Lesson 1 - The Business World and Business Management PDF

LESSON 1: THE BUSINESS WORLD AND BUSINESS MANAGEMENT This lesson will require approximately SIX notional hours. Figure 1.1 represents an overview of lesson 1. 1.1 Introduction 1.2 The role of business in society...

LESSON 1: THE BUSINESS WORLD AND BUSINESS MANAGEMENT This lesson will require approximately SIX notional hours. Figure 1.1 represents an overview of lesson 1. 1.1 Introduction 1.2 The role of business in society 1.3 Needs and need satisfaction 1.4 The main economic system 1.5 The need-satisfying institutions of the market economy 1.6 The nature of business management 1.7 Summary Figure 1.1: Visual overview of the lesson 2 1.1 INTRODUCTION This lesson discusses the role of business in society and explains how a business organisation in a market economy employs the limited resources of a nation – including its natural resources, human resources, financial resources and entrepreneurship – to satisfy the need for products and services. The lesson gives an overview of the main prevailing economic systems in the world and explains how the business organisation functions in a market economy. Against this background, the purpose and nature of business management is examined. LEARNING OUTCOMES When you have worked through lesson 1, you should be able to do the following: Critically discuss the role of business in society. Explain the needs of society and how need satisfaction occurs. Discuss the three main economic systems in the world. Explain the differences between need-satisfying institutions and non-profit institutions. Explain the inherent nature of business management. KEY TERMS Maslow’s hierarchy needs entrepreneurship capital natural resources human resources market economy socialism command economy business organisations government non-profit organisations business management mixed economy Click on the Additional Resources tab for the comprehensive Multilingual glossary for MNB1501. 3 1.2 THE ROLE OF BUSINESS IN SOCIETY The business activity generally involves the transformation of resources into goods and services to meet society’s needs. Business, however, cannot operate without society at large. It is important to understand how closely any business organisation is linked to the society in which it operates. Some of the roles that businesses play in society are indicated in figure 1.2. Provide employment Supply products and services which satisfy consumer needs/wants Preserve natural resources Generate income Social responsibility Influence the country’s economy Provide taxes to the government Figure 1.2: The roles of businesses in society Businesses provide employment to the members of the society in which they operate. They employ people, providing them with incomes that they can spend, and in this way, they can boost the economy of the community. Businesses increase the level of taxation for a local community and ensure that the money remains in that society. Furthermore, businesses decrease poverty levels in a society; more and more people become entrepreneurs as others also get employed. Businesses contribute to a country’s economy by bringing growth and innovation to the society where the business is established. 4 A business also acts as a social platform by providing a place to meet or interact outside the family, thus providing a sense of community. The needs and values of a society have a strong influence on what a business does. For example, if the people in the society are very aware of the need for protecting the environment, they will soon bring pressure to bear (often through the news media) on any business that pollutes the environment with its waste materials. Businesses should not only be aware of their influence on the physical environment, but also of the effect their business activities have on consumers, the economy at large and their competitors. Through the spheres of social responsibility, consumerism (a social force that protects consumers against unsafe products and malpractices by exerting moral and economic pressure on businesses) and the prevention of environmental damage, for example, a society can persuade an organisation not to pollute or damage the environment or to fix prices. Just like a society can influence its business organisations, these organisations can have a significant influence on the society. By developing new products, businesses can influence the behaviour patterns of people in a particular society. Just think of the impact that the electronics industry (with its production of smart phones, e-cigarettes and e-printing, for example) has had on the social life of our society. The success of businesses also has a major impact on the prosperity of a society. In a town such as Secunda, for example, Sasol employs many of the inhabitants. If Sasol were to go bankrupt, thousands of people would be left jobless, and the entire town would be affected. Open the link below to watch the video about the role of business in society. Time: 3:11 minutes https://www.youtube.com/watch?v=UTNuSWqNVJE In the next section, you will learn about needs and need satisfaction. 5 1.3 NEEDS AND NEED SATISFACTION Human beings have various – and seemingly unlimited – needs. Society, however, has limited resources to satisfy those needs and so a choice has to be made on how best to utilise those resources. Most of us would like to live in a mansion, drive a luxury car, own a seaside cottage, go on an overseas trip every year, wear the latest fashion clothes and so on, but very few people have enough money to afford all these products and services. Most of us have limited resources (money), so we have to decide how to utilise the little we do have to obtain the greatest satisfaction possible. The decision to obtain the greatest possible benefit (or satisfaction) with the limited resources we have is known as the economic principle. 1.3.1 Maslow’s hierarchy of needs Since the business world is geared towards satisfying needs in the society, it is important for management to know what those needs are. According to Maslow, all people have the same basic needs, but not everybody strives to satisfy the same needs. In countries with severe famine, for example, people will direct a great deal of their energy towards the satisfaction of physiological needs such as hunger and thirst. However, according to Maslow, once these needs are satisfied, people will strive to satisfy the next level of needs (i.e. security needs) and so on. Figure 1.3 shows the need classification by Maslow (a famous psychologist). Human needs are classified in a hierarchy where the lowest, more basic needs must be satisfied before the higher needs can receive attention. For example, for a hungry man whose first basic need is to find food, all communication dealing with the satisfaction of his other needs will fall on deaf ears. The hierarchy starts with the basic needs at the bottom and the higher-level needs following the basic needs. The needs in Maslow’s hierarchy are explained below: Physiological needs: These are the basic survival needs such as the need for food, water clothing, shelter and sleep. Safety and security needs: These needs refer to our needs for protection from violence and theft, health security, and financial security. 6  Social needs: Such needs comprise our need for love, community and belonging, which in turn includes the need for friendship, family bonds and belonging to social groups, intimacy, and relationships. Esteem needs: These needs are all ego-driven needs and refer to the need for prestige, achievement, recognition and status. Self-actualisation or self-realisation needs: This need is at the top of the hierarchy and relates to becoming more than what we are. It refers to our desire to reach our full potential. According to Maslow, this need can only be met once all the other needs have been satisfied. 5. Self-actualisation needs 4. Esteem needs – prestige, status 3. Social needs – love, friendship, acceptance 2. Safety and security needs 1. Physiological needs – hunger, thirst, sex Figure 1.3: Maslow's hierarchy of needs (Maslow, 1954) After reading the discussion above, complete the activity that follows. Activity 1.1 This activity will take approximately 15 minutes to complete. As the consumer, you are confronted with the situations below. Use Maslow’s hierarchy of needs to classify each of the situations. Not having eaten lunch, you are quite hungry and thirsty. You are scared to sleep at night after a neighbour was murdered. 7  You are worried about your continuing relationship with your partner, as he/she wants to move out of the flat that you share. Your boss has screamed at you at work in the presence of fellow workers. You want to enrol for further studies in the field of management in order to further yourself in life. Feedback: Using Maslow’s hierarchy of needs, we can classify the above as follows: Being hungry is classified as a physiological need, which is the most basic need. Being too scared to sleep at night reflects a need for security, a right that is guaranteed by the Constitution of the Republic of South Africa. Having problems with your partner reflects a social need for love and affection, which seems to be negatively affected. Having had your boss shout at you in front of your fellow workers affects your self- esteem negatively. Self-esteem is a very important part of the hierarchy of needs and may adversely affect your productivity at work. Finally, having aspirations to further yourself in life through education is classified as a self-actualisation need, which is the pinnacle of the hierarchy of needs. 1.3.2 Society’s scarce resources We live in a world of scarcity because the amount of goods and services that people would like to consume will always exceed the amount that can be produced. Scarcity applies to everyone and every society in the world. Since scarcity is a relative concept, there will always be wants which are not fully satisfied – even among the most affluent societies of the world. This is because people’s wants are continually expanding and changing. Once their basic human needs (e.g. food, water, clothing and shelter) have been satisfied, there will be a growing desire for more luxurious articles like cars, fridges, stoves and many of the goods regarded as essential in highly developed countries. One must carefully distinguish between wants and needs. Wants are human desires for goods 8 and services which are unlimited. Needs are necessities which are essential for survival, like food, water, shelter, and so forth. Even if people are given limitless spending power, scarcity will still exist because time is limited. Not even the wealthiest person in the world is free of the problem of scarcity because no one has the time to enjoy all the travelling, holidaying, and art that he/she would like to have. Time is a prime example of a limited resource. In the business world, there are four types of resources available to manufacture goods or provide services. These resources are known as production factors and refer to all the resources used for producing goods or services. Whether a certain item is a production factor or an end product will depend on its use. For a truck manufacturing company, a truck is not a production factor – it is the end product. However, for a transport company, a truck is a production factor – without it, the company would not be able to provide the basic service of transporting goods. Figure 1.4 below depicts the four production factors. Figure 1.4: The production factors The four production factors are discussed below: Human resources or labour refer to all intellectual, physical or other human productive efforts. Labour therefore comprises not only manual labour, but includes the services of those who follow a profession (e.g. doctor, lawyer, teacher, etc.). 9 Capital refers to the machinery, tools and buildings which humans use to produce goods and services. This could include the entire range of durable equipment – from hammers, saws and other simple tools, to machines and computers. Capital differs according to the worker and the type of work being done. If we refer to capital, we mean real capital (equipment) and not money. Money is not a resource that can be used in production. Natural resources or land refer to the gifts of nature and include factors such as climate, mineral resources, soil, metals, forests, water, and so forth, and all other resources from nature that are at the disposal of humankind. Natural resources are the raw materials in the production process. The entrepreneur (from the French word entreprendre which means to undertake) combines natural resources, labour and capital in the production process in order to make a profit. Without the vision of the entrepreneur, labour and other resources would remain largely unrealised potential. The entrepreneur is also the innovator who comes to the fore with new goods or new production techniques. That is why the entrepreneur is at the same time the bearer of risk – the entrepreneur’s time, effort, reputation and own funds (and those of others) are at stake should the innovation or business venture fail. The entrepreneur is also responsible for taking non-routine decisions in the management of the enterprise. Such a person normally pursues profit in starting and running a business, and in the process also accepts risk. An entrepreneur also makes the most of opportunities in the environment; in fact, one of the traits of entrepreneurs is that they can foresee opportunities in a dynamic business environment much quicker than other people. Lastly, entrepreneurs also combine expertise and resources to provide products and services. Open the following link to watch the video about the production factors. 10  Time: 6:10 minutes https://www.youtube.com/watch?v=RSyvcANRaOE Activity 1.2 This activity will take approximately 10 minutes to complete. Identify the factors of production from the following list: Coal Forklift Factory Oil Patrice Motsepe Feedback: We can classify the above as follows: Coal forms part of land or natural resources. A forklift is part of the capital which humans use to produce products and services. A factory is also part of the capital used to produce the products and services. Oil is part of land or natural resources. Patrice Motsepe is an entrepreneur. As mentioned above, the resources of any community are scarce and can easily be exceeded by its needs. Society is confronted with the fundamental economic problem of how to ensure the highest possible satisfaction of needs with the limited, scarce resources available. This is known as the economic principle. See figure 1.5, which illustrates the limited resources and unlimited needs. 11  Maslow’s unlimited needs Limited needs Physiological Natural resources needs Human resources Safety needs Capital Social needs Entrepreneurship Esteem needs Self-actualization needs Satisfaction of society’s needs Figure 1.5: The needs and resources of a society (Source: Author’s design) From the preceding section it is evident that people have unlimited wants which they strive to fulfil. The individual is continually confronted with choices – unlimited wants have to be satisfied with limited means. At any time an individual must decide which wants must be satisfied immediately and which can be postponed or cannot be satisfied at all. One will have to be satisfied to have less of one thing if one wants more of another. If, for example, one decides to buy a car, one’s holiday (or something else), falls victim to this decision. If a ticket to a rugby/soccer game costs the equivalent of ten loaves of bread, then the cost of attending the game is equivalent to the ten loaves of bread that have to be sacrificed. It is not only the individual who is forced to make choices due to scarcity – every business/organisation has to decide between various alternatives. They have to decide how many labourers or other inputs have to be employed in order to produce goods and services (i.e. the output of the business/organisation). 12 The government of a country has to decide how to spend money – on, say reconstruction and development projects. It strives to provide houses, electricity, running water, free health services and jobs to all needy citizens. But, because resources are limited, it will have to decide what must be done first and what will have to be postponed until later. Factors of production are scarce and when they are used for the production of a certain good, it means that these factors cannot be used for the production of another good or goods. A decision to produce more of one good also means that less of another good can be produced. Within a society, needs satisfaction occurs within a cycle, as can be seen in figure 1.6. Study this cycle – it is very important. One of the elements within this cycle is the economic system determined by the community. We will have a look at the main economic systems in the next section. If society is not satisfied with its need satisfying- system, another system will be chosen Society Economic system Entrepreneurs and their businesses Must decide on their need satisfying Must achieve best need satisfaction which are the need-satisfying system (economic system). with limited reources. Is subject to institutions in a market economy. the economic principle. Economic motive Market economy Driving source is profit Maslow's unlimited needs Socialism Society's needs are satisfied or Limited resouces Command economy not satisfied (Communism) Figure 1.6: The need-satisfaction cycle (Source: Author’s design) 1.4 THE MAIN ECONOMIC SYSTEMS The world is divided into three basic economic systems: the free-market economy, socialism and the command economy. Socialism is in the middle, between the two extremes. Figure1.7 puts this position into perspective: 13  Free-market economy Socialism Command economy Figure 1.7: The three economic systems (Source: Author’s design) At the one end of the spectrum, we have the free-market economy, also referred to as capitalism. This economic system is based on the principle that each individual in society is free to choose his or her own economic activity. Private individuals mostly own the society’s resources and they are free to utilise those resources in whatever way they wish. Everyone is free to work where they prefer, providing whatever service they like or manufacturing whatever they want to, and so on. There is freedom of association and the right to strike. The profit motive is recognised and there is free competition. At the other end of the spectrum, we have the command economy, also known as communism. This system is based on the principle that the state (the government) owns almost all of the country’s resources and that the state (in the form of government officials) decides what products and services should be manufactured/provided, who should be employed where, what each person should earn, and so on. Countries that have a command economy are North Korea and Cuba. In between these two systems is the system known as socialism. According to this system, individuals may certainly own private property and choose their own form of economic activity. The state, however, also owns many of the country’s resources and plays a far greater economic role than in a free-market system. In South Africa, the state- owned enterprises (SOE) such as SAA and Eskom are examples of the socialist economic system that exists. 14 Table 1.2: Economic systems Source: Kenro’s Blog (2022) Table 1.2 above provides a useful summary of the most important differences between the three economic systems. It is important to note that no country in the world has an economy that is a pure capitalist economy, or a communist economy, or a socialist economy. The economic system of a country may range along a scale from pure communism to pure capitalism, or vice versa. Some countries therefore have a mixed economy. There are no clear boundaries in many countries regarding the economic system that exists. In the United States of America (USA), which is regarded as the purest example of a capitalist economic system, there are also traces of socialism, while in Cuba, where communism exists, there are also traces of capitalism. When an economy is a combination of private enterprise, government ownership of resources and government planning of the economy, this is 15 called a mixed economy. In such economies, government sets minimum wage laws, subsidies are given to businesses and expropriation of private property is allowed. After reading this section, complete the activity that follows. Activity 1.3 This activity will take approximately 15 minutes to complete. Read the following scenario: When a giant private organisation such as Masterbond or Saambou in South Africa or Enron in the USA goes bankrupt, critics of capitalism have a handy stick to beat this economic system. In South Africa we often hear that the solution to the country’s problems lies in socialism, that is, an economic system where the rich are heavily taxed and where government intervention, ownership and control are at the order of the day. What is important to remember, however, is that the downfall of organisations such as Saambou and Enron actually shows that capitalism is functioning very well. If an organisation is inefficient, it will go bankrupt. However, if government intervenes to keep such organisations afloat, it will keep inefficient companies going on for a longer period of time. On the other hand, state organisations cannot fail, even if they perform badly, because they are supported by taxpayers’ money! How would you classify the South African economic system? Discuss. Would socialism be the answer to South Africa’s economic problems? Critically discuss. Feedback: Even though South Africa is often classified as a socialistic economic system together with other developing nations such as Brazil and developed nations such as France and the United Kingdom, very rarely do any of the three economic systems in use occur in a pure form. Keeping this in mind, the most appropriate description of the prevailing economic system in South Africa is a mixture between the free-market system and the socialist system. In other words, it is moving 16  towards a market-orientated economy, yet it has a high degree of government participation and control within the economy. Some members of the government alliance consider socialism to be the best alternative economic system. They state that only in a socialist South Africa will problems of unemployment, lack of housing and other needs of society be solved. The opinion is that without the planned, rational, equitable and sustainable use of South Africa's resources the survival of all the people of South Africa is at risk. In this section we looked at the three main economic systems, which include the free- market economy, the command economy and socialism. In the next section we will look at the need-satisfying institutions of the free market economy. 1.5 THE NEED-SATISFYING INSTITUTIONS OF THE MARKET ECONOMY The functioning of the South African economy is affected by need-satisfying institutions such as business organisations, government institutions and non-profit-seeking institutions. Business organisations are also referred to as profit-seeking businesses since their aim is to conduct their business in such a way that it will lead to a profit for the owners. These organisations can be sole proprietorships, partnerships, closed corporations or companies. Most of these business organisations are privately owned – but remember that the state also owns business organisations. These are called public corporations (e.g. Transnet) and they function just like any other kind of business organisation. There are also government organisations or state-owned enterprises (SOEs) that do not operate on a profit-seeking basis. They are usually referred to as government departments. The Department of Public Works and the South African Police Service are examples of government departments that do not operate on a profit-seeking basis. They provide a service to society and they obtain their funds from Treasury. In other words, the people in the society pay for these services by means of taxes. 17 Not all non-profit-seeking organisations are state owned. There are also privately owned organisations that do not strive to make a profit. Most of them seek to obtain just sufficient income to cover their costs. Sports clubs, welfare organisations and religious organisations usually fall into this category. After reading the discussion above, complete the activity that follows. Activity 1.4 This activity will take approximately 10 minutes to complete. How would you classify the following organisations in the South African economy? Telkom The Treatment Action Campaign organisation (TAC) Pirates soccer club Feedback: The telecommunications organisation, Telkom, was owned by the state. Then Telkom was privatised and its shares are now traded on the Johannesburg Stock Exchange. However, the South African government still holds shares in the organisation. The Treatment Action Campaign (TAC) is a non-profit private organisation that campaigns for the rights of South Africans suffering from HIV/AIDS. It is described as a non-governmental organisation (NGO). Pirates is a private profit-seeking organisation owned by private businesspeople. 1.6 THE NATURE OF BUSINESS MANAGEMENT In the study of business management, it must first be stressed that there is a difference between economics and business economics or, as it is called nowadays, business management. The main difference between Economics as a subject and Business 18 Management as a subject is that the former studies the “management of the national economy” and the latter studies the “management of a need-satisfying institution”. Economics is a study of the broader area of economic problems in the community, whereas Business Management focuses on the problems of individual organisations in the same community. Business Management as a subject entails the study of how to manage a business as productively as possible. This ties in with the economic principle, which states that the business must strive to attain the highest income with the lowest cost, with the difference between the income and cost being the profit. Note that the economic principle applies as much to non-profit-seeking businesses as it does to profit- seeking businesses. The difference is that any form of profit is ploughed back into the community for which the non-profit- seeking organisation is working. The business organisation performs a number of activities, such as researching markets to find out whether there is a need for the product of the business; acquiring and processing raw materials in the manufacturing process; and appointing people to operate the machinery in the manufacturing process. Capital must be obtained and the income generated must be managed, while creditors must be paid and workers remunerated. These are just a few of the activities being performed in a business organisation. Furthermore, these activities must be coordinated and managed. This is the reason why activities are grouped into functional areas to ensure proper coordination and management. The functional areas are described in table 1.3. Table 1.3: Functional areas and their descriptions Functional area Description Human resources Manages all the staffing requirements and is responsible for management organising the management structures. Marketing management Responsible for establishing the need-satisfying products and services and making them available to customers. Purchasing and supply Responsible for all the purchasing and distribution logistics management required by the organisation. Operations Responsible for transforming the organisation’s resources 19  management into the final goods and services that are sold to customers Financial management Focuses on the monetary requirements for running the organisation. Information Responsible for maintaining, implementing and controlling management technology in the organisation. General management is at the centre of the organisation and deals with the planning, implementation and control of activities (management functions) that are needed to run the business. These management functions will be dealt with in considerably greater detail in the rest of this study guide. Activity 1.5 This activity will take approximately 15 minutes to complete. The following information was provided by the Governor of the South African Reserve Bank: The unemployment rate in South Africa is too high. Consumers are warned to use credit with caution, because there is a strong case for increasing the interest rate by 2%. The labour laws of the country are very restrictive and are hampering economic growth. 1. Which of these statements have to do with the broad South African economy and society in general? 2. What are the implications of these statements for South African businesses? Feedback: All of these statements have implications for the broad South African economy and society in general. However, there are also implications for business organisations, in that businesses such as retailers must be careful about 20  granting credit to consumers because an increase of 2% in the interest rate will have a negative impact on the disposable income of consumers. This could therefore adversely affect the turnover of these organisations. As such, this statement must be carefully considered by the financial function of the business, which deals with the granting of credit. The reference to the labour laws is also important for each and every business in South Africa that is currently very hesitant about employing more workers because of labour laws that are perceived to be restrictive. 1.7 SUMMARY You now have basic insight into the business world, economic systems, institutions of the free market and the nature of business management. In the next lesson you will study entrepreneurship in business. SELF-ASSESSMENT QUESTIONS This activity will take approximately 15 minutes to complete. QUESTION 1 Which one of the following statements is correct about Maslow’s hierarchy of needs? 1 Maslow’s needs hierarchy starts with the higher-level needs at the bottom. 2 Social needs refer to our need for financial security. 3 Esteem needs refer to our desire to reach our full potential. 4 Self-actualisation needs are at the top of the hierarchy. QUESTION 2 Society is confronted with the fundamental economic problem of how to ensure the highest possible satisfaction of needs with the limited, scarce resources available. This is known as … 1 the entrepreneurship principle. 2 the economic principle. 21 3 the marketing principle. 4 the production principle. QUESTION 3 Which of the following statements are correct? An entrepreneur is someone who …. a. pursues profit. b. accepts risk. c. makes the most of opportunities in the environment. d. combines expertise and resources to produce products and services. 1 ab 2 cd 3 bcd 4 abcd QUESTION 4 Which of the following attributes are characteristics of a free-market economy as an economic system? a. private ownership of production factors b. free competition c. profit motive recognised d. limited right to strike in state enterprises 1 ab 2 ac 3 abc 4 abcd QUESTION 5 Which one of the following statements is incorrect? 1 All non-profit seeking organisations are state owned. 2 Welfare organisations are non-profit-seeking organisations. 22 3 Society pays for the services of the South African Police Services by means of taxes. 4 A closed corporation is a type of business organisation. THE ANSWERS TO THE SELF-ASSESSMENT QUESTIONS Question 1 Option 4 is correct. Self-actualisation needs are at the top of Maslow’s hierarchy of needs. Maslow’s needs hierarchy starts with the lower-level needs at the bottom and ends with the higher-order need of self-actualisation. See section 1.3.1. Question 2 Option 2 is the correct answer. The economic principle refers to how to ensure the highest possible satisfaction of needs with limited, scarce resources available. See section 1.3.2. Question 3 All four of the statements are correct regarding the characteristics of an entrepreneur. Such a person normally pursues profit in starting and running a business, and in the process also accepts risk. An entrepreneur also makes the most of opportunities in the environment; in fact, one of the traits of entrepreneurs is that they can foresee opportunities in a dynamic business environment much quicker than other people. Lastly, entrepreneurs also combine expertise and resources to provide products and services. The correct answer is therefore option 4 (a b c d). See section 1.3.2. Question 4 In a free-market economy the economy is characterised by private ownership and free competition, and the profit motive is recognised. There is also freedom of association and the right to strike. So, statements a, b and c are correct, and d is incorrect. The right answer is therefore option 3 (a b c). See section 1.4. 23 Question 5 The only incorrect answer is option 1. Not all non-profit seeking organisations are state owned. All the other statements are correct. See section 1.5. Make sure you have mastered the key concepts that were listed at the start of the lesson by making brief notes so that the meaning of each term is clear. Before proceeding to the next lesson, take some time to reflect on what you have learned in lesson 1. Make sure you have achieved all the outcomes listed at the start of this lesson. 1.8 REFERENCES Kenro’s Blog. 2022. Economic systems: A comparison. Available from: [Accessed 6 March 2023]. Maslow, A. 1954. Motivation and personality. Manhattan, NY: Harper & Row. 24  Contents 2.1 INTRODUCTION..................................................................................................... 26 2.2 DEFINITION OF AN ENTREPRENEUR.................................................................. 27 2.3 THE ENTREPRENEURIAL PROCESS................................................................... 31 2.4 ENTREPRENEURIAL SKILLS AND RESOURCES................................................. 33 2.5 OWNING A BUSINESS........................................................................................... 35 2.5.1 Starting a new business.......................................................................................... 35 2.5.2 Buying an existing business.................................................................................... 37 2.6 FRANCHISING AS A BUSINESS OPPORTUNITY................................................. 39 2.6.1 Advantages of a franchise....................................................................................... 40 2.6.2 Challenges of a franchise........................................................................................ 41 2.7 ENTREPRENEURSHIP AND THE FOURTH INDUSTRIAL REVOLUTION (4IR).... 45 2.8 SUMMARY.............................................................................................................. 47 2.9 REFERENCES........................................................................................................ 50 2.10 FURTHER READING: OPEN EDUCATIONAL RESOURCES (OERs).................... 51 25 LESSON 2: ENTREPRENEURSHIP This lesson will require approximately TEN notional hours. Figure 2.1 represents an overview of lesson 2. 2.1 Introduction 2.2. Definition of an entrepreneur 2.3 The entrepreneurial process 2.4 Entrepreneurial skills and resources 2.5 Starting a business 2.6 Franchising as a business opportunity 2.7 Entrepreneurship and the Fourth Industrial Revolution 2.8 Summary 2.9 References 2.10 Open Educational Resources (OERs) Figure 2.1: Visual overview of lesson 2 (Source: Author's design) 2.1 INTRODUCTION Entrepreneurship has been a term batted around in business and media environments alike. In this lesson, we will have a closer look and discuss entrepreneurship as the fourth factor of production. We will also discuss the role of entrepreneurs and small businesses in society and the entrepreneurial process. 26 LEARNING OUTCOMES When you have worked through this lesson, you should be able to do the following: Define the terms “entrepreneur” and “entrepreneurship”. Discuss the entrepreneurial process. Explain the skills and resources required to become an entrepreneur. Distinguish the diverse ways in which an entrepreneur may start a business. Discuss the advantages and disadvantages of owning a business. Discuss the implications of choosing a franchise as a business opportunity. Understand the impact of the Fourth Industrial Revolution on entrepreneurship. KEY TERMS Entrepreneur Entrepreneurship Starting a business Entrepreneurial process Franchise Existing business Entrepreneurship skills and Fourth Industrial Revolution resources Click on the Additional Resources tab for the comprehensive Multilingual glossary for MNB1501. 2.2 DEFINITION OF AN ENTREPRENEUR Different writers in the field of management and entrepreneurship differ in their definition of an entrepreneur, as various aspects need to be considered (Erasmus, Rudansky-Kloppers & Strydom, 2019). Taking into account diverse elements of definitions, we define an entrepreneur as a person who takes up a new venture and who is willing to accept full responsibility for the outcome. Entrepreneurs take the initiative and financial risk by harnessing the factors of production to generate products and services, with the reward of earning a profit. However, they can also incur losses due to unforeseen circumstances or making the wrong decisions. 27 Entrepreneurship is described as the process undertaken by an entrepreneur – identifying, creating, or sensing an investment or business opportunity where others do not see it. It is also a process of finding and combining resources (often owned by someone else) to pursue the opportunity until it becomes a successful, established business, creating employment and contributing to the economy. Entrepreneurship is a scarce human trait since not everyone in a country has the skills or is prepared to take risks associated with generating products and services in an uncertain economic environment. We will briefly examine four successful African entrepreneurs. These entrepreneurs were innovative throughout the entrepreneurial journey and have grown and sustained their businesses through innovation. Aliko Dangote is the founder and president/chief executive of the Dangote Group, the largest conglomerate in West Africa. The Group currently has a presence in 17 African countries and is a market leader in cement on the African continent. One of the Group's subsidiaries, Dangote Cement Plc, is the largest listed company in West Africa and was the first Nigerian company to join the Forbes Global 2000 Companies list. Dangote was a graduate of Al-Azhar University in Cairo, Egypt, and began his business career in 1978, trading in rice, sugar, and cement before venturing into full-scale manufacturing. In 2013, Forbes referred to him as the “Most Powerful Man in Africa”. In April 2014, TIME Magazine listed him among its 100 “Most Influential People in the World”. He is also one of CNBC's “Top 25 Businessmen in the World” who changed and shaped the century. Internationally, Dangote sits on the Corporate Council on Africa board and is a member of the Steering Committee of the United Nations Secretary-General's Global Education First Initiative, the Clinton Global Initiative, and the International Business Council of the World Economic Forum. The US Chamber of Commerce appointed him as Co-chair of the US-Africa Business Center in September 2016. In April 2017, Dangote joined the Board of Directors of the Clinton Health Access Initiative, helping countries build the necessary systems to provide health services to their people. Source: https://www.dangote.com/about-us/aliko-dangote/ Richard Maponya was an entrepreneur who began his business by reselling soiled clothing offcuts sold to him by the manager of the clothing factory he worked for, in Soweto. In the early 1950s, Richard and his wife Marina established the Dube 28 Hygienic Dairy, which employed a fleet of boys on bicycles to deliver milk to customers in Soweto who had no access to electricity or refrigeration. By the 1970s, the retail empire had grown to include several general stores, car dealerships, and filling stations. In 2007, Richard Maponya launched the Maponya Mall in Soweto. It holds more than 200 stores and a cinema complex. Clearly, Maponya had an entrepreneurial spirit and spotted opportunities that others did not see. Source:https://www.thepresidency.gov.za/national-orders/recipient/richard-john- pelwana-maponya-1926 Dr Patrice Motsepe, an attorney, is a South African entrepreneur and the country’s first black billionaire. Motsepe made his fortune through mining interests. During his youth, he worked at his father’s store, a job that taught him essential business management lessons. In 1994, Patrice founded a mine services company, Future Mining, and applied all his life experience, his understanding of political and legal structures, and his insightful spirit of entrepreneurship to his work. In 1997, he launched African Rainbow Minerals gold (ARM gold) which in 2003 merged with Harmony, and acquired Anglovaal Mining (Avmin). Motsepe was appointed the Chairman of the newly reorganised ARM in 2004. By 2006, the company had expanded beyond gold and other metals into coal mining. Motsepe is the Executive Chair of African Rainbow Minerals (ARM) and the founder and Chair of Ubuntu-Botho Investments, African Rainbow Capital, African Rainbow Energy and Power and UBI General Partner (Pty) Ltd. He bought 51 per cent interest in the Mamelodi Sundowns Football Club in 2003. In 2004, he gained complete control of the Club and he was the President of the Club between 2004 and 2021. In March 2021, he was elected president of the Confederation of African Football Association (CAF). He is also a non- executive director at Sanlam. Source: https://www.sanlam.com/cv2.php Source: https://www.britannica.com/biography/Patrice-Tlhopane-Motsepe Magda Wierzycka was born in Poland in 1969. In 1981, her family defected to Austria, where she lived in a refugee camp, escaping communist Poland for eight months. The family relocated to South Africa in 1982. Before moving to Cape Town, she attended Pretoria High School for Girls, winning a bursary to study actuarial science at UCT. 29 After working for several financial services companies, she became CEO of the African Harvest Group before founding her multibillion-rand empire in the male-dominated financial services industry, Sygnia Limited. She also co-founded a UK-based venture capital firm, Braavos Investment Advisers. With a business model built on transparency and low fees, it was natural for Magda to become an outspoken critic of corporate and government corruption, exposing wrongdoing and making many powerful enemies. Magda Wierzycka is South Africa’s most successful businesswoman and in 2020, Forbes magazine listed her among “Africa’s 50 Most Powerful Women”. Source: https://www.penguinrandomhouse.co.za/book/magda/9781776096671 Activity 2.1 This activity will take approximately 5 minutes to complete. Define an entrepreneur in your own words. Feedback An entrepreneur can be described as someone who takes initiative and financial risk by harnessing the factors of production to generate products and services to earn a profit. Entrepreneurs have the desire to succeed; they identify or create opportunities. They have control over their actions and they are prepared to take risks. Aspiring entrepreneurs are creative, innovative, and motivated to work hard to succeed. We encourage you to watch the YouTube videos of different aspiring entrepreneurs by opening the following links for examples. VIDEO 1 Time: 6.59 minutes https://youtu.be/7O6Ubos4eyk?t=3 30  VIDEO 2 Time: 2.39 minutes https://youtu.be/vFveRj59GYg VIDEO 3 Time: 4.15 minutes https://www.youtube.com/watch?v=o0etimvtD74 Having watched the videos above, do you think the people in the videos are entrepreneurs? You may discuss your views with your fellow students on myUnisa. 2.3 THE ENTREPRENEURIAL PROCESS Entrepreneurship is the process of recognising, making or detecting an opportunity where others do not notice it, and uniting resources to chase the opportunity to establish a thriving business. According to Erasmus et al (2019), the entrepreneurial process involves the following steps: Step 1: Aptitudes, personality and skills: Does the potential entrepreneur have the background, the necessary knowledge and persona to succeed in the business? The entrepreneur must understand his/her strengths and weaknesses in pursuing the business. Step 2: Access to resources: Access to resources is critical in creating a new business initiative. Does the potential entrepreneur have access to resources or does the entrepreneur have the financial capacity and human resources to start the business? The entrepreneur will not be able to start the business without resources. Step 3: Opportunities and ideas: What are the chances that the entrepreneur’s business idea will be successful? Is there a possibility that the business initiative will work? Opportunities and business ideas remain as such until they are realised by converting them into viable products, services, or processes. Step 4: Feasibility study: The feasibility study entails gathering information to determine whether the business idea will survive. It evaluates whether the business idea or opportunity is realistic. What are the probabilities that the 31  business idea or initiative will succeed? The objective and practical evaluation of the concept are essential to avoid failure, which can be costly for the aspiring entrepreneur. He/she may find that competitors have developed the idea and that pursuing it may not be viable. Step 5: Business plan: Once the feasibility study has been conducted and there is a probability that the idea appears feasible, the entrepreneur can ask the following questions. Has the entrepreneur compiled a business plan to obtain the necessary funding for the new business initiative? Does the business plan give the potential investors and suppliers comfort regarding the probability of success? The business plan should reassure potential investors about the likelihood of business success. More details of the business plan are covered in the following chapter. Step 6: Managing the business: Can the entrepreneur launch or start the company, or does the entrepreneur have contingency plans in place if unexpected disruptions affect the business’s launch? The entrepreneur must be prepared to manage his/her business. Various functions may need to be performed by the entrepreneur in his/her company, for example, staff management, ensuring that equipment is in good condition, financial management, marketing and other tasks required to run the business. Now that you have learned about the critical steps of the entrepreneurial process, do the following activity. Activity 2.2 This activity will take approximately 10 minutes to complete. Let us assume that you have a business idea that you would like to pursue and make a successful business out of it. How would you go about the entrepreneurial process to achieve your dream? Feedback In answering the question for this activity, you needed to explain the steps of the entrepreneurial process and assess how you would perform in each step. The steps of the entrepreneurial process are as follows: 32  Aptitude, personality and skills: Being honest before starting a business is essential. Aspiring entrepreneurs must know their personality, strengths, weaknesses, and skills required to run a business. Access to resources: The business cannot be started without resources such as financial resources. Opportunities and ideas: Opportunities and business ideas remain as such until they are realised by converting them into viable products, services, or processes. Feasibility study: The entrepreneur should ensure that the business idea is realistic to start a business. Business plan: A business plan must be viable and comfort potential investors who are willing to invest in the business. Managing the business: Managing a business requires commitment and time. Entrepreneurs need to manage their business for it to be successful. In the next section, you will learn about the skills and resources that entrepreneurs should have in order to operate a business. 2.4 ENTREPRENEURIAL SKILLS AND RESOURCES A skill is an ability to execute an action competently with determined results. It can be acquired through knowledge, aptitude and attitude – developed through life experiences or observation in performing a task. Entrepreneurs require certain skills that are critical to running a business, as discussed below. Strategic thinking skills: Strategic thinking skills are essential in positioning the business in a competitive environment. It is the ability to view the company holistically – how it fits in the marketplace – and deliver value efficiently and effectively to its customers, compared to competitors’ ability. Planning skills: Planning skills entail the ability to plan for the future of the business. Without planning skills, the entrepreneur will not be able to prepare for the future of the business. Planning will help the entrepreneur focus on the objective of the business and acquire appropriate resources for the success of the potential business. 33  Marketing skills: It involves the ability to evaluate the relevance of the products or services in the target market. The entrepreneur should have an idea of who to sell the products or services to and must be able to create and satisfy the needs and wants of the identified market. For the business to be sustainable, the entrepreneur should understand what attracts customers to the offering; he/she needs to understand the target market's changing needs and wants. The entrepreneur should also consider promoting his/her products or services, including distribution. Financial skills: It is the ability to manage the business’s finances. The entrepreneur must understand the management of business finances to track the business expenditure and cash flow. An entrepreneur should also be able to evaluate investments in the business, as well as the associated risk. Project management or organising skills: Organising various business activities, including managing business resources, is vital. Attention should be paid to reliability and consistent, timeous supply of products or services. Other important factors include ensuring sufficient stock to meet customer demands and making sure the quality of products or services provided to clients is acceptable. Human relations or interpersonal skills: These involve the ability to interact, communicate, lead, motivate and form relationships with employees. Human relations or interpersonal skills are also crucial in developing relationships with various external stakeholders such as customers, prospective customers, suppliers and distributors, for the sustainability and smooth running of the business. Resources are critical to the success of a business as entrepreneurs would be unable to operate a successful business without much-needed financial, human, and operating/physical resources. For example, in certain locations, a restaurant must have a kitchen (to prepare food), a dining area, and storage facilities to keep food fresh (physical resource). The place must be in a secure and safe location (security / human resources / CCTV) where patrons will feel safe and relaxed while dining. A generator in good working condition is important, as the restaurant must still be able to operate during loadshedding. An excellent chef is needed to prepare meals; waiters must be 34 appointed to serve meals; and cleaning staff should be provided (human resources). Financial assistance will be needed for all of the above. In the next section, you will discover what it takes to own a business. 2.5 OWNING A BUSINESS There are diverse options that entrepreneurs can use to implement their business ideas. They can create a new business, buy an existing business, or enter a franchise. 2.5.1 Starting a new business The advantages and disadvantages of buying an existing business compared to opening a new enterprise have been debated for quite some time. There are various dynamics to consider when establishing a new business, such as the type of business the entrepreneur wants to start, the location of the company, potential success of the business, as well as constant and adequate cash generation. While owning a business can be rewarding, it comes with challenges. Some individuals dare to take a risk and start a business. The business owners experience a sense of achievement and satisfaction if the company is successful. Table 2.1 highlights some advantages and disadvantages of business ownership. Table 2.1 Advantages and disadvantages of business ownership Advantages Disadvantages Autonomy: Time-consuming: Owning a business allows entrepreneurs Owning a business is time-consuming to make their own decisions. The and demands one’s attention. entrepreneur does not have to take Sometimes business owners do not get instructions from anyone. It provides time to take a break from their business creativity – without being told what to do. as they may miss an opportunity. They Aspiring entrepreneurs are at liberty to may struggle to divide time between decide how they want to grow their work and family/leisure (work-life business and they can be creative balance). without restrictions. 35 Flexibility: Demanding: Being a business owner allows one to be Being a business owner can be stressful. flexible. It also gives self-control. One It comes with many responsibilities such can decide how much time to put into the as paying employees, ensuring sufficient business; when to work or take time off. stock, fixing broken equipment, Business owners determine how much managing security, taking care of they want to grow their business and deliveries to clients, ensuring customer they can be innovative in growing their satisfaction, dealing with competitors, business. and attracting customers. Marketing the business can also be a source of stress for business owners. Profit: Financial risk: Owning a business can be financially Starting a business calls for financial rewarding. Business owners can decide resources. Business owners may use how much they want their business to their life savings to start a business grow to make more money. They can without any guarantee that the company devote more effort and hard work to will be successful – or they may have to make more profit, or reinvest in the take a loan to start a business; going into growth of their business. debt. There is also no guarantee for income when starting a business. Learning: Unpleasant tasks: Starting a business exposes the owners Owning a business comes with to a variety of tasks they may have to unpleasant tasks. There may be tasks learn as they run the business. When that one may not like. Starting a business managing a business, there are lessons may require an owner to take care of all to be learned through trial and error. It the business tasks, including the also requires one to understand all the functions they may not like, such as aspects of owning and operating a cleaning the business premises or business. making deliveries to customers. Fulfilment: It gives personal fulfilment or achievement as one sees the business grow and the ideas come to fruition, 36  turning into products or services. Business owners can also use their skills and knowledge in running their business. Source: Adapted from the University of Minnesota (2016) 2.5.2 Buying an existing business If entrepreneurs consider purchasing an existing business, they buy a going concern with its opportunities and problems they may not know. According to Section 197 of the Labour Relations Act, buying or selling a business as a going concern means that the current employment contracts are transferred under the same conditions to the new employer. Both parties, the seller and the buyer, should ensure that all matters regarding the conditions of employment are cleared before they sign the agreement. These could include employee benefits and remuneration of employees. Where both the seller and the buyer are value-added tax (VAT) vendors and have agreed on selling the business as a going concern, such a transaction will not be charged VAT. The South African Revenue Service defines VAT as an indirect tax on the economy's consumption of goods and services. All trades or businesses must register for VAT to collect revenue for the government. The following should be considered before buying an existing business: The financial status of the business Assessment of competitors The reason for the current owner to sell the business The physical status of the business Table 2.2 highlights the advantages and disadvantages of buying a business as a going concern. 37 Table 2.2: Advantages and disadvantages of buying an existing business Advantages Disadvantages Customers are familiar with the business The location may be undesirable or lose location. its value due to the developments in the surrounding areas. Continuation of current customers. The Changing the image of the business may entrepreneur may benefit from the be challenging. The new owner may existing/ established customer base. struggle to establish a new relationship with existing customers, which may cause him/her to lose current customers. Customers may also not like the new management and the changes made. The business will come with experienced Under Section 197 of the Labour employees and this will reduce training Relations Act, existing employment costs. contracts get transferred to the new employer under the same conditions. This means that the new owner inherits the employees who may not fit the growth strategy of the new employer. The new entrepreneur’s values may not align with the current culture of the existing business or may be unsuitable for the business. There may be more employees than required to operate the business, increasing the expenses and affecting the entrepreneur’s profit. Planning can be based on known It may be difficult to change how the historical data. business is run (the culture of the company), which may clash with the business plans of the new owner. Supplier relationships will already be in The new owner might inherit past place. liabilities. The entrepreneur will also 38  need to establish new supplier relationships, which might take longer. Inventory and equipment will be in place. The inventory in place may be outdated and need replacement by the new owner. Financing may be available from the Financing costs could drain cash flow owner. and threaten the survival of the business. Source: Adapted from Erasmus et al (2019) In the next section, you will learn about franchising as a business opportunity. 2.6 FRANCHISING AS A BUSINESS OPPORTUNITY A franchise provides the entrepreneur with an opportunity of owning a business. A franchisor grants the entrepreneur (the franchisee) a right or a licence to use the franchisor’s established business name, products or services, knowledge, trademarks or brand (a franchise). This allows the franchisee to own a business by selling products or services under the franchisor’s name, such as Steers. In return, the franchisee will pay the franchisor an initial fee and the use of licence fees or part of the profit for the franchise and services provided by the franchisor on an ongoing basis (Erasmus et al, 2019). The business idea of franchising lies between starting a new business from scratch and buying an existing one. For instance, if the aspiring entrepreneur is considering opening a quick-service restaurant, the entrepreneur could apply for a franchise licence from a franchisor such as Steers. Steers will then assign the business banker to assist with the finance application if the application is approved. Once approved, the entrepreneur (franchisee) can run a Steers restaurant as the business owner with certain advantages. For example, the franchisor supports the aspiring entrepreneur with the knowledge and training required to run a business, helps with selecting a suitable location and with administrative and operational support, marketing, manufacturing and distribution. Therefore, the entrepreneur will benefit from the above and the established brand. However, the entrepreneur would have to manage the restaurant the way Steers as the franchisor requires its restaurants to be operated. Steers will conduct site visits to ensure compliance with and adherence to the 39 franchise’s standards by the franchisee. The franchisee will also have to pay the franchisor a regular fee for the right to use its name and facilities. Resource: https://steers.co.za/get-in-touch?own-a-steers Activity 2.3 This activity will take approximately 10 minutes to complete. Access the links below to watch the two YouTube videos about franchising: Video 1 – Time: 2.41 minutes https://www.youtube.com/watch?v=Kp-0AhgBiDg Video 2 – Time: 2.34 minutes https://youtu.be/u0WsybJ3QUA After watching the two YouTube videos, write a summary of your understanding of a franchise and how it works. Feedback A franchise is an option that could assist an inspiring entrepreneur in starting a business, such as a quick restaurant like Steers. Watching the above videos will broaden your understanding of franchising. According to the International Franchise Association (2019), there are certain advantages and challenges associated with franchising. 2.6.1 Advantages of a franchise Advantages of starting a business through a franchise as a business opportunity (IFA, 2019): Experience: The aspiring entrepreneur can enter a franchise with no or little understanding/knowledge of the franchise business – and benefit from the experience, through guidance provided by the franchisor. In addition, the franchisee can learn the franchise’s operations from the franchisor, with minimum chances of failure. 40  Training: The franchisee can become acquainted with the franchise’s operations through hands-on training by the franchisor. This training will empower the franchisee to understand the business intricacies of the franchise. Franchisees can also learn management skills or attend training in business management through the franchisor. Brand and advertising: The franchisee will benefit from the franchise's known and established brand. The franchisor also helps the franchisee to promote the business through advertising. Purchasing power: The franchisor can buy inventory in bulk because of the purchasing power and can negotiate lower prices. The franchisee, in return, will benefit from the lower prices as most business start-ups cannot afford to purchase stock in bulk. Research and development: The franchisor invests in research and development to keep the franchise relevant in the market and to improve the products and services provided by the franchise. The franchisee benefits as the franchisor makes these new products and services available to the franchisee. Networking and collaboration: Through networking, the franchisee can learn and benefit from other franchisees by sharing ideas or seeking solutions. The franchisees collaborate as members of the franchise, imparting knowledge and advice. The franchise staff members will also assist the new franchisees with much-needed information and ongoing support. 2.6.2 Challenges of a franchise While there are benefits to operating a franchise, there are also challenges. Aspiring entrepreneurs who intend to enter a franchise should consider the challenges of running a franchise (IFA, 2019). Working within a franchise: Franchising can be rigid; some entrepreneurs may find it challenging to work within a franchise. Creative entrepreneurs who might want to change some operations will find franchising frustrating. While the franchisee may find some flexibility in areas such as marketing, maintaining consistency in the franchise process is critical for the franchisor. Risk: Like starting any other business, there is a risk of failure in starting a franchise. The responsibility and the success of the franchise business rest with 41  the franchisee. Therefore, the franchisee must devote time and effort to the business to succeed. The great product and the brand will not make the franchise a success; the commitment and hard work of the franchisee will determine the franchise’s success. Relationship: The relationship between the franchisee and the franchisor contributes to the franchisee’s success. They both have a legally binding relationship that goes over a lengthy period. Therefore, the franchisor and the franchisee must have a healthy relationship for the franchise's success. False expectations: Success does not come easy; sometimes, aspiring entrepreneurs enter a franchise expecting quick results. The franchisee may ultimately run a successful business. However, like any other business, franchising requires tremendous time to learn the trade, commitment and understanding of the franchise environment within which they operate. Managing the business: Not all aspiring entrepreneurs like to manage; they might find it burdensome. Aspiring franchisees should be realistic about whether they can run the business and they must have interpersonal skills to develop relationships with their employees. Otherwise, they should attend a training course such as business management to develop their skills. Activity 2.4 This activity will take approximately 15 minutes to complete. Read the following success story of an entrepreneur from a humble background who knew what he wanted and who was prepared to take a risk. Then answer the questions that follow. FROM RAGS TO RICHES As an individual who prides himself on building a reputation from the bottom up, Luvuyo Rani's journey is a classic rags-to-riches story. Luvuyo was born and raised in the Eastern Cape. His entrepreneurial personality was always there as his mother was self-employed. In 1996, he went to Cape Town to attain a tertiary education and pursue a career in teaching. He graduated from Cape Technikon with a National Diploma in Commercial Education and a BTech in Communicative Technology, and 42 later completed his BTech in Business Management while working as a teacher at Khayelitsha High School in Cape Town. After three years, Luvuyo resigned and, with his brother Lonwabo, took a risk to start his business and fulfil his dream of owning a business. Beginning as a schoolteacher, Luvuyo knew that his destiny was to be found elsewhere and took the plunge in the form of a R10,000 loan to start his business. He founded his award-winning IT services company, Silulo Ulutho Technologies, in 2004 to provide internet and computer access to a lower-income target market. Luvuyo knew there was a demand for technology in the township and rural areas and saw an opportunity to start his business. Luvuyo started his business by selling refurbished computers and he soon expanded to basic IT training and writing business profiles and plans for local companies. He opened the first internet café in Khayelitsha township, providing much-needed digital resources to the community. The company has over 46 stores in townships and rural areas in the Western Cape, Eastern Cape, and KwaZulu-Natal, with 220 full-time staff members and 18 franchisees. Luvuyo owes much of his success to the support he got from his mother when growing up. He often cites her as his core inspiration and why he achieved his BTech in Communicative Technology. In 2006, he enrolled for the Associate in Management course at UCT Graduate School of Business, which prepared him to grow his business confidently. His business propelled him into Forbes Magazine in 2014. He was named one of JCI’s Ten Outstanding Young Persons of the World (JCI TOYP) in business, economics, and entrepreneurial accomplishments. In June 2016, Luvuyo received the Schwab Social Entrepreneur of the Year award for 2016 at the World Economic Forum in Kigali, Rwanda. His vision is “to open Silulo centres in every township and rural area in South Africa.” Source:https://www.pyxeraglobal.org/team-member/luvuyo-rani/#:~:text=Born%20 and%20raised%20in%20the,mother%20from%20a%20young%20age Source: https://www.homesofdistinction.co.za/news/sas-top-five-young- entrepreneurs-of-2021/ Questions: 1. Identify five management skills Luvuyo needed to run a successful business. 2. What resources did Luvuyo require to start his business? 3. How did Luvuyo identify the new business opportunity? 43  Feedback: 1. Any of the following skills would be required by Luvuyo to run a business successfully: Strategic thinking skills Human relations or interpersonal skills Planning skills Marketing skills Financial skills Organising skills or project management skills 2. Resources required by Luvuyo to start his business: Financial resources – he took a R10 000 loan to start his business. Physical resources – such as a secure place to start his business; and computers. Human resources (person/s) collaborated with him in his business, such as his brother Lonwabo. 3. The following are examples of how Luvuyo identified a business opportunity. Luvuyo saw a demand for access to technology in the townships and rural areas when he was teaching in the Khayelitsha township in Cape Town. Growing up in the Eastern Cape and later moving to Cape Town, Luvuyo saw a gap in the market by identifying a need for IT services in the township and rural areas that could provide internet and computer access to a lower- income community which was his target market. Luvuyo spotted a gap in the lower-income market to provide a much-needed resource – access to technology in the townships and rural areas. He realised that his knowledge of technology, attained through his studies, would help him start a business. In the last section of this lesson, you will learn about the role played by entrepreneurship in the Fourth Industrial Revolution (4IR). 44 2.7 ENTREPRENEURSHIP AND THE FOURTH INDUSTRIAL REVOLUTION (4IR) The First Industrial Revolution was in the 18th century with the invention of the steam engine, followed by the Second Industrial Revolution with electricity, and the Third Industrial Revolution with electronics and assembly lines. The 4IR is driven by advanced innovation and automation processes globally. Artificial Intelligence (AI) is crucial in leading the automation processes. The 4IR brings speed of change and disruption at an unprecedented rate, with new inventions transforming industries at a pace we cannot avoid. The 4IR involves vital technologies such as genetics, AI, cloud computing, 3-D printing, mobile networks, nanotechnology and biotechnology (Erasmus et al, 2019). Professor Klaus Schwab, Founder and Executive Chairman of the World Economic Forum, has been at the centre of global affairs for over four decades; he articulates that the 4IR fundamentally changed the way we relate, work, and live and that it may bring challenges at various levels, as indicated below. Businesses may not be able to adapt their operations with speed, causing them to be left behind. Governments may fail to embrace innovative technologies, therefore, losing out on the benefits and opportunities brought by technology. Governments may also struggle to regulate this new revolution as the power shifts away from them to the innovators. Inequalities may grow as only those with the means would embrace the opportunity brought by technology – thus, increasing inequalities in communities. At the World Economic Forum, Professor Schwab calls for leaders and citizens to “together shape a future that works for all by putting people first, empowering them and constantly reminding ourselves that these modern technologies are first and foremost tools made by people for people” (World Economic Forum, n.d.). Thus, during the Covid-19 pandemic, businesses were forced to adapt their business operations as they responded to the disruption caused by the pandemic (PwC Financial Services, 2020). The face-to-face interaction was moved to online 45 communication, and business meetings, training, and graduations were conducted using technology such as Zoom and Microsoft Teams. Education went online full-time during the Covid-19 lockdown. Teachers were forced to use technology, and students had to learn using technology. At the same time, we saw inequalities in disadvantaged communities where many students were unable to access education through modern technology. According to Erasmus et al (2019), Africa should – and can – embrace the 4IR by using the opportunities presented by this rapid change. They add that Africa should play a pivotal role in changing institutions, such as businesses and places of education, by preparing young talent who can drive development on the continent – assuming its rightful place in the world by taking advantage of the opportunities presented by the 4IR. To gain more insight into the challenges and opportunities of the 4IR, open the link below to access the strategic intelligence wheel. Then click each circle around the 4IR circle presented by the World Economic Forum. https://intelligence.weforum.org/topics/a1Gb0000001RIhBEAW?tab=publications Activity 2.5 This activity will take approximately 15 minutes to complete. Open the link below to watch a YouTube video regarding the 4IR: https://youtu.be/SCGV1tNBoeU Time: 1.42 minutes Summarise the opportunities and challenges brought by the 4IR. Feedback: The opportunities associated with the 4IR include system-wide innovation and new realities presented by nanotechnology, brain research, 3D printing, mobile networks and computing. Goods and services are produced quickly and cheaply, and business models are transformed, The challenges at various levels include the following: Businesses may not be able to adapt their operations with speed, causing them to be left behind. 46  Governments may fail to embrace innovative technologies, therefore, losing out on the benefits and opportunities brought by technology. Governments may also struggle to regulate this new revolution as the power shifts away from them to the innovators. Inequalities may grow as only those with the means would embrace the opportunity brought by technology – thus, increasing inequalities in communities. 2.8 SUMMARY You now understand the concept of entrepreneurship and the entrepreneur as the driving force behind business and economic growth. This lesson explained the entrepreneurial process and why individuals choose to become entrepreneurs – the advantages and challenges of business ownership. You learned about the difference between entrepreneur and entrepreneurship. Furthermore, the skills and resources required to be an entrepreneur were described. Diverse ways to start a business were discussed in detail, along with the advantages and implications of choosing a specific business opportunity. Lastly, the Fourth Industrial Revolution and Artificial Intelligence were briefly discussed, together with their impact on businesses. In the following lesson, you will learn about a business idea and starting a business; the importance of a suitable business location; the advantages and possible disadvantages of a small business; and why small businesses fail. The legal forms of business ownership will be highlighted, as well as the advantages and disadvantages of different forms of ownership. The importance of a well-developed business plan and funding opportunities for small businesses will also be discussed. Make sure you have mastered the key concepts that were listed at the start of the lesson by making brief notes so that the meaning of each term is clear. Before proceeding to the next lesson, take some time to reflect on what you have learned in lesson 2. Make sure you have achieved all the outcomes listed at the beginning of this lesson. 47 SELF-ASSESSMENT QUESTIONS This activity will take approximately 15 minutes to complete. QUESTION 1 Describe the entrepreneurship process. QUESTION 2 Thandi, a visionary, has opened a hair salon for children aged between 2 and 12. She has employed five hairdressers and two support staff members. One of her daily management functions is supervising and interacting with her employees while delegating their responsibilities. The most appropriate management skills are the ___________ skills to perform this function. 1. passionate 2. strategic 3. planning 4. interpersonal 5. organising QUESTION 3 Chris is an aspiring creative entrepreneur who likes to take control and makes his own decisions. He is innovative and he wants to implement innovative ideas and make changes when he sees fit. He would like to start a business through a franchise. Which of the following statements are correct about a franchise? a. The franchise provides training and knowledge. b. The franchise allows access to lower prices. c. The franchise has no business risk. d. The franchise has an established brand. e. The franchise allows creativity and flexibility. 48 Choose the correct option: 1 a; b; c 2 b; c; d 3 a; b; e 4 d; b; e 5 a; b; d QUESTION 4 Which sentence is not correct about the benefits of buying an existing business? 1 It is easy to change the image of the business. 2 It comes with customers who are familiar with the location. 3 It has inventory and equipment in place. 4 It has employees who have experience in the business. QUESTION 5 Which one of the following points is not an entrepreneurial process of starting a business? 1 Feasibility study 2 Job creation 3 Business plan 4 Ideas and opportunities THE ANSWERS TO THE SELF-ASSESSMENT QUESTIONS Question Answer 1 Entrepreneurship is the process undertaken by the entrepreneur to identify or create a need or to recognise an investment opportunity where others do not see it. It is also a process of finding and combining resources (usually owned by someone else) to pursue the opportunity to its completion, create employment, and contribute to the economy. 2 The correct answer is Option 4. One of the daily management functions performed by Thandi is to supervise and interact with her employees 49  while delegating responsibilities to them. Interpersonal skills involve the ability to interact, communicate, lead, motivate and form relationships with employees. 3 The correct answer is Option 5. The statements that are true about franchising are a, b and d. 4 The correct answer is Option 1. It is not easy to change the image of an existing business. 5 The correct answer is Option 2. Job creation is not one of the entrepreneurial process points. 2.9 REFERENCES Erasmus, B., Rudansky-Kloppers, S. & Strydom, J. 2019. Introduction to business management (11th edition). Cape Town: Oxford. Etheredge, L. 2022. Britannica Online Encyclopaedia. Available from: [Accessed 9 May 2022]. International Franchise Association (IFA). 2019. Advantages, challenges of franchising. Available from: [Accessed 6 February 2023]. PwC Financial Services. 2020. Securing your tomorrow, today: The future of financial services. Available from: [Accessed 19 April 2022]. University of Minnesota Libraries Publishing edition, 2016. Exploring Business by the University of Minnesota. Available from: [Accessed 6 February 2023]. World Economic Forum. (n.d). The Fourth Industrial Revolution, by Klaus Schwab. Available from: [Accessed 6 February 2023]. 50 2.10 FURTHER READING: OPEN EDUCATIONAL RESOURCES (OERs) University of Minnesota Libraries Publishing edition, 2016. Exploring Business by the University of Minnesota. Available from: [Accessed 6 February 2023]. Focus on the following: Chapter 5: The challenges of starting a business 51  Contents 3.1 INTRODUCTION......................................................................................................54 3.2 DEFINITION OF A SMALL BUSINESS....................................................................55 3.3 BUSINESS IDEA......................................................................................................55 3.4 THE IMPORTANCE OF GEOGRAPHICAL LOCATION...........................................56 3.4.1 Geographical location...............................................................................................56 3.4.2 Location factors........................................................................................................57 3.5 ADVANTAGES OF A SMALL BUSINESS................................................................58 3.6 FAILURE OF A SMALL BUSINESS.........................................................................58 3.6.1 Types of small business failures...............................................................................59 3.6.2 Reasons why small businesses fail..........................................................................59 3.7 THE LEGAL FORMS OF OWNERSHIP IN SOUTH AFRICA...................................61 3.7.1 Choosing a form of ownership..................................................................................61 3.7.2 Types of ownership..................................................................................................62 3.8 DEVELOPING A BUSINESS PLAN..........................................................................74 3.8.1 Purpose....................................................................................................................74 3.8.2 Objectives................................................................................................................75 3.8.3 Business plan development principles......................................................................75 3.8.4 The components of the business plan......................................................................76 3.8.5 Business plan development checklist and project planner........................................77 3.9 FUNDING FOR A SMALL BUSINESS......................................................................80 3.9.1 Banks.......................................................................................................................80 3.9.2 Government departments and agencies...................................................................80 3.9.3 Venture capital finance.............................................................................................81 3.9.4 Business incubators.................................................................................................82 3.9.5 Crowdfunding...........................................................................................................82 3.9.6 Angel investors.........................................................................................................82 3.10 SUMMARY...............................................................................................................83 3.11 REFERENCES.........................................................................................................85 3.12 FURTHER READING: OPEN EDUCATIONAL RESOURCES (OERS)....................86 52 LESSON 3: ESTABLISHING A BUSINESS This lesson will require approximately TEN notional hours. Figure 3.1 represents an overview of lesson 3. 3.1 Introduction 3.2. Definition of a small business 3.3 Business idea 3.4 The importance of geographical location 3.5 Advantages of a small business 3.6 Failure of a small business 3.7 The legal forms of ownership in South Africa 3.8 Business plan development 3.9 Funding for a small business 3.10 Summary 3.11 References 3.12 Open Educational Resources (OERs) Figure 3.1: Visual overview of lesson 3 (Source: Author's design) 53 3.1 INTRODUCTION It has become a globally documented phenomenon that the advancement of Small, Medium and Micro-Enterprises (SMMEs) can greatly contribute to the Gross Domestic Product (GDP), reduce unemployment and stimulate social welfare (Ladzani & Van, 2002; Oni, Agbobli & Iwu, 2019). However, current studies in South Africa reveal that SMMEs are only creating 28% of total employment – even though 98.5% of the country's economy is made up of SMMEs. The goal of the National Development Plan (NDP) for small businesses – to create 90% of the jobs by 2030 – will not be achieved unless this important sector of the economy is accurately understood. Starting a small business or operating one requires hard work, talent, perseverance, willpower and a lot of research and planning. LEARNING OUTCOMES When you have worked through lesson 3, you should be able to do the following: Define the terms "small business" and "business idea". Identify the factors that influence the location of a business. Describe the advantages associated with a small business. Explain the types of small business failures and the reasons why small businesses fail. Distinguish the different forms of ownership that are found in South Africa. Discuss the purpose, objectives, components and the development process of a business plan. Distinguish the different funding options for a small business. 54  KEY TERMS small business business idea juristic person sole proprietorship partnership business location business trust business plan co-operative society close corporation business failure 3.2 DEFINITION OF A SMALL BUSINESS Defining a small business is problematic because aspects such as labour, turnover and capital intensities need to be considered (Langa, & Govender, 2019; Masocha, 2019; Muriithi, 2017). The National Small Business Act 29 of 2004 defines a small business as a separate and different business entity, such as co-operative enterprises and non-governmental organisations. Furthermore, the entity is managed by one owner or more, including its branches or subsidiaries, if any, and is predominantly carried on in any sector or sub-sector of the economy. Small business in South Africa can be classified as a micro, small or medium enterprise (SMME) (The Presidency, Republic of South Africa, 2004). Now that you have learned about the definition of a small business, you need to understand what constitutes a business idea. 3.3 BUSINESS IDEA The most important factor a person needs before starting a business is a business idea. For some people, coming up with a great business idea is a rewarding exercise. However, others regard this task as overwhelming. Essentially, one needs to establish what customers want and try to satisfy a need not fulfilled by others. The key question to ask is what customers want – instead of focusing on what the business does. A business idea should be innovative and creative. Possible sources of business ideas include previous work experience, personal interests, industry-related exposure, educational courses, and suggestions from customers, family and friends. A business 55 idea can be implemented by starting a new business, buying an existing one or obtaining a franchise. Activity 3.1 This activity will take approximately 10 minutes to complete. Identify a business idea that you could implement in your community and succeed in it. Feedback: A business idea can come from novelty innovation or doing something people have been doing for a very long time – selling bread, vegetables, or clothes, for instance. We advise you to watch the following video by opening the link below for examples of different business ideas: https://youtu.be/AH1FN_y8IP8 From the business idea, we move on to look at the importance of geographical location. 3.4 THE IMPORTANCE OF GEOGRAPHICAL LOCATION 3.4.1 Geographical location The choice of geographical location for specific premises is important to all kinds of businesses, although it may be more important for some than for others. For example, the success of most retail organisations depends on the location of the business. Depending on the nature of the proposed product or service to be offered, the entrepreneur should, for example, decide whether the business needs to be located either near its market or near its sources of raw materials, near competitors, in the city centre, in the suburbs, in a rural area, in existing industrial areas, or according to personal preference. Woolworths, for example, selects the premises of its stores according to the following criteria (https://www.woolworths.co.za/): The premises should be located near other national retailers, banking and other facilities. The site should provide adequate security. There should be convenient parking facilities.