Principles of Business Management 4th Edition PDF

Principles of Business MANAGEMENT Principles of Business MANAGEMENT Johan Strydom Bruwer De Beer Holtzhausen Kiley Maritz Nieuwenhuizen Oosthuizen Rudansky- Kloppers Steenkamp Oxford University Press is a department of the University of Oxford. It furthers the University’s objective of excellence in research, scholarship, and education by publishing worldwide. Oxford is a registered trade mark of Oxford University Press in the UK and in certain other countries. Published in South Africa by Oxford University Press Southern Africa (Pty) Limited Vasco Boulevard, Goodwood, N1 City, Cape Town, South Africa, 7460 PO Box 12119, N1 City, Cape Town, South Africa, 7463 © Oxford University Press Southern Africa (Pty) Ltd 2018 e moral rights of the author have been asserted. First published 2008 Second edition published in 2011 ird edition published in 2015 Fourth edition published in 2018 All rights reserved. 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Principles of Business Management 4th edition Print ISBN: 978-0-19-072334-7 ePUB ISBN: 978-0-19-044844-8 Typeset in [ITC Caslon 224 Std] 10pt on 12pt Acknowledgements Publisher: Janine Loedolﬀ Editor: Lee-Ann Ashcro Project Manager: Nicola van Rhyn Permission Researcher: Felicity Chetwin Indexer: Cliﬀord Perusset Designer: Natalie McCulloch Cover design: Judith Cross Typesetter: Aptara Inc. XYZ Printing Company e authors and publisher gratefully acknowledge permission to reproduce copyright material in this book. Every eﬀort has been made to trace copyright holders, but if any copyright infringements have been made, the publisher would be grateful for information that would enable any omissions or errors to be corrected in subsequent impressions. Links to third party websites are provided by Oxford in good faith and for information only. Oxford disclaims any responsibility for the materials contained in any third party website referenced in this work. Brief Table of Contents Part One: Introduction to business management Chapter 1: Business and its challenges Chapter 2: The business environment Part Two: Management tasks Chapter 3: The task of management Chapter 4: Planning Chapter 5: Organising Chapter 6: Leading Chapter 7: Motivating Chapter 8: Controlling Part Three: The functional areas of management Chapter 9: Operations management Chapter 10: Logistics management Chapter 11: Financial management Chapter 12: Employment relations management Chapter 13: Marketing management Part Four: Entrepreneurship and the business plan Chapter 14: Entrepreneurship Chapter 15: The business plan Table of contents Preface Part One Introduction to business management Chapter 1: Business and its challenges Johan Strydom 1.1 Introduction 1.2 What is a business? 1.2.1 Business and pro ts 1.3 The economic principle 1.4 The factors of production 1.4.1 Natural resources 1.4.2 Human resources 1.4.3 Capital 1.4.4 Entrepreneurship 1.5 The economic systems in which businesses operate 1.6 The advent of the fourth industrial revolution 1.6.1 Arti cial intelligence (AI) 1.6.2 The internet of things (IoT) 1.7 South African businesses and the changing social contract 1.7.1 The expectations of business-related stakeholders 1.7.2 The expectations of opinion-related stakeholders 1.7.3 The expectations of public-related stakeholders 1.7.4 Corporate social responsibility 1.7.5 The current social contract of a South African business 1.8 The parts of this book Case study: Pick n Pay’s sustainable development goals (2017) Summary Multiple choice questions References Chapter 2: The business environment Jerome Kiley 2.1 Introduction 2.2 The systems approach 2.3 Organisational environment 2.3.1 The micro-environment 2.3.2 The market environment 2.3.3 The macro-environment 2.4 Conducting a SWOT analysis of a business’s environment 2.5 Ethics in data collection Case study: Smoking in South Africa and the growth of vaping Summary Multiple choice questions References Part Two Management tasks Chapter 3: The task of management Theuns FJ Oosthuizen 3.1 Introduction 3.2 What is management? 3.3 What is a manager? 3.4 Organisations in which managers work 3.5 Levels of management 3.5.1 Top management 3.5.2 Middle management 3.5.3 First-level management 3.6 Management tasks 3.6.1 Planning 3.6.2 Organising 3.6.3 Leading 3.6.4 Motivating 3.6.5 Controlling 3.7 Areas of management 3.7.1 Production and operations managers 3.7.2 Logistics managers 3.7.3 Information technology managers 3.7.4 Financial managers 3.7.5 Human resource managers 3.7.6 Marketing managers 3.7.7 Public relations managers 3.7.8 Administrative managers 3.8 Management skills 3.8.1 Conceptual skills 3.8.2 Human skills 3.8.3 Technical skills 3.9 Management competencies 3.10 Management roles 3.10.1 Decisional roles 3.10.2 Interpersonal roles 3.10.3 Informational roles Case study: Ms Courier Summary Multiple choice questions References Chapter 4: Planning Sharon Rudansky-Kloppers 4.1 Introduction 4.2 Why planning is necessary 4.3 The planning process 4.3.1 Setting goals 4.3.2 A hierarchy of goals 4.3.3 Criteria for setting effective goals 4.3.4 Developing action plans 4.4 Implementing the selected plans 4.5 The full circle Case study: Pick n Pay Summary Multiple choice questions References Chapter 5: Organising Andreas de Beer 5.1 Introduction 5.2 The organising process 5.3 Principles of organising 5.3.1 Co-ordination 5.3.2 Authority 5.3.3 Responsibility 5.3.4 Accountability 5.3.5 Delegation 5.3.6 Specialisation 5.3.7 Divisionalisation 5.4 Organisational structures 5.4.1 Line organisational structure 5.4.2 Line-and-staff organisational structure 5.4.3 Functional organisational structure 5.4.4 Divisional organisational structure 5.4.5 Matrix organisational structure 5.4.6 Team organisational structure 5.4.7 Network organisational structure 5.5 The changing organisation Case study – TAU Builders Summary Multiple choice questions References Chapter 6: Leading Maggie Holtzhausen 6.1 Introduction 6.2 The three components of leadership 6.2.1 An interactive framework of leadership 6.3 Leadership versus management 6.4 A brief history of leadership theories 6.4.1 Earlier leadership theories 6.4.2 Newer leadership approaches 6.5 Leadership tools 6.6 Leadership and diversity 6.6.1 Leadership and gender 6.6.2 Leadership and culture 6.6.3 Integrating diverse leadership styles 6.7 Ethical implications for leaders 6.8 Worldwide leadership trends Case study: Sally’s challenge Summary Multiple choice questions References Chapter 7: Motivating Jerome Kiley 7.1 Introduction 7.2 What is motivation? 7.3 The needs and expectations of employees 7.3.1 Individual differences 7.3.2 The needs of individuals 7.3.3 The expectations of employees 7.4 Managing employees’ motivation 7.4.1 Directly in uencing employee behaviour 7.4.2 Facilitating (helping to bring about) employees’ good performance 7.5 Monitoring employee morale 7.6 Practical motivational strategies 7.7 Ethical motivation Case study: 14 effective ways to motivate employees Summary Multiple choice questions References Chapter 8: Controlling Theuns FJ Oosthuizen 8.1 Introduction 8.2 Types of control 8.2.1 Pre-control 8.2.2 Concurrent control 8.2.3 Post-control 8.3 Sources of control 8.3.1 Individual self-control 8.3.2 Group control 8.3.3 Organisational control 8.3.4 Stakeholder control 8.4 The control process 8.4.1 Developing performance standards 8.4.2 Measuring actual performance 8.4.3 Comparing actual performance with performance standards 8.4.4 Reinforcing good performance, and correcting if necessary 8.5 When to use a control measure 8.6 Financial controls 8.7 Quality controls 8.7.1 Total quality management 8.7.2 Quality circles 8.7.3 Six Sigma 8.7.4 Benchmarking 8.7.5 Continuous improvement 8.7.6 Reduced cycle time 8.8 The balanced scorecard 8.9 The bene ts of controlling Case study: Comair Training Centre – critical performance standards training Summary Multiple choice questions References Part Three The functional areas of management Chapter 9: Operations management Rigard J Steenkamp 9.1 Introduction to operations management 9.1.1 A brief history of operations management 9.1.2 The future of operations management 9.1.3 Operations management is the core function of any organisation 9.1.4 Effectiveness, ef ciency and productivity 9.1.5 Process management 9.1.6 Operations strategies 9.2 Design management and operations management principles 9.2.1 Product and operations designs 9.2.2 Operations management principles 9.3 Operations planning and control 9.3.1 Reconciling (dealing with opposites) supply and demand (give and take) 9.3.2 Production time (P):demand time (D) ratios 9.3.3 Addressing bottlenecks 9.3.4 Demand management 9.3.5 Fixed capacity planning 9.3.6 Adapting capacity to a change in demand 9.3.7 Inventory (list of equipment) management 9.3.8 Material requirements planning 9.3.9 Make-or-buy decisions 9.4 Operations improvement 9.4.1 Total quality management (TQM) 9.4.2 Statistical process control 9.4.3 Maintenance and replacement 9.4.4 Safety, health and environmental management 9.4.5 Project planning and control 9.4.6 The fourth industrial revolution (Industry 4.0), enterprise resources planning (ERP) and the internet of things (IoT) Case study: Cosmetics go Lean at L’Oréal Summary Multiple choice questions References Chapter 10: Logistics management Mark Maritz 10.1 Introduction 10.2 De ning logistics 10.2.1 Types of logistics 10.2.2 The logistics process from a systems approach 10.2.3 Phases in logistics 10.2.4 Components of a logistics system 10.3 Logistics management 10.3.1 The objectives and activities of logistics management 10.4 Integrated logistics 10.5 Reverse logistics 10.6 Global logistics 10.7 The bene ts of good logistics management 10.8 Ethics in logistics management 10.9 Future trends in logistics management Case study: DHL Supply Chain South Africa introduces central control tower Summary Multiple choice questions References Chapter 11: Financial management Juan-Pierré Bruwer 11.1 Introduction 11.2 The basics of economics 11.3 The basics of budgets 11.3.1 Flexible budgets 11.3.2 Cash budgets 11.4 Basic nancial statements 11.4.1 Statement of comprehensive income (income statement) 11.4.2 Statement of nancial position (balance sheet) 11.4.3 Statement of cash ows (cash ow statement) 11.5 Ratio analyses 11.5.1 Pro tability ratios 11.5.2 Solvency ratios 11.5.3 Liquidity ratios 11.5.4 Ef ciency ratios 11.6 Financial education and nancial management Case study: The Virgin Group Case study: Pick n Pay Summary Multiple choice questions References Chapter 12: Employment relations management Maggie Holtzhausen 12.1 Introduction 12.2 The concept of HRM 12.3 The role of human resource management 12.4 The human resource management process 12.4.1 Strategic human resources planning 12.4.2 Staf ng the organisation 12.4.3 Developing and assessing the organisation’s human resources 12.5 Maintaining the organisation’s human resources 12.6 Labour relations 12.6.1 The role players 12.6.2 Labour legislation 12.6.3 Workplace procedures 12.6.4 Dismissals 12.6.5 Collective bargaining 12.6.6 Strikes and lockouts 12.7 Ethical conduct in organisations and the role of human resource management 12.8 Important trends in human resource management Yuppiechef: A Human Resources Case Study Summary Multiple choice questions References Chapter 13: Marketing management Sharon Rudansky-Kloppers Johan Strydom 13.1 Introduction 13.2 The nature of marketing 13.3 Marketing thinking through the years 13.3.1 Pro t orientation 13.3.2 Consumer orientation 13.3.3 Social responsibility 13.3.4 Organisational integration 13.4 Consumer behaviour 13.4.1 Determinants of consumer behaviour 13.4.2 The consumer’s decision-making process 13.5 Marketing research 13.5.1 The marketing research process 13.6 Market segmentation, target marketing, and product positioning 13.6.1 Market segmentation 13.6.2 Target marketing 13.6.3 Product positioning 13.7 The product decision 13.7.1 De nition of a product 13.7.2 The product concept 13.7.3 Classi cation of consumer products 13.7.4 Brand decisions 13.7.5 Product strategies 13.7.6 The product life cycle 13.8 Distribution decisions 13.8.1 Selecting the distribution channel 13.8.2 Factors that play a role in the determination of a distribution channel 13.8.3 Channel leadership 13.8.4 Market coverage 13.8.5 Logistics 13.9 Price decisions 13.9.1 Price de ned 13.9.2 The price determination process 13.9.3 Adaptations of the nal price 13.10 Marketing communication decisions 13.10.1 Marketing communication de ned 13.10.2 Advertising 13.10.3 Direct marketing 13.10.4 Personal selling 13.10.5 Sales promotions 13.10.6 Public relations, publicity and sponsorships Case study: The impact of the sugar tax on some FMCG businesses in South Africa Summary Multiple choice questions References Part Four Entrepreneurship and the business plan Chapter 14: Entrepreneurship Cecile Nieuwenhuizen 14.1 Introduction 14.2 The impact of entrepreneurial businesses on the economy 14.3 Who is an entrepreneur? 14.4 Entrepreneurial success factors 14.4.1 Ingenuity 14.4.2 Leadership 14.4.3 Calculated risk taking 14.5 The entrepreneurial process 14.6 Temporary entrepreneurs versus growth-oriented entrepreneurs 14.7 Entrepreneurship, management and leadership in entrepreneurial businesses 14.8 Types of entrepreneurial business 14.8.1 The informal business sector 14.8.2 The micro- and small business sectors 14.8.3 The medium and large business sectors 14.8.4 Franchisors and franchisees 14.8.5 Corporate entrepreneurship Case study: Curro private schools Summary Multiple choice questions References Chapter 15: The business plan Cecile Nieuwenhuizen 15.1 Introduction 15.2 Identifying an opportunity 15.3 Performing a feasibility study 15.4 Performing a viability study 15.4.1 Establishing who the consumers would be and what their needs are 15.4.2 Developing the purpose or mission statement of the business 15.4.3 De ning the business goals and business objectives 15.4.4 Determining the business’s share of the total market 15.4.5 Calculating the income of the business 15.4.6 Calculating the expected net pro t of the business to determine if the business idea is viable 15.4.7 Calculating the break-even point 15.5 Developing the business plan 15.5.1 The contents and framework of a business plan 15.5.2 Key elements of a business plan 15.6 Determining the resources and starting the business Case study: Curro Holdings Summary Multiple choice questions References Answers to multiple choice questions Glossary Index Preface Business Management as a subject area is a vibrant eld with momentous changes taking place at the moment. South Africa is seen as one of the major gateways into Southern Africa and, as such, forms the conduit between the developed world and Southern Africa, and Africa in general. In South Africa business stand at the forefront of great technological change with the advent of Industry 4.0 (also called the 4th Industrial Revolution). South African businesses are renowned for their ability to identify and create opportunities during periods of uncertainty and will also come out stronger from these technological developments that are occurring. In keeping up with the changes, a team of authors from South African academic institutions have developed an introductory textbook that aims to keep abreast and reports on these changes to the eld of business. In tertiary academic institutions, various textbooks are used to teach rst year students. In most cases these textbooks are of American origin. However, in the last ten years a few South African textbooks have seen the light. Joining this line of South African textbooks, Principles of Business Management rst edition was published in 2008. What made this book unique was that it was aimed speci cally at the introductory rst level business management student and especially the University of Technology market. The authors are pleasantly surprised at the uptake of the book in various markets in the South African tertiary environment. We are especially thankful for the positive criticism and recommendations that were made by various lecturers using this book. We incorporated most of these comments in this fourth edition of Principles of Business Management. This book is divided into four parts. In the rst part the general background to the eld of business management is given. In the second part the focus is on the management tasks, which cover the traditional elds of planning, organizing, leading, motivation and controlling. In the third part of the book the functional areas are discussed, referring to operations management, logistics management, nancial management, employment relations management and marketing management. In the last part of the book the attention is on entrepreneurship and the development of a business plan. Some of the outstanding features of this book are the following: Critical thinking boxes to encourage independent thought regarding the issues under discussion. This nurtures critical evaluation and the discussion of academic content in the class- situation. Practical information boxes provide real-life examples of how the theory is applied in practice. Key terminology is explained in a Glossary at the end of the textbook to unlock the language of business management, and to give students ownership of the special words that are used in this subject area. Case studies are provided to further embed the practical application of the theoretical discussion. Multiple-choice questions at the end of each chapter allow students to test their knowledge and understanding of the subject material. As part of the educational support package the following ancillary materials are available: PowerPoint® slides Instructor’s manual Case studies with suggested answers A Question bank with solutions to these questions. We thank Mr Theuns Oosthuizen for his hard work in this regard. We trust that the book will be enjoyed and used by academics and business practitioners alike. Please feel free to email the editor ([email protected]) with useful suggestions on how to improve the book. Sincerely, The authors Pretoria 2018 PART ONE INTRODUCTION TO BUSINESS MANAGEMENT This part explains the concept of business and the business environment. The rst chapter explains the philosophy of business, and elaborates on pro t-seeking and non-pro t organisations. It also touches on the corporate (group) social responsibility of the organisation. The second chapter deals with the business environment in which the organisation operates. The business environment is dynamic, and South African businesses must be aware of how changes in the environment will in uence the day-to-day operations of the business. Chapter 1 BUSINESS AND ITS CHALLENGES Johan Strydom Purpose of this chapter This chapter explains the basic concepts (ideas) on which a business is built, such as pro t, the economic principle and the factors of production. It also explains the basic economic systems in which businesses operate, and describes the importance of corporate social responsibility in the running of a business. This chapter provides a key to unlocking the fascinating subject of business management at an introductory level. Learning outcomes This chapter should enable you to: understand what the concept of business involves understand the concepts of pro t-seeking and non-pro t-seeking organisations show how business uses the factors of production in trying to make a pro t distinguish between the diﬀerent economic systems in which a business may operate describe the impact of the fourth industrial revolution on businesses describe the diﬀerent stakeholders that in uence South African businesses discuss the concept of corporate social responsibility explain the principles of the social contract under which South African businesses operate understand the model used to explain the layout of this book. 1.1 Introduction 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 in uence 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. natural resources 2. human resources (labour) 3. capital 4. 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 Banks provide four basic reasons for their continued reluctance to lend money to small businesses and entrepreneurs: 1. 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. 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. 4. 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 de nitions, 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 in uences 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 Second Third industrial Fourth industrial revolution industrial revolution revolution revolution This is This occurred This started in Continuing from estimated to between 1840 the late 1960s the third have spanned and the start of and focused revolution, the the 80-year World War I in primarily on fourth period from 1914. The main using advanced revolution is 1760 to 1840 in innovation was technologies digital in nature the UK, from electric power, such as and commenced where it which was used electronics and in the 1990s. It is expanded to to create mass information to based on the other parts of production and automate convergence of the world. to establish production. loose-standing Water and communication. Some of the technologies steam power Railroads technologies spanning were used to developed, that converged diﬀerent mechanise connecting during this time industries, such production, countries and were as the disruption vastly providing computers, the occurring in improving iron infrastructure to World Wide banking, production regions that Web, software, transport and processes. The were previously new processes accommodation textile industry isolated. This such as three- services. New also grew also happened dimensional opportunities rapidly, creating in South Africa, printing, and are occurring in employment with the web-based the eld of that resulted in development of services. The arti cial an increase in mines in the change brought intelligence (AI), the standard of interior of the about mass- robotics, the living of the country. customisation internet of population for such as things (IOT), self- First industrial Second Third industrial Fourth industrial revolution industrial revolution revolution revolution the rst time in individualised driving cars, history. manufacturing nanotechnology, and the biotechnology consumption of and energy specialised storage (e.g. products at batteries as competitive propagated by prices. 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. 1.6.1 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 in uenced 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 in uence 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 As can be seen from Figure 1.2, there are three broad stakeholder groups of which management must be aware: 1. Business-related stakeholders are the owners, investors, bankers and the staff of the organisation. 2. Opinion-related stakeholders are the media, potential employees, customers and suppliers. 3. 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. 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.) 2. 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.) 3. 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 Economic, political, social and The current social contract of ecological systems are volatile and economic growth and creation of fragile. employment that glue together the stakeholders and business is under threat. There is political and economic This indicates a failing social alienation of citizens. Rising contract. Growing anger and unemployment, stagnating social frustration of the people are mobility and a growing resulting in new agendas being population of unskilled youth are generated (e.g. Fees must Fall). resulting in growing populism of Business must deal with this new the people. reality in the business environment. There is increased dependence on There is the threat of the nancial the government for social support cliﬀ.19 South Africa’s economy (e.g. grants), increasing state cannot deliver on the social employment and a rampant state contract as written in the wage bill. State eﬃciency has Constitution. New realities must declined. be accepted and changes to the way in which businesses operate must be investigated. There is a need for a rethink of the A kinder and more just society relationship between stakeholders must be developed, for example a and business basic income grant for all citizens. New nancial threats to business are occurring, such as increased taxation. Trends Implications for the social contract of businesses There is a need for a new social A process of constructive contract. 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. 1.8 The parts of this book This book is organised into four parts (see Figure 1.3). Part 1 is made up of this introductory chapter and a chapter on the business environment. Every business must scan its environment all the time and use this information in the strategic management process to manage its activities. (See Chapter 2.) Part 2 covers the tasks of management, starting with an introductory chapter providing a holistic picture of the management process. (See Chapter 3.) The management process is then broken down into planning, organising, leading, motivating and controlling: Planning is the process of determining objectives and nding methods to reach these objectives. (See Chapter 4.) Organising is the process of creating a structure for the business that will help employees to attain the set objectives. It decides what jobs need to be done, who will do them, and how they will be managed and co-ordinated. (See Chapter 5.) Leading is the process of in uencing employees to reach the business objectives. (See Chapter 6.) Motivating employees to perform well is one of the manager’s tasks. (See Chapter 7.) Controlling is the task of checking whether the set objectives were achieved and if they were not, nding out why not. Control is therefore the start of a new planning process. (See Chapter 8.) Part 3 starts by discussing the functional areas to be found in any business: Operations management deals with the activities that transform resources into goods or services while ful lling the objectives of the business. (See Chapter 9.) Logistics management is the planning, implementation, and control of the ow of goods and services, from the point of production to the point of consumption. (See Chapter 10.) Financial management is the planning, processing and management of the business’s funds to accomplish the set objectives of the business. (See Chapter 11.) Human resource management deals with the function of attracting, developing and retaining enough capable employees to attain the objectives of the business. (See Chapter 12.) Marketing management includes identifying a target market as well as the process of developing, pricing, promoting and distributing products to this target market. (See Chapter 13.) Part 4 discusses the unique aspects that make a person an entrepreneur (see Chapter 14) as well as business plans (see Chapter 15). Figure 1.3 The topics covered in the chapters that follow Case study: Pick n Pay’s sustainable development goals (2017)21 The following is an excerpt from the 2017 Pick n Pay Sustainable Development Report identifying its key stakeholders and the sustainable development goals that they have to improve the life of their stakeholders. Read it carefully and answer the questions that follow. Questions 1. Name the stakeholders that are being addressed by Pick n Pay in this extract from the 2017 Sustainable Development Report. 2. Is the Pick n Pay group ful lling its corporate social responsibility through the above-mentioned sustainable development activities? 3. After reading the above extract, explain the activities that Pick n Pay is performing to ful l its social contract with South African society. 4. Human resources management is an important factor of production for a company such as Pick n Pay. From the information provided in the case study, indicate the activities that Pick n Pay is performing to enhance the quality of work life for its employees. Summary The factors of production are the key resources used by a business to start and to grow, and consist of land, labour, capital and entrepreneurship. The four economic systems in which a business may operate are capitalism, socialism, communism and the mixed economy. Currently there is a big debate about the way forward and the economic system that should be followed. The free-market environment as we know it has serious aws, with unbridled capitalism leading to an over-concentration of power in the hands of a few global organisations. This has in turn resulted in economic mismanagement for which the taxpayer eventually pays. The world is at a point where unemployment, due to technological disruptions, is a fact of life. With these changes, the focus will shift from the manufacturing of products, to having access to these products (meaning having the means/money to buy these products). This can only be effected by growing the economy and creating new jobs for consumers to afford these products. All businesses are involved with key stakeholders, which can be divided into business-related, opinion-related and public-related stakeholders; some have more stakeholders than others. All South African businesses have a social contract with their stakeholders, which can be broken down into explicit expectations, implicit expectations and frontier issues. Multiple choice questions Blitz is a manufacturing company residing in an industrial area in Johannesburg. The company is involved in the manufacturing of car batteries and related products, and is responsible for a lot of smoke pollution in the mostly sub-economic housing areas surrounding it. There have been numerous complaints from residents regarding respiratory ailments that they ascribe to the mercury being used in the manufacturing processes of the company. The CEO published a press release making the following statements: 1 ‘Blitz’s main objective is to provide the greatest possible need satisfaction with the limited resources it has.’ 2 ‘Blitz is working in a business environment where socialism is the political/economic system of the day.’ 3 ‘Blitz proposes that the social political/economic system be replaced with a free-market system which would dilute government’s interference in the economy.’ 4 ‘Blitz is in uenced by stakeholders and would love a competitive environment that is free of the threat of cartels and allegations of bribery.’ 5 ‘Blitz is a corporate socially responsible organisation.’ You are a new reporter for the Daily Times, a newspaper that provides political and economic analysis on a daily basis. You are preparing an analysis on the statements by the CEO of Blitz. You must obtain background information regarding the issues raised by the CEO. Here are some of the issues that you must understand (identify the most correct answer given below): 1 Statement 1: Blitz’s main objective is known as: a) Need satisfaction b) Productivity c) Rate of return on capital d) The economic principle 2 Statement 2: Socialism as an economic system has some disadvantages that must be discussed in the article. Which one of the following describes a disadvantage of socialism? a) Socialism creates cyclical uctuations in the economy. b) Socialism usually results in a lower standard of living. c) Socialism can result in state organisations run in an unproductive manner. d) Socialism creates an unstable business environment. 3 Statement 3: The free-market system limits government interference in the economy (to) __________. a) the minimum b) the maximum c) within reason d) having no in uence at all 4 Statement 4: The in uence of stakeholders and a competitive environment that is free of the threat of cartels and bribery is found in _______________. a) the domain of business-related stakeholders b) the domain of public-related stakeholders c) the domain of opinion-related stakeholders d) no domain of the business 5 Statement 5: The statement of Blitz being a good corporate socially responsible organisation as stated by the CEO is made to ___________. a) make the organisation look good in the eyes of the stakeholders b) make stakeholders understand that the company has a positive effect on the physical environment c) impress the stakeholders that Blitz is busy with environmentally friendly practices d) temper the pressure on Blitz and can be seen as part of a cover-up References 1 Erasmus, B.J., Strydom, J.W & Rudansky-Kloppers, S. 2016. Introduction to business management. 10th ed. Cape Town: Oxford University Press, p. 4. 2 Department of Trade and Industry. The Companies Act 71 of 2008. [Online]. Available: http://www.westerncape.gov.za/legislation/companies-act-no-71- 2008 [Accessed 24 March 2014]. 3 Fatoaki, O.O. & Mazanai, M. 2012. Access to nance in the SME sector: A South African perspective. Asian Journal of Business Management, 4(1):58–67. 4 Shuttleworth, M. 2007. Biography. [Online]. Available: http://www.markshuttleworth.com/biography [Accessed 23 May 2007]. 5 Fatoaki, O.O. 2010. Graduate entrepreneurial intention in South Africa: Motivations and obstacles. International Journal of Business and Management, 5(9) September. 6 Ibid. 7 Fioramonti, L. 2017. Why capitalism wins. And how a simple accounting move can defeat it. [Online]. Available: http://theconversation.com/why-capitalism-wins-and-how-a- simple-accounting-move-can-defeat-it-83821? utm_medium=email&utm_campaign=Latest%20from%20The%2 0Conversation%20for%20October%209%202017%20- %2085157044&utm_content=Latest%20from%20The%20Conver sation%20for%20October%209%202017%20- %2085157044+CID_a19f8a4c8c747dd4e59cf4fb4a9a37d0&utm _source=campaign_monitor_africa&utm_term=Why%20capitali sm%20wins%20And%20how%20a%20simple%20accounting%20m ove%20can%20defeat%20it [Accessed 9 October 2017]. 8 Schwab, K. 2016. The World Economic Forum …The Fourth Industrial Revolution: What it means, how to respond. [Online]. Available: https://www.weforum.org/agenda/2016/01/the-fourth- industrial-revolution-what-it-means-and-how-to-respond/ [Accessed 25 October 2017]. 9 Difference between First and Second Industrial Revolution. [Online]. Available: http://www.differencebetween.com/difference-between- rst- and-vs-second-industrial-revolution/ [Accessed 25 October 2017]; Schwab, op. cit.; The Third Industrial Revolution. 2012. [Online]. Available: http://www.economist.com/node/21553017 [Accessed 25 October 2017]. 10 DeMers, J. 2017. 7 ways the Internet of Things will change businesses In 2017. [Online]. Available: https://www.forbes.com/sites/jaysondemers/2017/01/11/7-ways- the-internet-of-things-will-change-businesses-in- 2017/#6a1ced239e6b [Accessed 25 March 2017]. 11 Adapted from Noren, G., Bendrot, I., Laurent, B., Nyberg, C., Strömdahl, I. & Thorsenherd, M.L. 2004. The role of business in society. Sweden: Confederations of Swedish Enterprise, p. 8. 12 Fin24. 2010. One in six adults owns a small rm. [Online]. Available: http://www. n24.com/Entrepreneurship/1-in-6- adults-owns-a-small-business-20100917 [Accessed 30 September 2010]. 13 Pickworth, E. 2013. Remuneration report sees pay gap widening in SA. [Online]. Available: http://www.bdlive.co.za/business/management/2013/10/11/remu neration-report-sees-pay-gap-widening-in-sa [Accessed 30 March 2014]; Mashego, T. 2013. No chance of closing worker– boss wage gap. [Online]. Available: http://www.bdlive.co.za/business/2013/12/01/no-chance-of- closing-worker-boss-wage-gap [Accessed 30 March 2014]; BusinessTech. 2016. What the average CEO and executive earns in South Africa. 2016. [Online]. Available: https://businesstech.co.za/news/business/113176/what-the- average-ceo-and-executive-earns-in-south-africa/ [Accessed 26 October 2017]. 14 Flower, J. 2009. Knowledge review: Sustainable goes strategic. Strategy + Business, 54:1–10. 15 Erasmus et al., op. cit., p. 7. 16 Nyuur, R.B., Ofori, D.F. & Debrah, Y. 2014. Corporate social responsibility in sub-Saharan Africa: Hindering and supporting factors. African Journal of Economic and Management Sciences, 5(1): 94–95. 17 Bonini, S.M., Mendonca, L.T. & Oppenheim, J.M. 2006. The social issues become strategic. The McKinsey Quarterly, 2: 20– 32. 18 Raghubar, J. 2017. Fourth Industrial Revolution: Shifting sands of techno-capitalism show need for a new social contract. [Online]. Available: https://www.businesslive.co.za/bd/opinion/2017-06-08-shifting- sands-of-techno-capitalism-show-need-for-a-new-social- contract/ [Accessed 3 November 2017]; Oosthuizen, M. 2016. Why South Africa can’t deliver on the social contract set out in its constitution. [Online]. Available: https://theconversation.com/why-south-africa-cant-deliver-on- the-social-contract-set-out-in-its-constitution-69119 [Accessed 3 November 2017]. 19 Rossouw, J. 2016. South Africa is on a cliff edge – just as it was in 1985. [Online]. Available: https://theconversation.com/south- africa-is-on-a-cliff-edge-just-as-it-was-in-1985-53094 [Accessed 3 November 2017]. Calland, R. 2017. South Africa can’t save itself just by talking 20 the talk. It must walk the walk. [Online]. Available: https://theconversation.com/south-africa-cant-save-itself-just- by-talking-the-talk-it-must-walk-the-walk-73863 [Accessed November 2017]. 21 Adapted from Pick n Pay Sustainable Development Goals (2017 Report). [Online]. http://www.picknpayinvestor.co.za/downloads/doing- good/sustainable-living-report/2017/sustainable-living-report- 2017.pdf [Accessed 2 November 2017]. Chapter 2 THE BUSINESS ENVIRONMENT Jerome Kiley Purpose of this chapter This chapter discusses the concept of systems thinking, because all aspects of a business, both internal and external, are interconnected. This chapter examines how the micro- environment, the market environment and the macro-environment affect the success of a business, and it explains how to perform a SWOT analysis. Learning outcomes This chapter should enable you to: understand the concept of systems thinking comprehend the nature and impact of the business environment explain the level of control that management has over the diﬀerent organisational environments describe the micro-environment and how the various management functions aﬀect the success of the business discuss how the diﬀerent role players in the market environment aﬀect the success of the business understand how the sub-environments in the macro-environment aﬀect the business and its continued existence analyse the impact of the environment on an organisation, using a SWOT analysis. 2.1 Introduction Because a business is an open system, it is affected by both the forces within it and those outside of it. The manager needs to understand how these forces affect the business in order to manage the consequences (results) of these for the business. The business environment comprises anything that happens outside the organisation which impacts upon both its current and future activities. Each organisation has a unique environment that has distinct impacts depending on such factors as the type of product or service and the market to which these products or services are being offered. 2.2 The systems approach The systems approach is based on the idea that all organisations are made up of interdependent parts that can only be understood by looking at the whole.1 Any system consists of three components, namely inputs, processes and outputs. Figure 2.1 The organisation as a system The inputs are all the things that are brought together in an organisation (human resources, natural resources, capital and entrepreneurship). The inputs are then processed by carrying out the different management functions (operations management, logistics management, nancial management, human resources management, and marketing and public relations management), with the end result being outputs in the form of goods or services. A business does not exist in a vacuum. Everything that happens, both within and outside the organisation, affects the organisation. The easiest way to understand this is to think of the human body with its different parts and organs. If any one of the organs does not function properly, it affects the functioning of the entire body. For example, if a person stubs his or her big toe, this affects the body’s functioning by causing that person to limp and be distracted by the pain. A business organisation is governed by the same principles. If any part of the system is not functioning properly, it will affect the functioning of the whole organisation. For example, if there is a problem in the human resources department, this can affect all the other departments by demotivating employees and causing an overall drop in their performance, and therefore in the overall performance of the business. 2.3 Organisational environment A business’s organisational environment is the world outside the business as well as what goes on inside the business.2 These work together in affecting the success of the business. Figure 2.2 The organisational environment The organisational environment has three parts: 1. Micro-environment: This is the environment inside the business that consists of the different business functions and the way they are managed. 2. Market environment: This is the environment immediately outside the business, where the business gets its resources from and trades its products. It comprises suppliers, intermediaries, customers and competitors. 3. Macro-environment: This includes all those factors that affect the business, including the natural, technological, social, political, economic and international environments. An important point about these three parts of the organisational environment is the degree of control that the manager has over each one. Figure 2.3 Levels of management control over the three components of the organisational environment The manager has direct control over the micro-environment. This is the environment inside the business that the manager makes decisions about on a daily basis. These decisions relate to any of the functional activities of the organisation, such as how the business will be marketed or how the operations will be run. These decisions have a direct effect on the micro-environment. The market environment, which is the environment immediately outside the business, is in uenced by management. For example, the decisions of management on advertising and pricing may attract customers to the business. However, there are many things that management has little or no control over, such as the availability of goods and skilled labour. The organisation can be seen as a victim of the macro- environment, in that management has very little or no control over events on national and international levels. These are often the events that we hear about on the news. Management has to deal with the effects of these events on the organisational environment. This is why the SWOT analysis forms such an important part of the manager’s job description. (See section 2.4.) It is management’s responsibility to form strategies (plans) for the business to achieve a competitive advantage that will eventually make the business a success.3 Rather than being passive victims of fate, managers must be proactive (respond quickly) in managing the organisational environment. However, one of the major challenges for management is dealing with the huge amount of information that is available, and making accurate predictions based on this.4 2.3.1 The micro-environment The micro-environment (also known as the ‘internal environment’) is the environment inside the business. It includes the business functions (operations, logistics, nance, human resources management, marketing and public relations) and the management tasks (planning, organising, motivating, leading, and controlling) that are involved in running the organisation. Figure 2.4 Relationships between the business functions in the micro- environment The effectiveness of managers in carrying out the various management tasks has a direct impact on the functioning of a business. To see this in action, think of two branches of a take-away chain. If you go to any well-known franchise, you expect the quality of the food and service to be the same; in fact, that is the point of a franchise. Operations processes are standardised in order to achieve this. In reality, you may have experienced quite the opposite, with one branch of a franchise being more ef cient, having better prepared food and offering a more pleasant experience overall – friendly staff members, fresh and tasty food, and clean oors and windows. By contrast, the staff at another store may be unfriendly and unhelpful. They may often be out of stock of items on their menu, their food may not be of the same quality, and the oors and tables may be dirty and littered. You will probably have noticed that in the rst store, the manager is present and actively involved with the staff, while in the second the manager is often absent, or if present, he or she has very little to do with the other staff members and how they are performing. The success of a business depends on how well the manager does his or her job. The operations function is responsible for producing the products that the business sells (e.g. at a fastfood restaurant, this is the kitchen that produces the food). If the operations function does not perform effectively, the business will not be able to supply its customers with the required quantity and quality of products. The logistics function is responsible for getting the right quality products, in the right quantity, at the right time, and at the right price (purchasing), as well as for distributing the products of the business, either within the organisation or by delivering them to the customer (e.g. one of the key factors that SPAR attributes to their success is that they are ef cient in supplying products to their stores). If this function is not working well, the products of the business will not be in the right place at the right time, at the right price, and the business will lose customers. The nancial function must operate effectively to ensure that the business has enough capital to run the business in both the short and the long term. It must collect debts and pay the creditors of the business. If this does not work properly, the business will de nitely fail. The human resources management (HRM) function must get the right quality of employees for the business and then look after them so that they stay and help the business to achieve its goals. The HRM function is thus responsible for the selection and recruitment of employees, orientation and induction, personnel administration, training and development, performance appraisal, career management and labour relations. The marketing function is there to tell potential (likely) customers about the products sold by the business, and to persuade them to buy these goods and services. A business can have the best goods or services in the world, at the best possible price, but if customers do not know about them, they will not buy them. The business must also have a ‘positive image’ (attractive mental picture, often linked to its brand). If it does not, customers may not buy its goods and services. The public relations function is there to make sure that the business keeps a positive image among its customers as well as in the broader society. (Although the public relations function is a separate function, for the purposes of this book, it is dealt with together with the marketing functio

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