TOPIC 1 INTRODUCTION TO BUSINESS MANAGEMENT INTRODUCTION AND AIM OF THE TOPIC The aim is to provide an overview of the business world and business management, the role of entrepreneurship and its nature and role in society, how a business can be established and the business environment in which a business functions. Lastly we look at corporate social responsibility. 138 Learning objectives 1 After completing this topic, you should be able to demonstrate an understanding of the role of business in society and the position of business management in the business world identify an entrepreneur and explain his or her role in society recognise how an organisation functions and how it is established explain the term “business environment”, examine its composition and investigate aspects of environmental scanning explain what corporate social responsibility is and what it entails 139 CONTENT 140 Topic 1 comprises five learning units: LEARNING UNIT 1: The business world and business management LEARNING UNIT 2: Entrepreneurship TOPIC 1: INTRODUCTION TO BUSINESS MANAGEMENT LEARNING UNIT 3: The establishment of a business LEARNING UNIT 4: The business environment LEARNING UNIT 5: Corporate social responsibility 141 2 MNB1501/1/2018–2020 Learning Unit 1 The business world and business management INTRODUCTION AND AIM OF THE UNIT This learning unit discusses the role of business in society and explains how a business organisation in a market economy employs the limited resources of a nation, its natural resources, human resources, financial resources and entrepreneurship to satisfy the need for products and services. The learning unit gives an overview of the main prevailing economic systems in the world and explains how the business organisation functions in a market economy. Against this background, the purpose and nature of business management is examined: specifically the task of business management, namely studying the factors, methods and principles that enable a business to function as efficiently as possible. A classification of the study material on business management is also presented. 142 STUDY CHAPTER 1 (sections 1.2–1.9) IN INTRODUCTION TO BUSINESS MANAGEMENT (ITBM) 2 Contents of the learning unit: The role of business in society Needs and need satisfaction The main economic systems The need-satisfying institutions of the market economy The nature of business management and the classification of the study material on business management Learning objectives 3 When you have worked through learning unit 1, you should be able to demonstrate an understanding of the role of business in society explain the needs of society and how need satisfaction occurs discuss the three main economic systems in the world explain the differences between need-satisfying institutions and non-profit institutions explain the inherent nature of business management understand how the study material on business management is classified 3 4 KEY TERMS community needs economic systems society development classification free market market economy Refer to the end of chapter 1 in the prescribed book to familiarise yourself with the key terms for this learning unit before continuing. 143 1.1 THE ROLE OF BUSINESS IN SOCIETY Study section 1.2 in ITBM. The business activity generally involves the transformation of resources into goods and services to meet society’s needs. Business, however, cannot operate without society at large. It is important to understand how closely any business organisation is linked to the society in which it operates. The needs and values of a society have a strong influence on what a business does. For example, if the people in the society are very aware of the need for protecting the environment, they will soon bring pressure to bear (often through the news media) on any business that pollutes the environment with its waste materials. 144 Not only should businesses be aware of their influence on the physical environment, but also of the effect their business activities have on consumers, the economy at large and competitors. 145 Through the spheres of social responsibility, consumerism and the prevention of environmental damage, for example, a society can persuade an organisation not to pollute or damage the environment or fix prices. Just as a society can influence its business organisations, so these organisations can have a significant influence on the society. By developing new products, businesses can influence the behaviour patterns of people in a particular society. Just think of the impact that the electronics industry (with its production of cell phones and DVD recorders, for example) has had on the social life of our society. The success of businesses also has a major impact on the prosperity of a society. In a town such as Secunda, for example, Sasol employs many of the inhabitants. If Sasol were to go bankrupt, thousands of people would be left jobless and the entire town would be affected. 146 147 5 4 MNB1501/1/2018–2020 Did you know? South Africa’s steel industry was on the verge of collapse. Read the case study above section 1.2 in ITBM to begin forming an understanding of the effect of business sustainability on society. Activity 1.1 In the past few years we have seen a number of newspaper articles with the following headlines: • • • • • “Miners and their families without food in Stilfontein” “New questions raised about the fiduciary responsibilities of directors of Saambou Bank” “Jonathan Oppenheimer of De Beers announces a black economic empowerment partner” “Small landholders lodge claims against Mittal Steel for environmental damage” “Consumer organization complaints about the high telecommunication prices” 148 From the five headlines above, identify what type of influence is being exerted by South African organisations on society. Feedback: 6 Contact your e-tutor via myUnisa for the answer to this activity. 1.2 NEEDS AND NEED SATISFACTION Study section 1.3 in ITBM. Human beings have many varied and seemingly unlimited needs. Society, however, has limited resources to satisfy those needs and so a choice has to be made how best to utilise those resources. Most of us would like to live in a mansion, drive a luxury car, own a seaside cottage, go on an overseas trip every year, wear the latest fashion clothes and so on, but very few people have enough money to afford all these products and services. Most of us have limited resources (money), so we have to decide how to utilise the little we do have to obtain the greatest satisfaction possible. The decision to obtain the greatest possible benefit (or satisfaction) with the limited resources we have is known as the economic principle. 149 Since the business world is geared towards satisfying needs in the society, it is important for management to know what those needs are. According to Maslow, all people have the same basic needs, but not everybody strives to satisfy the same needs. In countries with severe famine, for example, people will direct a great deal of their energy towards 150 5 the satisfaction of physiological needs such as hunger and thirst. However, according to Maslow, once these needs are satisfied, people will strive to satisfy the next level of needs (i.e. security needs) and so on. In the business world, there are four types of resources available to manufacture goods or provide services. These resources are known as production factors and refer to all the resources used for producing goods or services. Whether a certain item is a production factor or an end product will depend on the use it is put to. For a truck manufacturing company, a truck is not a production factor – it is the end product. However, for a transport company, a truck is a production factor, since without it the company would not be able to provide the basic service of transporting goods. The figure below depicts the four production factors. 151 Society is confronted with the fundamental economic problem of how to ensure the highest possible satisfaction of needs with the limited, scarce resources available. Within a community, needs satisfaction occurs within a cycle, as can be seen in figure 1.5 in your prescribed book. One of the elements within this cycle is the economic system determined by the community. We will have a look at the main economic systems in the next section. 153 154 After reading this section and the discussion above, complete the activity that follows. Activity 1.2 As the consumer, you are confronted with the following situations: • • • • • Not having eaten lunch, you are quite hungry and thirsty. You are scared to sleep at night after a neighbour was murdered. You are worried about your continuing relationship with your partner, as he has indicated that he wanted to move out of the flat that you share. Your boss has screamed at you at work in the presence of fellow workers. You want to enrol for further studies in the field of management in order to further yourself in life. Use Maslow’s hierarchy of needs to classify the above situations. 6 MNB1501/1/2018–2020 7 Feedback: Contact your e-tutor via myUnisa for the answers to this activity. 1.3 THE MAIN ECONOMIC SYSTEMS Study section 1.4 in ITBM. 155 The world is divided into three basic economic systems: the free-market economy, socialism and the command economy. Socialism is in the middle, between the two extremes. The following figure puts this position into perspective: 156 158 Free-market economy 159 Socialism Command economy 160 157 At the one end of the spectrum we have the free-market economy, also referred to as capitalism. This economic system is based on the principle that each individual in society is free to choose his or her own economic activity. Private individuals mostly own the society’s resources and they are free to utilise those resources in whatever way they wish. Everyone is free to work where they like, providing whatever service they like or manufacturing whatever they want to, and so on. 161 At the other end of the spectrum we have the command economy, also known as communism. This system is based on the principle that the state (the government) owns almost all of the country’s resources and that the state (in the form of government officials) decides what products and services should be manufactured/ provided, who should be employed where, what each person should earn, and so on. 162 In-between these two systems is the system known as socialism. According to this system, individuals may certainly own private property and choose their own form of economic activity. The state, however, also owns many of the country’s resources and plays a far greater economic role than in a free-market system. Many of the large corporations, for example, are owned by the state and therefore managed by government employees. 163 Table 1.2 in the prescribed book provides a useful summary of the key differences between the three economic systems. You do not have to memorise these differences, but to understand the different economic systems you must read through this table. It is also important to note that no country in the world has an economy that is a pure capitalist economy, or a communist economy, or a socialist economy. The economic system of a country may range along a scale from pure communism to pure capitalism, or vice versa. 164 Some countries therefore have a mixed economy. See the description below of a mixed economy. 165 7 A mixed economy is an economic system that includes a variety of public and government control, or a mixture of capitalism and communism. There is not one single definition for a mixed economy, but relevant aspects include a degree of private economic freedom (including privately owned industry) intermingled with centralised economic planning and government regulation (which may include regulation of the market for environmental concerns, social welfare or efficiency, or state ownership and management of some of the means of production for national or social objectives). Adapted from source: http://en.wikipedia.org/wiki/Mixed_economy After reading this section and the discussion above, complete the activity that follows. 166 Activity 1.3 When a giant private organisation such as Masterbond or Saambou in South Africa or Enron in the USA goes bankrupt, critics of capitalism have a handy stick to beat this economic system. In South Africa we hear regular voices saying that the solution to South Africa’s problems lie in socialism, that is, an economic system where the rich are heavily taxed and where government intervention, ownership and control is at the order of the day. What is important to remember, however, is that the downfall of organisations such as Saambou and Enron actually shows that capitalism is functioning very well. If an organisation is inefficient, it will go bankrupt. If government intervenes to keep such organisations afloat, it will keep inefficient companies going on for a longer period of time. On the other hand, state organisations cannot fail, even if they perform badly, because they are supported by taxpayers’ money! (1) How would you classify the South African economic system? (2) Would socialism be the answer to South Africa’s economic problems? 167 168 Write down your considered responses to these questions in your workbook. Feedback: 8 Contact your e-tutor via myUnisa for the answer to this activity. 1.4 THE NEED-SATISFYING INSTITUTIONS OF THE MARKET ECONOMY Study section 1.5 in ITBM. The functioning of the South African economy is affected by need-satisfying institutions such as business organisations, government institutions and non-profit-seeking institutions. 169 8 MNB1501/1/2018–2020 Business organisations are also referred to as profit-seeking businesses since their aim is to conduct their business in such a way that it will lead to a profit for the owners. Most of these business organisations are privately owned, but remember that the state also owns business organisations. These are called public corporations (e.g. Transnet) and they function just like any other kind of business organisation. 170 There are also government organisations that do not operate on a profit-seeking basis. They are usually referred to as government departments. The Department of Public Works and the South African Police Service are examples of government departments that do not operate on a profit-seeking basis. They provide a service to society and they obtain their funds from Treasury. In other words, the people in the society pay for these services by means of taxes. 171 Not all non-profit-seeking businesses are state owned. There are also privately owned organisations that do not strive to make a profit. Most of them seek to obtain just sufficient income to cover their costs. Sports clubs, welfare organisations and religious organisations usually fall into this category. 172 173 After reading this section and the discussion above, complete the activity that follows. Activity 1.4 How would you classify the following organisations in the South African economy? • • • Telkom The Treatment Action Campaign organisation (TAC) Pirates soccer club Feedback: 9 Contact your e-tutor via myUnisa for the answer to this activity. 1.5 THE NATURE OF BUSINESS MANAGEMENT AND THE CLASSIFICATION OF THE STUDY MATERIAL ON BUSINESS MANAGEMENT Study sections 1.6 and 1.7 in ITBM. In the study of business management it must first be stressed that there is a difference between economics and business economics or, as it is called nowadays, business management. The key difference between Economics as a subject and Business Management as a subject is that the former studies the “management of the national economy” and the 174 9 latter studies the “management of a need-satisfying institution”. Economics is a study of the broader area of economic problems in the community, whereas Business Management focuses on the problems of individual organisations in the same community. Business Management as a subject entails the study of how to manage a business as productively as possible. This ties in with the economic principle, which states that the business must strive to attain the highest income with the lowest cost, with the difference between the income and cost being the profit. Note that the economic principle applies as much to non-profit-seeking businesses as it does to profit-seeking businesses. The difference is that any form of profit is ploughed back into the community for which the non-profitseeking organisation is working. The business organisation performs a number of activities, such as researching markets to find out whether there is a need for the product of the business; acquiring and processing raw materials in the manufacturing process; and appointing people to operate the machinery in the manufacturing process. Capital must be obtained and the income generated must be managed while creditors must be paid and workers remunerated. These are just a few of the activities being performed in a business organisation. Furthermore, these activities must be coordinated and managed. This is the reason why activities are grouped into functional areas to ensure proper coordination and management. The functional areas are depicted in the following figure: 175 176 After reading these sections and the discussion above, complete activity 1.5. 177 As we can see, general management is at the centre and deals with the planning, implementation and control of activities (management functions) that are needed to run the business. These management functions will be dealt with in considerably greater detail in the rest of the prescribed book, but section 1.7 provides a useful summary of what these functions entail. 178 Activity 1.5 The following information was given by the Governor of the South African Reserve Bank: • • The unemployment rate in South Africa is too high. Consumers are warned to use credit with caution, because there is a strong case for increasing the interest rate by 2%. The labour laws of the country are very restrictive and are hampering economic growth. 10 MNB1501/1/2018–2020 Which of these statements have to do with the broad South African economy and society in general? What are the implications of these statements for South African businesses? 10 Feedback: Contact your e-tutor via myUnisa for the answer to this activity. SUMMARY You now have a basic insight into the business world, economic systems, institutions of the free market and the nature of business management. In the next learning unit you will study entrepreneurship in business. 179 BUSINESS IN CONTEXT One of the recommended books for the MNB1501 module is entitled Business Cases. This book provides students with actual business scenarios and case studies which cover relevant theoretical business aspects. It is not compulsory that you read these case studies, but it will provide you with real local and international implementation of theory in practice. For this learning unit, you can read the various case studies covered in this book for a better understanding of business management within the business world. 180 SELF-ASSESSMENT QUESTIONS 181 QUESTION 1 182 Which of the following statements are correct? 183 An entrepreneur is someone who ... 184 a b c d 185 186 187 188 pursues profit. accepts risk. makes the most of opportunities in the environment. combines expertise and resources to produce products and services. 189 190 191 192 193 1 2 3 4 ab cd bcd abcd 194 11 195 QUESTION 2 Which of the following attributes are characteristics of a free-market economy as an economic system? 196 197 a b c d 198 199 200 private ownership of production factors free competition profit motive recognised limited right to strike in state enterprises 201 202 203 204 205 1 2 3 4 ab ac abc abcd 206 207 QUESTION 3 208 209 210 211 Which of the following statements about the state and economic systems are correct? a b c d 212 State intervention to solve an economic problem in a market economy indicates a move towards a command or centrally controlled economy. Government intervention in the economic system aims at encouraging economic growth and stability. Control of strategic organisations cannot be left to profit-seeking entrepreneurs. An expanding entrepreneurial role by the state eventually leads to a democracy. 213 1 2 3 4 214 215 216 217 ac abd bc abcd 218 THE ANSWERS TO THE SELF-ASSESSMENT QUESTIONS 219 Question 1 220 All four of the statements are correct regarding the characteristics of an entrepreneur. Such a person normally pursues profit in starting and running a business, and in the process also accepts risk. An entrepreneur also makes the most of opportunities in the environment; in fact, one of the traits of entrepreneurs is that they can foresee opportunities in a dynamic business environment much quicker than other people. Lastly, entrepreneurs also combine expertise and resources to provide products and services. The correct answer is therefore option 4 (a b c d). 221 222 12 MNB1501/1/2018–2020 223 Question 2 In a free-market economy the economy is characterised by private ownership and free competition, and the profit motive is recognised. There is also freedom of association and the right to strike. So statements a, b and c are correct and d is incorrect. The right answer is therefore option 3 (a b c). 224 225 Question 3 The first statement referring to state intervention to solve an economic problem in a market economy does not necessarily mean a move towards a command or centrally controlled economy. The elected government of the day is duty-bound by the Constitution to improve the life of all its citizens, which could entail state intervention from time to time. The second statement about government intervention in the economic system that aims at encouraging economic growth and stability is obviously correct, as explained earlier. Control of strategic organisations cannot be left to profit-seeking entrepreneurs only, because these strategic organisations must be managed to the benefit of all the citizens. This statement is therefore correct. The last statement is obviously wrong. Expanding the government’s entrepreneurial role does not have a corresponding positive influence on the development of a democracy. The right answer is therefore option 3 (b c). 226 227 13