MNE2601 Assignment 2 semester 2
2020 with explanation from
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Answer: 2
2.4 THE ROLE OF SMALL-BUSINESS START-UPS IN THE EMERGING SOUTH
AFRICAN ECONOMY
SMEs play an important role in the development of emerging countries (Fida, 2008). They
contribute to economic development by creating employment for the growing labour force in
rural and urban areas; they also generate income, thereby providing desirable sustainability and
innovation for the economy as a whole and eventually, leading to the reduction of poverty.
Maas and Herrington (2006) confirm this as they state that SMEs are seen as a significant
component of the solution to South Africa’s development issues, which include poverty,
income inequality and unemployment. A recent study conducted by Abor and Quartey (2010)
estimates that 91 per cent of formal business entities in South Africa are SMEs, and these SMEs
contribute between 51 and 57 per cent of the gross domestic product (GDP) and provide about
61 per cent of the country’s employment; Van Scheers (2011) also confirms these statistics.
The Banking Association of South Africa and member banks are committed to small-business
development and offer support through stakeholder engagement, and involvement or
ownership of several initiatives. Other initiatives described by Fatoki and Akinwumi (2010)
that promote the development of small businesses include the current framework of smallbusiness support and development in South Africa, which comprises the following:
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The White Paper on National Strategy for the Development and Promotion of Small
Business (DTI, 1995), which sets out the government’s strategy in this regard
The Centre for Small Business Promotion, which has also been established by the
government with the goals of creating an enabling environment for the growth and
expansion of SMEs and of developing and supporting the institutions involved in
delivering support services to SMEs
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Developing economies often have high numbers of low-capital businesses that manufacture or
sell similar products that will decrease unemployment. Next ideas for small-business start-ups
will be discussed.
Answer: 1
3.2 PRODUCT/SERVICE FEASIBILITY ANALYSIS
The aim of the product or service feasibility analysis includes:
•
To determine whether the planned product or service is attractive to the envisaged market
in the form and price intended
• To determine the ease of use, suitability for purpose, or challenges potential users might
encounter when using the product for the first time
• To gather feedback from the consumer, which can be used to make the necessary
adjustments to the product or service before releasing it to the market
• To determine whether forecasts can be made to reflect the expected demand for the
product.
The steps followed in this process are: to conduct market research to determine if there is a
need for the product or service; to undertake a concept test (utilising a concept statement); to
develop a prototype and conduct usability testing; and to use the feedback gathered to
determine whether or not to proceed with a business idea. If the research or test indicates that
there is no need or demand for the product or service, the budding entrepreneur might decide
not to implement the rest of the steps listed above.
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Answer: 1
5.4.5 Decision-making skills
Decision-making skills involve the small-business owner’s ability to choose an appropriate
course of action from two or more alternatives. Subordinates perform the task directly required
for production, but the owner must still decide what strategy to implement, what resources are
acquired and how they are to be allocated (Terblanche, Moeng & Macleod, 2011). Smallbusiness owners use these skills when they consider the overall objectives and strategy of the
business, the interactions among different parts of business, and the role of the business in its
external environment. The key to decision making is the ability to select the appropriate
decision-making style for each decision faced. Successful small-business owners learn to
match the appropriate decision-making style with the situation.
Answer: 3
4.6.3 Formal collaborations
More formal and/or strategic collaborations can be in the form of joint ventures or strategic
alliances. They can be between small businesses themselves or the small business can try to
partner with bigger businesses.
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Joint ventures: a joint venture is “a temporary partnership formed by two or more organisations
for the purpose of capitalising on a particular opportunity” (Ehlers & Lazenby, 2010: 211). Joint
ventures are especially attractive when the two businesses that are coming together have unique
skills and/or competencies that complement one another. Usually businesses enter into joint
ventures to learn unique skills that the partner has so they can improve their own skills, or take
advantage of newer technologies, or increase their ability to penetrate newer markets that they
would not have been able to access if they were operating on their own. The ultimate goal of
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•
entering into a joint venture is to enhance the competitiveness of both businesses (Ehlers &
Lazenby, 2010; Haberberg & Rieple, 2008). According to Ehlers and Lazenby (2010: 212): “smaller
organisations can increase their competitiveness by joining forces against larger organisations”. In
addition, small businesses in joint ventures can “… lower business risk by partnering with local
entrepreneurs who have knowledge, contacts and experience of the domestic market” (Rwigema,
2006: 225).
Strategic alliances: in strategic alliances, small businesses can enter into partnership agreements
to share knowledge, expertise and skills; share and reduce costs when dealing with suppliers or
reduce costs in terms of research and development; work together on the development of new
products and technologies; and share the benefits of new businesses while they each remain
independent and do not necessarily share ownership. Strategic alliances may be shorter term
compared to joint ventures (Ehlers & Lazenby, 2010; Elmuti & Kathawala, 2001; Išoraite·, 2009;
Rwigema, 2006). Išoraite· (2009: 39) defines a strategic alliance as “an agreement between two or
more organizations to cooperate in a specific business activity, so that each benefits from the
strengths of the other, and gains competitive advantage”. More and more companies are
encouraged to enter into strategic alliances to enhance their ability to respond effectively to
globalisation as well as the ever-increasing uncertainty and turbulence of the business
environment. Strategic alliances are especially good when small businesses want to grow by
venturing into new and unfamiliar markets while coping with the increasing costs that come with
research, development and management of such growth (Ehlers & Lazenby, 2010; Rwigema,
2006).
Answer: 4
4.6.2 Who to collaborate with
Collaboration and networking opportunities can be with governmental or non-governmental
organisations whose mandates include SMME support and development; private businesses;
or personal relationships with other SMMEs, customers and/or suppliers (Senik, Scott-Ladd,
Entrekin & Adham, 2011). Thus, the partnerships and collaborations can take several forms as
follows:
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•
Firstly, networks with bigger corporations can afford the SMME managers/owners an opportunity
to get access to coaching and mentoring by people who have more experience in running
businesses in their area of interest and, importantly, in their geographic area.
Secondly, SMMEs can form networks and/or agreements with their suppliers. This kind of
agreement can provide them an opportunity to negotiate for better deals and better prices; they
can have some influence on the quantity of the materials and/or services they get from their
suppliers, and should situations call for it, they may be able to get materials quickly (just-in-time),
which is something that can be difficult to negotiate if there is no continuous relationship with the
suppliers.
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•
Thirdly, networks can be formed with customers, both current and potential. The advantages of
having a relationship with customers include the fact that:
– It is easier to know the customer’s needs and whenever possible tailor-make products and
services to suit those customer’s needs;
– Customer satisfaction can be better monitored;
– Frequent contact with a customer will likely promote customer loyalty.
– Customers can also include the communities within which businesses operate. Usually they
have expectations in terms of social responsibility. Forming some form of
relationship with them can assist businesses to know what communities expect. This type of
relationship can also promote support by the local communities.
Answer: 2
4.4.1 Management and leadership knowledge
An ideal entrepreneurial venture starts with a good, viable idea and/or an opportunity that needs
to be managed well, in order for it to flourish and be sustainable. Organisations, big or small,
utilise financial, human, technological and infrastructural/physical resources to achieve goals
of producing products or rendering services. This management of resources is more challenging
for small businesses in emerging markets as the resources are limited. Therefore, effective and
efficient management of these scarce resources becomes crucial to achieve the entrepreneur’s
vision. Management is a process that entails planning, organising, leading and coordinating
organisational resources to achieve organisational objectives.
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Planning, which is the first step in the management process, involves being able to scan the
environment, both internally and externally, to find out the strengths and weaknesses of the
organisation, as well as the opportunities and threats that are outside the organisation, which
may facilitate or hinder the prosperity of the organisation. Being able to identify what
opportunities there are can help the entrepreneur respond to customer needs and thereby build
and maintain a competitive advantage. In addition, if entrepreneurs are able to assess the threats
and opportunities, they are able to make projections/forecasts in terms of business prospects.
Projections help in drafting informed business plans to help convince potential financiers in cases
where finance is required. This points to the fact that entrepreneurs need, in line with strategic
planning, to be able to draft clear and informed business plans. The end-product of planning is to
come up with the vision, mission, goals, and strategic and operational plans for how the
entrepreneurial venture is going to be executed.
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•
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Organising, the second phase of the management process, follows once the goals and plans of the
entrepreneurial venture have been outlined. This second step involves indicating how the
available resources are going to be allocated and utilised to achieve the set goals. For instance,
organising involves checking if money/finance, or properly qualified human resources are
available to be able to execute the set plans effectively and efficiently. In addition, during
organising, different employees who have similar skills and competencies can be grouped
together to achieve specific operational goals. These categorisations of people with similar skills
and competencies show the levels of skill as well as reporting structures, thereby resulting in
organisational structures and hierarchies. The structures are also essential for people to take
responsibility and be accountable for the execution of plans and goals as set out during the
planning session. Having organisational structures is important for entrepreneurs to
allocate/delegate and monitor progress of duties that need to be performed. How well duties are
performed is important for the prosperity of any organisation, as well as its competitive
advantage. The organising function includes having policies and standards of operations on, for
instance, recruitment and selection, promotion, remuneration and labour relations, which guide
employees on what to do and how to do it. Entrepreneurs need these guides that can help them
in interactions with all their stakeholders, existing and potential.
Leading involves influencing employees towards achievement of the set goals. The leading role
requires that the entrepreneur communicates the vision of the business, as well as goals and
plans to all the employees and other stakeholders in such a way that they will be motivated to
achieve those goals. Therefore, interpersonal skills of communication and motivation of the self
and others are very important in all businesses, including small businesses.
The control function is there mainly as a way of monitoring and evaluating progress in terms of
the execution of plans as laid out, checking where mistakes have been made and
taking corrective measures to remedy such mistakes. In start-up ventures especially not everyone
has the same understanding of the business owner’s vision of the business. So by controlling all
other employees, the small-business manager or owner makes sure that all employees do what
they are supposed to do.
Answer: 1
3.6 ORGANISATIONAL FEASIBILITY ANALYSIS
An organisation has to be formed by the entrepreneur in order to exploit the idea and bring the
idea to the marketplace. After this, resources need to be acquired and allocated to the
organisation in order for it to operate effectively.
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Organisational feasibility is determined by evaluating management aspects (management
prowess), organisational structure as well as the non-financial resource requirements of the
firm.
3.6.1 Management aspects
Management prowess includes
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the passion of the entrepreneur or management team
knowledge and understanding of the market by the management team
the management team’s professional and social networks.
Answer: 3
3.3.1 Types of industries
There are various types of industries, with each type of industry offering different
opportunities. The following types of industries can be identified:
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Emerging industries: an emerging industry is a new industry in which standard operating
procedures have yet to be developed. A high level of uncertainty characterises emerging
industries, yet many new ventures enter emerging industries as the barriers to entry are usually
low with no established pattern of rivalry. Due to the high level of uncertainty in these industries,
success may be short-lived with new innovations constantly changing the nature of competition,
for example the cellular market.
Fragmented industries: a fragmented industry is one that is characterised by a large number of
firms of approximately the same size.
Mature industries: a mature industry is an industry that is experiencing slow or no increase in
demand, has numerous repeat customers, and has limited product innovation. A challenge in this
industry for a new entrant is the cost associated with marketing and distributing, in order to
achieve awareness and a presence in the market.
Declining industries: a declining industry is an industry that is experiencing a reduction in demand
and is therefore not an attractive industry to enter. An opportunity here would be to revolutionise
the industry by becoming the leader in a niche segment of the industry by creating uncontested
new market space that makes the competition irrelevant, for instance, Cirque du Soleil. See the
reference to Cirque du Soleil at the end of this chapter for more information.
Global industries: a global industry is an industry that is experiencing significant international
sales. A start-up entering this industry usually tries to appeal to an international market from the
very first day of operation and is typically found in internet-based businesses.
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Answer: 3
3.2.2 Concept statement
The concept statement is a short, preliminary description of the product or service idea. The
concept statement includes the following items:
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A description of the product or service being offered: this section often includes a sketch in the
case of a product, so that the prospective customer could see how the intended product would
look. It would also include features of the product or service that would enable the prospective
consumer to express an opinion on his or her attitude towards the intended product/service. The
response received at this stage would assist in building the prototype that incorporates the
feedback and intention that the entrepreneur had in mind.
The benefits of the product or service: this section highlights the benefits and value that the
product or service offers potential users as well as the needs and wants that it aims to address or
problems that it seeks to solve.
The intended target market: this section lists the consumers or businesses that are expected to
be interested in the product or service to be offered.
A description of how the product will be positioned relative to its competitors: by utilising a
positioning map, the entrepreneur is forced to think of the criteria that would be used to
distinguish his or her product or service from that of competitors.
A description of how the product or service will be sold or distributed: this section forces the
entrepreneur to think of strategies and channels of distribution that need to be utilised in order
to get a product or service to the consumer.
A brief description of the company’s management team.
Answer: 1
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3.2 PRODUCT/SERVICE FEASIBILITY ANALYSIS
The aim of the product or service feasibility analysis includes:
•
•
•
•
To determine whether the planned product or service is attractive to the envisaged market in the
form and price intended
To determine the ease of use, suitability for purpose, or challenges potential users might
encounter when using the product for the first time
To gather feedback from the consumer, which can be used to make the necessary adjustments to
the product or service before releasing it to the market
To determine whether forecasts can be made to reflect the expected demand for the product.
Answer: 3
2.7.1.5 Global challenges
Global challenges such as the threat of cheaper imported goods and little protection in the way
of import taxes also present serious challenges to an enterprise. Management and the workers
need to cooperate in order to survive in a highly competitive global environment. Productivity
levels and the best technology need to be employed to meet the challenge of cheap imported
goods. On the other hand, globalisation offers export and offshore investment opportunities.
2.7.1.6 Physical challenges
The physical factors are scarce resources such as water, fossil oil, pollution and environmental
damages. The world’s fossil-oil resources are decreasing as a result of fast-growing countries
like China using more energy to produce products. The Kyoto agreement on pollution and the
environment came into effect into 2005. This is an agreement whereby most governments
throughout the world agreed to reduce carbon pollution to protect the earth’s atmosphere.
Greater social awareness and government commitment to reducing pollution will put pressure
on businesses to display greater environmental responsibilities.
We have already learnt that the business will use raw material and other physical resources in
the course of production. The supplies of these natural resources are often not sustainable,
which means that these resources may become depleted and therefore need to be properly
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managed at all times. The physical challenges are to try to protect scarce resources such as
water and fossil fuel, and to reduce pollution and environmental damages.
2.7.1.7 Political challenges
Political instability and restrictive legislation can negatively affect investment and growth in
South Africa. It is therefore important for the business community to engage with the
government and the labour movement to ensure sound macro environmental policies, which
are conducive to trade and investment.
Labour legislation, which forms part of the political environment, also presents unique
challenges to South African small businesses, for example, the attainment of equity targets and
black business empowerment. The small business can turn these challenges into advantages by
entering into partnership with suitable empowerment stakeholders who can add value to
the small business. An equity plan needs to be in place to ensure a smooth transition of skills
to equity appointees. The political factors have a huge influence upon the regulation of a
business and the spending power of consumers and other businesses.
Answer: 4
2.7.1.2 Monetary policy challenges
The monetary policy challenges include changes in interest rates, inflation, the rate of taxation
and the exchange rate. For example, interest rates: small businesses pay interest on money they
borrow and they also receive interest when they invest money. Small businesses also charge
interest when customers buy goods on credit. Therefore an increase or decrease in interest rates
affects business activities as well as the buying habits of their customers. The rate of taxation
on the customer will have an impact on spending power and therefore also on the survival of
the business. If customers do not buy products, the small business will not survive.
Monetary challenges such as interest rates, inflation and exchange rates can have a negative
impact on the business when there are sudden changes or fluctuations. If the rand increases in
value against our major trading partners, it will make it more difficult for local companies to
compete against cheaper imported goods. On the other hand, a stronger currency means capital
goods and resources can then be imported more cheaply.
Small businesses need to focus more on productivity in an attempt to meet the challenges of
higher inflation or less favourable exchange rates. Changes in the income levels of customers
will have a direct impact on the sales turnover. In times of economic growth and development,
more people will have jobs, which in turn will result in higher sales. The opposite is also true
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when the economy is not growing or even shrinking. In such a case the overall income levels
of people will be lower and fewer people can afford goods and services.
Answer: 2
2.6.1.1 Sole trader
This business is owned by one individual and managed by the same person. Many small service
businesses such as general dealers, spaza shops, plumbers, hairdressers and lawyers are sole
traders. There are no legal formalities other than a licence to trade, and a limited investment is
required to start such a business. The owner is responsible for contributing the funds or capital
required by the business. The owner accepts all the risks involved, bears any losses and gets
the profit of the business. The owner is also liable, in his personal capacity, for the debts of the
business.
The owner is also taxed on the profit of the business and the owner declares the profit on his
personal income tax return. This is done because the sole trader is not a juristic person distinct
from its owner. We can say that the business has no legal “personality” and cannot be
summoned to court. When the owner of the sole trader dies, the business ceases to exist. If the
business activities are taken over by someone else, a new soletrade business comes into being.
Advantages
The main advantages of the sole-trader business are that it is easy to set up and control the
business. The sole trader
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makes all the decisions
keeps all the profits
controls the business
starts with minimum capital
has a simple management system.
Disadvantages
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There is unlimited liability for debts of the business and the risk of losing personal wealth if the
business fails.
Lack of capital means the business stays small.
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•
There will be lack of continuity in the business if the sole trader dies and then the business will
also die.
Answer: 2
The most widely used framework in South Africa is the definition of the National Small
Business Act, which defines five categories of business as follows:
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Survivalist enterprise: the income generated is less than the minimum income standard or
the poverty line. This category is considered pre-entrepreneurial, and includes hawkers,
vendors and subsistence farmers. (In practice, survivalist enterprises are often categorised
as part of the micro-enterprise sector.)
Micro enterprise: the turnover is less than the VAT registration limit (that is, R150 000
per year). These enterprises usually lack formality in terms of registration. They include,
for example, spaza shops, minibus taxis and household industries. They employ no more
than five people.
Very small enterprise: this category includes enterprises employing fewer than 10
employees, except mining, electricity, manufacturing and construction sectors, in which
the figure is 20 employees. These enterprises operate in the formal market and have access
to technology.
Small enterprise: the upper limit is 50 employees. Small enterprises are generally more
established than very small enterprises and exhibit more complex business practices.
Medium enterprise: the maximum number of employees is 100, or 200 for the mining,
electricity, manufacturing and construction sectors. These enterprises are often
characterised by the decentralisation of power to an additional management layer.
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Answer: 1
The term “emerging economy” represents those newly industrialising economies or countries
(NICs) which today include the BRICS and their showing in international forums such as the
World Trade Organization (WTO) (Pieterse, 2009: 1–3; Palat, 2009: 39–60). Nowadays it is
loosely applied to all the global South. These countries have also been called the “developing
world” or “developing economies”. It is also important to understand that the evolution of the
term has been informed by both economic and political narratives. However, the choice of the
term “emerging economies” shows clear concentration on the economic front rather than the
political one. This emergence is reflected in the postulated view that China and India in
particular stand to overtake the leading Western economies in terms of GDP in the near future.
Thus it is necessary to understand the characteristics of emerging economies. In the definitions
below, Pieterse (2009: 15–28) simplifies the characteristics of emerging economies as follows:
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Trade: there is a growing trend to redefine the geographies of trade among developing
countries as they prefer to trade among themselves.
Finance: the hegemonic role of money lenders (the IMF and the World Bank, both of
which are dominated by Western leadership) is declining as developing countries choose to
finance their own economies along East Asian–Latin and American–African lines
(hegemony refers to the dominance of one state or body over another).
Institutions: the policies of the IMF, World Bank and the WTO have resulted in large debt
burdens and prescriptive policies for countries in the South.
Hegemony: the Global South has distanced itself from the West and is pursuing Southfriendly policies in response to, for example, the primarily Western Group of Seven (an
informal bloc consisting of Canada, France, Germany, Italy, Japan, the UK and the US).
Growing inequality: there is clear growth of inequality in developing countries as
compared to developed ones, as seen in shrinking agricultural produce, the often-negative
role of multinational companies and rising slums.
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