Business Management Chapter 1 PDF

Business management is a dynamic eld of study that focuses on institutions that satisfy customers' needs.1 But what is a business and why do people start businesses? The answers to these questions involve the concepts of pro t, the economic principle, and the factors of production. It is also useful...

Business management is a dynamic eld of study that focuses on institutions that satisfy customers' needs.1 But what is a business and why do people start businesses? The answers to these questions involve the concepts of pro t, the economic principle, and the factors of production. It is also useful to look at the different economic systems in which a business could operate, and how these systems can inuence the operations of that business. One factor that is of the utmost importance for any organisation is the stakeholders with whom it interacts on a day-to-day basis. There is growing pressure on businesses to accommodate these stakeholders. This has resulted in the development of the concept of corporate social responsibility, and in the making of a social contract between businesses and South African society as a whole. Figure 1.3 at the end of this chapter provides a model that will make it easier to understand the logical ow of this book. This model consists of four broad sections, namely: the business environment in which a business operates; the task of the manager: the different areas for which the manager is responsible, and how business management is used in entrepreneurship and how a business plan is developed. 1.2 What is a business? The term 'business' has many meanings, but the main one is that it is an organisation that provides goods and services to its customers in the economic system in which it operates. Goods are those things that we can feel and touch, such as fridges, clothing, shoes and cars. We say that these are tangible goods. Services are usually intangible; in other words, we cannot feel or touch them, such as consultations with a doctor or lawyer. For the purpose of this book, the term 'products' will include both tangible goods and intangible services. Most businesses deliver both goods and services to their customers -- for instance, the delivery of fast food to your doorstep. The Domino's pizza that is delivered is a tangible good, but the activity of delivering it to your home is a service. In this book, we will concentrate more on the side of tangible goods, but will from time to time provide examples of the service industry in South Africa. (In this book, the terms 'business', 'organisation', ' rm' and 'enterprise' are used interchangeably, i.e. they mean the same thing.) Critical thinking Which of the following activities performed in South Africa can be viewed as a business? A medical consultation South African Business Express A Spaza shop 1.2.1 Business and pro ts One of the questions people ask is why anyone would want to operate or own a business. One of the answers is that people operate a business to make a pro t. Pro t is the amount of money that remains in the business after the business has paid all its costs. One could put it like this: For instance, the business generated a R1 million pro t for the year. The total revenue was R2 million and the total cost was R1 million. (See also Chapter 15, where the concepts of pro t, revenue and cost are further explained.) A business produces a certain amount of revenue by selling its goods and services (e.g. by selling and delivering pizzas). To produce this income, the business must spend money on equipment (such as a pizza oven) and on basic ingredients (such as our and yeast), and must pay its employees. The money that is left after all these costs have been subtracted is the pro t. Businesses must also pay tax on pro ts to the South African Revenue Services. Once this is done, the remaining pro t can be distributed to the owners or can be kept within the business to re-invest and, hopefully, to expand the business. Businesses are found in both the public and private sectors. There are also businesses that do not only look for pro t, but try to get just enough income to cover costs. They are called not-for pro t organisations (NPOs). Sports clubs, welfare organisations and religious organisations form part of this private sector, while political parties and labour unions are examples of public sector not-for-pro t-seeking business. However, both types follow the same business principles. NPOs are established for a public purpose, and there are no nancial bene ts for the members except for reasonable compensation for expenses incurred. Larger South African businesses are ruled by the Companies Act 71 of 2008 and amendments made to the Act (Companies Amendment Act 3 of 2011). Box 1.1: The Companies Act 71 of 2008 The purpose of the Companies Act of 2008 is to:2 promote compliance with the Bill of Rights as provided for in the Constitution in the application of company law promote the development of the South African economy by: encouraging entrepreneurship and enterprise efficiency, creating exibility and simplicity in the formation and maintenance of companies, and encouraging transparency and high standards of corporate governance as appropriate, given the signi cant role of enterprises within the social and economic life of the nation promote innovation and investment in the South African markets reaffirm the concept of the company as a means of achieving economic and social bene ts continue to provide for the creation and use of companies, in a manner that enhances the economic welfare of South Africa as a partner within the global economy promote the development of companies within all sectors of the economy, and encourage active participation in economic organisation, management and productivity create optimum conditions for the aggregation of capital for productive purposes, and for the investment of that capital in enterprises and the spreading of economic risk provide for the formation, operation and accountability of non pro t companies in a manner designed to promote, support and enhance the capacity of such companies to perform their functions balance the rights and obligations of shareholders and directors within companies encourage the efficient and responsible management of companies provide for the efficient rescue and recovery of nancially distressed companies, in a manner that balances the rights and interests of all relevant stakeholders provide a predictable and effective environment for the efficient regulation of companies. The Companies Act provides for two types of companies, namely pro t and non-pro t companies. Non-pro t companies (NPCs) were previously registered as section 21 companies under the old 1973 Companies Act. Under the new Companies Act, they can register as non-pro t companies. The Companies Act 2008 has a special schedule devoted to non-pro t companies and it regulates such companies more tightly than the 1973 Companies Act. Pro t companies (PCs) are companies whose aim is to make money for their shareholders, and they are divided into the following types: State-owned companies (SOCs), such as ACSA and SAA Private companies (Pty, Ltd) in which the general public cannot subscribe to take up shares Personal liability companies (Inc.) which are the same as section 53(b) companies of the 1973 Companies Act; most professionals, such as doctors, accountants and attorneys, currently use section 53(b) companies, where the directors of the company are personally liable for the company's debts Public companies (this is a residual category which will cover any company other than the above). 1.3 The economic principle South African consumers have a varied and unlimited need for goods and services. There are, however, a limited number of resources available to satisfy these needs. Most of us would like to live in a millionaire's mansion, drive a eet of luxury cars, have a vacation home by the ocean, go on overseas trips on a regular basis and wear the latest designer clothing -- but few of us have enough money to do this. Instead, we try to use our limited funds to get the greatest satisfaction possible. The whole matter of obtaining the greatest possible bene t with the limited resources available is the economic principle. Businesses also follow the economic principle. They must ensure that the pro ts made by the organisation must at least cover the cost of capital and leave enough pro t for the business. This can be reached if, for instance, the business has a unique product that makes it different from competitors' products or it lowers expenditure on producing the product. 1.4 The factors of production There are four basic resources available that can be used by a business to manufacture (make) and deliver goods and services. These four basic resources are known as the factors of production and consist of: 1. 2. 3. 4. natural resources human resources (labour) capital entrepreneurship. Some people also consider information as a separate factor of production. 1.4.1 Natural resources Natural resources are things in nature that are regarded as valuable in their untouched form, such as a piece of land that can be used for farming, a plantation of trees or mineral deposits. For the farmer, land is essential to produce crops such as grain and maize. In other instances, mineral deposits such as gold, coal, methane gas or crude oil are factors of production that can be used in the manufacturing process. Some of these resources can be sustained (kept going), but in most cases we are working with resources that are limited. For example, there is a nite amount of crude oil available and the price of crude oil has therefore increased dramatically over the past few decades. See the discussion regarding hydraulic fracking in South Africa in Box 1.2. Box 1.2: Hydraulic fracking in South Africa and the race for alternative energy sources The dependence of countries on crude oil as primary source of energy is well known. Since 1973, the world has seen a massive increase in the price of this basic commodity that literally keeps the lights of the world economy on. During the past decade, dire warnings have been issued that the crude oil reserves are less than was initially thought and that the world should start preparing for a day without oil. Research into alternative sources of energy has started to excite world leaders, but the fact remains that the world, for the foreseeable future, will still be dependent on basic commodities such as crude oil and coal. Coal is of great importance to the generation of energy in South Africa as this country has an abundance of this natural resource. Running out of coal could have dire consequences. In March 2014, persistent rain in the Mpumalanga province rendered coal reserves so wet that they would not burn properly. As South Africa is mostly dependent on coal-red power stations, South Africa subsequently went through a period of rolling blackouts when Eskom's power generating capacity could not keep up with the demand for electricity. It became clear that alternative energy sources had to be developed to supplement the traditional coal-red generating capacity of South Africa. With this as background, the announcement that South Africa has sizeable shale gas resources that could be used as an alternative energy resource was widely welcomed. To extract this gas, pressurised liquid (water and chemicals) is pumped deep into the ground to fracture the rock and release the natural gas trapped in shale layers of the earth. This technology could reduce South Africa's dependency on coal and crude oil. The South African government sees this as a golden opportunity to utilise alternative energy resources while at the same time creating sustainable jobs for the unemployed population. There are, however, risks involved, for example it is expensive to develop and it constitutes some threats to the environment, such as ground water pollution. The drive towards nding alternative energy sources has also resulted in the harnessing of wind energy, solar energy and hydropower, which have the added bene t of being much cleaner (causing less pollution). 1.4.2 Human resources Human resources (traditionally called 'labour') are the employees who perform speci c activities for an organisation. Human resources are needed to produce agricultural products (such as wheat and maize), to manufacture industrial products (such as engines) or to provide medical services (such as open-heart surgery and taking care of patients in hospitals). While human resources are seen as one of the untapped sources of the South African economy, unemployment remains high. Unemployment is seen as one of the most pressing socio-economic problems in this country, and in order to reduce the number of unemployed people, the economy must grow at 7% per year. If South African workers had higher levels of skills, this would help in achieving this growth gure (see Box 1.3). Technological changes leading to disruptive practices in the economy are also impacting negatively on employment gures in South Africa. Box 1.3: The scarcity of skilled workers in South Africa Various reasons can be provided why South Africa has a skills shortage. On the one hand, there is the persistent loss of highly skilled workers through emigration, the immigration restrictions for highly skilled foreigners wanting to live here, and the dysfunctional secondary and tertiary education system producing graduates that are unemployable, due to a mismatch between skills required by industry and the speci c quali cations obtained by these students. It is only in the specialised and the highly skilled sectors where the quality of the quali cation and specialised knowledge acquired will play a role to ensure that new jobs are being created. This is unfortunately also where not enough skilled workers are available to ll all the vacancies. Due to the poor domestic economy, thousands of jobs have been lost, mostly on the lower-skilled level of employment. It is especially this area which has been badly affected by recent technological advances that have resulted in many jobs becoming automated (taken over by computers or machines which can perform 352 days a year). The internet of things (IoT) and robotics are also impacting negatively on employment levels. IoT refers to the interconnectedness of devices through the internet. In this integrated world, where household appliances such as the coffeemaker, the washing machine, fridge and stove can be programmed to communicate with each other, the role of the personal assistant can be made redundant (see also the discussion of the fourth industrial revolution in section 1.6). Along with these changes, there are also new developments in the offing that will positively impact on countries, such as the youth dividend, where the median age of a nation gets younger with a resultant decrease in medical costs associated with the elderly and an increase in the size of the middle class. A major risk in South Africa is the poor absorption of young people into the economy, which remains a socio-political problem and makes the possible youth dividend a pipe dream. Obtaining a tertiary quali cation remains the most successful indicator of nding employment in a country such as South Africa. This has been proved with the majority of graduates still managing to nd a job in the South African economy. 1.4.3 Capital Capital is the money or the assets (such as equipment and buildings) used to deliver something of value to customers. The capital that is provided by the owners, banks or shareholders is invested in the business. In most cases, the capital is used to build the factories and buy the machinery needed to manufacture a product. In the service industry, capital could be needed to buy a franchise from an owner, so as to deliver a service to the customer. The franchising route is seen as one of the best ways to ensure empowerment of the previously disadvantaged communities. The number of black economic empowerment (BEE) franchises has been growing, but is hampered by the potential franchisees' lack of capital and the problems in getting new sources of capital. Box 1.4: Why banks are hesitant to lend money to entrepreneurs and small businesses3 1. Banks provide four basic reasons for their continued reluctance to lend money to small businesses and entrepreneurs: High administrative costs of having a number of small businesses on the loan book. Every loan entails a certain cost and time component that makes it unattractive for a bank to get involved in a small business as the amounts required are small. 2. Asymmetric information sharing. What the bank usually needs with regards to nancial background information cannot be obtained from the small business, as its information-gathering methods are different from those of banks and are usually under doubt from the bank's decision-makers. 3. 4. High risk perception by the banks. Many banks do not necessarily understand the business model of a small business and do not necessarily have the experience to deal with them comfortably. Lack of collateral. This remains one of the biggest problems. Banks want enough security and a success history to allow businesses to borrow money from them. Entrepreneurs starting out with their business do not have the necessary collateral or background credentials. 1.4.4 Entrepreneurship An entrepreneur is a person who takes the risk of starting and operating a business. Entrepreneurship is the process in which natural resources, human resources and capital are put together so as to manufacture a good, or offer a service, in order to make a pro t. Box 1.5: SMEs and entrepreneurship In South Africa, small and medium enterprises (SMEs) are one of the ways in which budding entrepreneurs can ful l their dreams to be independent and to create wealth. There is no exact gure available on how many SMEs there are in South Africa. Estimates range from one to three million, with about half a million being registered with authorities. Most of the informal SMEs are owned and operated by black South Africans. These informal business people are often called survivalists, but are not necessarily entrepreneurs, as most of them would prefer to have a secure job in the formal sector. Entrepreneurs are those who choose to run enterprises despite personal risks, because of the larger potential pro ts. One of the best South African examples of an entrepreneur is Mark Shuttleworth. In 1995, Shuttleworth was a nal-year Business Science student at the University of Cape Town. He started Thawte, an internet security company that helps facilitate safe payment for electronic commercial transactions. Shuttleworth sold Thawte in 1999 to Veri Sign, and then founded HBD Venture Capital and the Shuttleworth foundation.4 Box 1.6 presents a discussion of the entrepreneurial intention of a group of graduates in South Africa. Box 1.6: Entrepreneurial intention of graduates in South Africa5 Entrepreneurial intention as a concept has various denitions, but can generally be referred to as the search for information by the graduate that could then be used to start a business venture. It therefore refers to the student's own judgements about the likelihood of owning a business. The personal commitment of the would-be entrepreneur (i.e. the graduate) to found and start a business has a signi cant impact on shaping the entrepreneurial intention of the person. Entrepreneurial intention can also be compared between countries. The primary motivators (or reasons) for the entrepreneurial intention of graduates include the creation of their own employment opportunities, being in control of their own future, the freedom to make use of their personal creativity, the poor macro-economic environment in the country and their lack of access to capital. In a study done in South Africa by Fatoaki,6 it was shown that entrepreneurial intention is very low in South Africa. This can be ascribed to various reasons such as a lack of access to capital sources (e.g. funding by the banks), lack of competency from budding entrepreneurs, lack of government support, inherent risks such as crime and the broad macro-economic environment. One of the best ways to improve the entrepreneurial intention is to reduce the entrepreneurial obstacles, which can be done by entrepreneurship education. Entrepreneurial skills education includes creativity, innovation, risk taking and the ability to interpret a situation to identify opportunities. There is an evident skills mismatch between what skills graduate entrepreneurs develop in higher education and what they need in order to survive in the business world. Critical thinking Why is entrepreneurship so important for a developing country such as South Africa? Can we all be entrepreneurs? 1.5 The economic systems in which businesses operate The business world is divided into four basic economic systems (see Figure 1.1): Free-market economy Socialism Command economy Mixed economy Figure 1.1 The four economic systems On the left side in Figure 1.1, we have the free-market economy, which is better known as 'capitalism'. The basic theory of capitalism is that each individual in society is free to choose his or her own economic activity. There is usually very little government interference and, because private individuals own most of the society's resources, they can freely use those resources in any way they wish. Every citizen of the country is free to work where they like, providing whatever service they like, or manufacturing whatever they want to. Box 1.7: Criticism against capitalism is increasing Some strong arguments are being raised against the unbridled use of capitalism as the mainstay of the South African economy. Criticism has been mounting over a number of years after corporate disasters such as the bankruptcy of mines and subsequent layoff of workers, the Steinhoff debacle and various ecological mishaps. Fioramonti7 stated that in the capitalistic society, value can only be generated through transactions in the market place (that is buying and selling). This was always seen as positive for the country's economy. There is, however, concern about the impact of business transactions on society, for instance social costs (e.g. increases in unemployment) and pollution of the environment (e.g. ecological disasters such as the release of acidic mine water into rivers). The point of departure of capitalism was that what was good for the business must be good for society. Now there are serious questions about this basic assumption. There is a growing understanding that real value for the country and its citizens is generated when economic development also impacts positively on the social and broad environment in which the country and its citizens live. The shift is therefore towards investing not just for pro t, but also for the social bene t of society. By focusing on positive social and environmental contributions, much can be done to counteract the generational effect of poverty and inequality inherited over centuries. The argument therefore stated is that instead of just using the GDP of the country as a measure of value, the focus must shift towards business activities enhancing the public good for all citizens. In this manner, more wealth could be generated for the country as a whole, alleviating the decades-old social problems of South Africa. On the other side of the economic spectrum we have the command economy, better known as 'communism'. This system uses the basic premise that the government owns almost all of the country's resources and that government of cials can decide what goods and services should be delivered, who should be employed and where, what each person should earn, and so on. The problems with this economic system are well known, with countries like North Korea and Cuba being the last outposts to believe in it. Most of the success of China can be attributed to the policy changes to a mixed economy that occurred a number of years ago. Between these two systems we nd the system of socialism. The theory of socialism states that individuals may own private property and choose their own form of economic activity, but the government also owns many of the country's resources, and plays a far greater (guiding) role in the economy than in capitalism. With socialism, many of the large businesses are owned by government and are therefore managed by government employees. In South Africa, the state-owned enterprises (SOEs) such as SAA and Eskom are examples of the socialist economic system that we are living in. The problems encountered by SOEs in South Africa put permanent pressure on the South African economy. There are no clear boundaries in most countries regarding the economic system that is being followed. We nd traces of socialism in the US, which is regarded as the purest example of a capitalist economic system, and we nd elements of capitalism in Cuba, which is one of the last examples of communism. When an economy is a combination of private enterprise, government ownership of resources and government planning of the economy, it is called a mixed economy. The kind of economy in which a business functions inuences the social contract that a business will have with its stakeholders, an issue that will be discussed in section 1.7. Ultimately, however, the economy of a country operates in the global economic environment, which is dynamic and evolving at a faster pace than before, leading to the need to understand the impact of the fourth industrial revolution on the business world. Critical thinking How would you classify the South African economy? Is it a mixed economy or a free-market economy? 1.6 The advent of the fourth industrial revolution South Africa as a developing nation stands in the midst of a global technological revolution that will have an immeasurable impact on the way that businesses and workers will operate in future. Issues such as disruption of existing business models (think traditional banking and the impact that a low-cost bank such as Capitec is having) and convergence of different technologies to create new business opportunities (think Uber and AirBnB) come to mind. This revolution is called the fourth industrial revolution and is bringing change at an exponential rate, transforming business models, operation systems and the management and governance of businesses.8 The four industrial revolutions can be summarised as shown in Table 1.1. Table 1.1 The developments leading up to the fourth industrial revolution9 First industrial revolution Second industrial revolution Third industrial revolution Fourth industrial revolution This is estimated to have spanned the 80-year period from 1760 to 1840 in the UK, from where it expanded to other parts of the world. Water and steam power were used to mechanise production, vastly improving iron production processes. The textile industry also grew rapidly, creating employment that resulted in an increase in the standard of living of the population for This occurred between 1840 and the start of World War I in 1914. The main innovation was electric power, which was used to create mass production and to establish communication. Railroads developed, connecting countries and providing infrastructure to regions that were previously isolated. This also happened in South Africa, with the development of mines in the interior of the country. This started in the late 1960s and focused primarily on using advanced technologies such as electronics and information to automate production. Some of the technologies that converged during this time were computers, the World Wide Web, software, new processes such as three dimensional printing, and web-based services. The change brought about mass customisation such as Continuing from the third revolution, the fourth revolution is digital in nature and commenced in the 1990s. It is based on the convergence of loose-standing technologies spanning different industries, such as the disruption occurring in banking, transport and accommodation services. New opportunities are occurring in the eld of arti cial intelligence (AI), robotics, the internet of things (IOT), self 1.6.1 First industrial revolution Second industrial revolution Third industrial revolution Fourth industrial revolution the rst time in history. individualised manufacturing and the consumption of specialised products at competitive prices. driving cars, nanotechnology, biotechnology and energy storage (e.g. batteries as propagated by Elon Musk). Since 2008, when the worldwide recession occurred, drastic changes have been observed that have challenged the established thinking regarding what was believed to be normal cyclical changes to the world economy. Until then, periods of boom in the economy were followed by periods of bust, but always with the understanding that this was a recurring cycle. What is becoming clear is that the type of change now occurring is structural in nature, implying that new thinking is required for businesses to be able to adapt to what is happening in the market place. Some of the developments contributing to structural change are arti cial intelligence (AI) and the internet of things (IoT) that are further discussed in the sections that follow. Arti cial intelligence (AI) AI can be described in common terms as the accumulated intelligence of machines which can be used to assist the human intelligence of people. What is of interest to businesses is what contribution these machines (basically robots and computers) can make in the quest to assist and improve the productivity of workers. Robots and computers can currently perform certain routine physical work more cheaply, and making fewer errors, than humans. In this category of basic human activities that machines can perform are the functions of learning and problem solving. With the increase in the capacity of machines, it became easier to access and store large data sets, and using improved machine learning and algorithms, these machines can now make intelligent decisions. The possible applications of AI stretch over various industries, with the potential to disrupt established ways of thinking and working in the business world. Some of the most obvious applications of the automation are in the elds of healthcare, logistics and the supply chain, education and transportation. Thousands of jobs can to be destroyed when robots and computers take over menial physical routine jobs such as those found in the manufacturing of cars and household products as well as the extractive work (digging for gold) currently being done by miners in highly dangerous and unhealthy conditions. In the eld of logistics, drastic changes are expected where stocktaking, packaging and transportation activities will be performed by machines. It is, however, not on only on the lower levels in the organisation that the impact of AI will be felt. Even on higher management levels there is the realisation that some jobs could be performed by robots and machines. Driverless cars introduced in some countries and which could have an impact on logistical services and industries such as the taxi industry are an example of a possible impact on self employed jobs. Even in the eld of highly skilled medical professions such as radiology diagnostics, specialists will be replaced by a computer that will make error-free diagnoses in an instant and in a consistent manner. However, not all jobs will be impacted upon in the rush towards automation and in some industries, it will only be certain activities of an existing job that will be taken over by machines. A new interaction is therefore foreseen between humans and machines. In future, we will see that humans will be assisting machines and in this process new employment opportunities and skills will be created. 1.6.2 The internet of things (IoT) IoT is in essence linked to the use of broadband internet with more electronic devices such as smartphones being connected all over the world. Linking all these devices means that people connect with people, people connect with machines (e.g. you can watch your home security cameras on your smartphone at work) and even electronic equipment can connect to other electronic equipment (e.g. your Fitbit watch can connect with your medical scheme's computers to inform them about your tness levels). One of the biggest advantages for retailers will be obtaining data on consumer patterns when products and services are bought. Knowing a customer's preferences will make it easier to use mass customisation to market speci cally to him or her (e.g. a tness fanatic will be informed of the most recent range of health foods). This will generate numerous opportunities to create new jobs and businesses, and may improve the quality of life of consumers, but there is also a downside, with security being one of the major issues and the risk of losing personal privacy.10 Critical thinking Which business sectors will be impacted the most by the fourth industrial revolution in South Africa? What effect would this have on the South African economy? 1.7 South African businesses and the changing social contract South African businesses operate in an increasingly unsettled and angry world of strikes, accusations of enrichment levelled at top managers and attacks on the basic principles of capitalism, which is seen as being in con ict with the ideals of the workers of the country. Businesses are increasingly regarded with distrust and seen as an enemy of the workers due to job layoffs, corporate scandals such as the Steinhoff debacle and the massive increases in top management salaries. With rising unemployment, partly due to the advancement in innovation and technology as discussed above, change is required to ensure the cohesiveness of the social fabric of South African society. Because of the easy access to information and the way in which global communication operates, more guidance is expected from leaders and managers, such as CEOs, to guide organisations to sustainable success in this country. Since organisations are legal entities and are primarily concerned with making pro ts, managers have long focused on a micro-viewpoint of society and the way that their businesses interact with it, i.e. they have focused solely on what is good for the organisation that they themselves manage. Improving nancial performance has been the main goal, with external macro-variables such as environmental damage and social injustices being largely ignored. There is, however, a growing realisation that businesses cannot operate in isolation from the rest of society and that big business should take on more responsibilities toward society and the environment in which they operate. This implies that businesses must become more socially responsible. An organisation that is socially responsible will consider the effects of the organisation's actions on all stakeholder groups. South African businesses and their managers have a social contract (understanding) with the society in which they operate. All the role-players in the business environment who are inuenced by what the organisation does are part of that social contract. These people or institutions are called stakeholders, meaning that they have a stake in the performance of the organisation. Primary stakeholders are those nearest the organisation, i.e. the customers, the employees, the suppliers and the shareholders. When the primary stakeholders get unhappy with the business, this could create a threat -- for instance, the customers could stop buying from the organisation through organised boycotts. Secondary stakeholders, such as the government and the broader community at large, must also be considered by the organisation. They can exert a radical inuence on the long-term existence of the organisation by means of legislation. Today we nd various special interest groups that can be called stakeholders of an organisation in South Africa. One example of a special interest group is environmentalists. Issues such as global warming, reducing greenhouse gas emissions and preserving water resources are at the forefront of the discussions in management meetings of corporations worldwide. The social contract between the organisation and its stakeholders has changed over the years. There has always been a contract between top management of big businesses and the South African government, which at times is hostile and at other times co operative. There has also always been a contract with employees, consumers and shareholders. Nowadays, there is an even broader set of stakeholders that management must consider, such as the communities in which businesses operate, the media and the non governmental organisations (NGOs). Figure 1.2 Stakeholders of South African businesses11 1. As can be seen from Figure 1.2, there are three broad stakeholder groups of which management must be aware: Business-related stakeholders are the owners, investors, bankers and the staff of the organisation. 2. 3. Opinion-related stakeholders are the media, potential employees, customers and suppliers. Public-related stakeholders are the politicians, local and national authorities, and the NGOs. All these stakeholders have expectations regarding businesses, and these expectations will now be discussed in more detail.12 1.7.1 The expectations of business-related stakeholders Each kind of business-related stakeholder will have certain expectations of a South African business: Owners, shareholders and investors expect the business to produce a pro t so that they earn a return on the capital that they invested in the business. Banks expect the business to pay its interest on loans and overdrafts, to reduce the size of the loans over time, and to continue doing business with the bank. Insurance companies expect the business to be responsible in managing business risks, as they will calculate the insurance premiums according to the asserted risks of the business. Consumers expect the business to follow acceptable commercial, marketing and advertising principles, and to ensure that the goods and services supplied are of decent quality. They also expect the right product delivered at the right time and at the right price. Increasingly, consumers are demanding that a business respect human rights and employment practices as re ected in the laws of the country. For example, consumers often stop buying products from businesses that manufacture articles under poor working conditions, such as the sports clothing and shoe manufacturer Nike did in the past. Auditors expect, and ensure, that businesses obey legislation regarding accounting and other nancial standards. On the other hand, businesses and the country expect the auditing rms to be diligent and to have the country's best interests in mind. Current events point to a breakdown in the trust that stakeholders had with these institutions. The staff of a business expects that business will comply with labour legislation regarding issues such as gender and race equity and non-discrimination. They also expect the business to provide an environment conducive to work. Suppliers that form part of the supply chain expect to have consistent relationships with the business and to be paid on time. 1.7.2 The expectations of opinion-related stakeholders Each kind of opinion-related stakeholder will have certain expectations of a South African business: Competitors expect to be able to compete on equal business terms, with no threat of bribery and cartels (groups designed to limit competition or x prices so as to obtain an unfair advantage). Potential employees expect to be able to access the business's human resource policy and employment conditions so as to make an informed decision regarding prospective employment at the organisation. The media expect that the business will give open, 'transparent' information on products and developments inside the business. 1.7.3 The expectations of public-related stakeholders Each kind of public-related stakeholder will have certain expectations of a South African business: National authorities expect the business to obey the laws of the country and pay its taxes on time. They further expect the business to contribute to sustainable development in the country through the creation of jobs and stability in the workplace. Local authorities (such as municipalities and the metros) expect the business to contribute to the social progress of the speci c community in which they operate. Neighbours and the business's close community expect the business to comply with all the regulations about noise and pollution, and not to make trouble in its business undertakings. Non-governmental organisations (NGOs) expect openness and progressive thinking from business leaders. These NGOs focus mostly on single issues such as human rights, protecting the environment or employee safety. Trade unions expect a business to comply with labour laws and create a good working environment for the employees or members of the union. Politicians expect a business to t their understanding of how organisations should be run, and be a responsible citizen. Box 1.8 The widening salary gap between bosses and workers13 South Africa has entered an era of social unrest that the country and all its stakeholders can barely afford. The gap between the employed and the unemployed is widening, with fewer taxpayers providing tax income to a government that must spend more of its resources on social upliftment projects. Furthermore, civil unrest is on the rise as unemployment increases. Some of the global companies with investments in South Africa are reconsidering their options for future investments due to the unrest, unemployment and strikes. With this as background, labour unions are quick to accuse the CEOs of large companies of earning excessive salaries and perks such as share options in the companies that they manage. In 2016, it was reported that a director of a listed company in South Africa typically earns 21 times more in basic salary than the average employee, increasing to 36 times more when bonuses are added. A landmark research paper by Nedbank Private Wealth's political analyst JP Landman sees this big gap in salaries between the highest paid and lowest paid as a key factor in worker expectations during salary negotiations. It is also one of the leading reasons for industrial action, civil unrest and strife in the country. Critical thinking Why are the South African labour unions so obsessed with the salary packages of the bosses? Would income parity (meaning no difference in the salaries of workers and bosses) lead to less unrest and more social harmony in South Africa? 1.7.4 Corporate social responsibility South African businesses are always in contact with their stakeholders. In the past, this contact took place mostly in the local environment of the businesses, but it has now expanded to include interaction across the nation, across many nations, and across the globe. This continuous social interaction started out as an idea called 'corporate sustainability' more than 30 years ago, and was then described as 'ecological and environmentally friendly business practices'. Sustainability meant the following when it was rst used: It meant not only making the business look good in the eyes of the public but also having a clear understanding of the effect that the business processes and products had on the physical environment and nding ways that businesses could improve the physical environment. Sustainable practices could be used by employees of the business and were understandable to customers. Sustainability was measureable, so that progress could be reported. Sustainable policies were based on reality, not on spur-of-the moment ideas.14 From corporate sustainability as described above has developed corporate social responsibility (CSR), which is a wider concept that includes ethics, diversity, healthy communities and long-term corporate governance. CSR is the concept that organisations, especially corporations, have an obligation to consider the interests of customers, employees, shareholders, communities and ecological environments, in all aspects of their operations15. CSR means different things in different countries. In countries such as South Africa, Turkey and South Korea, CSR is seen as the responsibility of large businesses to give back to the community. In countries such as the US, Brazil and Chile, CSR is seen as the duty to treat employees fairly. In countries such as China, India and Russia, CSR is seen mainly as the delivery of safe, good-quality products. In the developing countries (of which South Africa forms part), CSR is applied differently than in developed countries such as the US and in Europe. Reasons for this are as follows:16 Developing countries are generally the most rapidly growing economies in the world and with such growth comes the opportunity to take short cuts in governance. Developing countries are where social and environmental crises come to the fore (think acid mine water owing into rivers). Developing countries are where the most negative environmental and social impacts occur. The challenges of developing countries are different as there is less governance in place. In South Africa, the King I, King II, King III and King IVTM reports have provided guidelines for responsible corporate management, with the most recent report focusing on some of the current changes such as disruption and the effect of social media. Some of these guidelines are connected to sustainable development goals, as is seen in the Pick n Pay case study at the end of the chapter. 1.7.5 The current social contract of a South African business Society's understanding of a business's responsibilities can be divided into three aspects:17 1. 2. 3. The formal contract, which refers to society's unspoken expectations from business, such as keeping global laws and environmental standards, and following the country's industry codes and norms. (A business must ful l these expectations at all times.) The semi-formal contract, which refers to new, spoken expectations that some people have about the responsibilities of a business, and which may affect formal contracts in the future. (For example, some people have criticised the products sold by global fastfood businesses such as McDonald's and Kentucky Fried Chicken, saying they lead to poor health.) Frontier (future) expectations, which refer to issues that will have an impact on business in the future, such as the health effects of obesity (being overweight). As some of these expectations change, issues may shift towards a semi-formal or formal contract. Some of the frontier issues that are shaping the social contract between businesses and their stakeholders are listed in Table 1.1. Table 1.1 Shifting expectations in the social contract of businesses18 Trends Implications for the social contract of businesses Trends Implications for the social contract of businesses Economic, political, social and ecological systems are volatile and fragile. The current social contract of economic growth and creation of employment that glue together the stakeholders and business is under threat. There is political and economic alienation of citizens. Rising unemployment, stagnating social mobility and a growing population of unskilled youth are resulting in growing populism of the people. This indicates a failing social contract. Growing anger and frustration of the people are resulting in new agendas being generated (e.g. Fees must Fall). Business must deal with this new reality in the business environment. There is increased dependence on the government for social support (e.g. grants), increasing state employment and a rampant state wage bill. State efficiency has declined. There is the threat of the nancial cliff.19 South Africa's economy cannot deliver on the social contract as written in the Constitution. New realities must be accepted and changes to the way in which businesses operate must be investigated. There is a need for a rethink of the relationship between stakeholders and business A kinder and more just society must be developed, for example a basic income grant for all citizens. New nancial threats to business are occurring, such as increased taxation. Trends There is a need for a new social contract. Implications for the social contract of businesses A process of constructive engagement and dialogue, such as an economic Codesa, is needed.20 This brings to an end the discussion of the changing social contract between business and society. In the nal part of this chapter, we will look at the structure and layout of the book and indicate the interaction between the various chapters and sections