in practice, even though they are not as exact as those in the natural sciences. This leads to the view that management is a normative science, which means that it constantly endeavours to establish norms or guidelines for management with a view to maximising profits. It is also said that the final purpose of a science should be to produce a generally accepted theory. In this regard, business management does not yet satisfy the requirements of an independent science. Because of the rapidly changing environment in which business organisations exist, it is doubtful whether this stage will ever be reached. It should also be borne in mind that the involvement of people in the management process and the influence of uncontrollable variables make it difficult, if not impossible, to explain management problems with any single uniform theory. While it is still debatable whether business management can be regarded as an independent science, this examination at least provides an insight into its nature. To summarise, business management is a young applied science that sets out to study the ways in which a business can achieve its prime objective, which is to make a profit. However, this does not mean that the application of management principles and approaches should always be done in a scientific way, nor does it require that the intuition and experience of managers be summarily dismissed. Successful management is often regarded as an art as well as a science. 1.6.4The interfaces between business management and other sciences Throughout the discussion of the scientific status of business management, it was held that the business organisation, as the subject of study, is the most important entity. However, one should bear in mind that businesses are also studied by other disciplines for other reasons. Business management, in its task of studying and examining those things that help a business to attain its goals as efficiently as possible, constitutes a young, developing science that frequently makes use of the knowledge gathered by other disciplines on the functioning of the business organisation, even though these disciplines may not be interested in the profitability of organisations. In short, business science takes from other disciplines what it can use to help businesses to accomplish their goals. Many current management concepts originated in other sciences and now form an integral part of the body of knowledge of business management. For example, the concept of strategy was borrowed from military principles; sociological knowledge and principles help explain the behaviour of an organisation; engineering principles are applied to improve productivity in the manufacture of products and mathematical models and computer science are used to help management make decisions. Furthermore, advertising frequently uses psychology, the arts and communication principles and techniques – all, of course, from the viewpoint of profitability. Table 1.3 provides a self-explanatory exposition of the multidisciplinary nature of business management. In view of the constantly changing environment in which contemporary businesses operate, business mana

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