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MNB1501/1/2024
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Contents
0.1
WELCOME ................................................................................... ii
0.2
PURPOSE OF THE MODULE ............................................................. ii
0.3
LINK TO OTHER MODULES ............................................................. iii
0.4
OBJECTIVES AND COMPETENCIES................................................... iii
0.4.1 Module objectives .......................................................................... iii
0.4.2 Our assumptions ............................................................................ iii
0.4.3 Framework for the module..................................................................iv
0.4.4 Composition of the study/learning package for the module ............................iv
0.5
COMPLETING ACTIVITIES AND ASSESSMENT QUESTIONS......................iv
0.5.1 Activities ....................................................................................... iv
0.5.2 Continuous assessments ................................................................... v
0.6
HOW TO ACHIEVE THE LEARNING OUTCOMES OF THIS MODULE ........... viii
0.7
WHAT YOU CAN EXPECT FROM UNISA ...............................................ix
0.8
HOW TO APPROACH MNB1501 ......................................................... x
0.9
CONCLUDING REMARKS ............................................................... xiii
i
0.1
WELCOME
Welcome to the module Business Management 1A (MNB1501). To make your studies
easier and to help you share in our enthusiasm for this field, we urge you to read the
welcome message (available on the module website for this module). You should also
read through your Tutorial Letter 101. Refer to these study materials as often as you
need to throughout your studies.
The field of management is extremely dynamic and challenging, so we have inserted
additional reading material and case studies, over and above the learning content in
the lesson. The material will provide you with opportunities to explore the latest
developments in the field of business management and will help you to discover
management as it is practised today.
Although you are studying on your own, please contact your lecturer if you are
experiencing any problems with this module. Our contact details appear in Tutorial
Letter 101 and on the welcome page. We urge you to make use of the myUnisa student
portal to participate in the discussion forums and the online activities. We hope that
you will enjoy this module.
0.2
PURPOSE OF THE MODULE
The purpose of this module is to establish a foundation for the study of business
management and to develop the learner’s understanding of the concept of strategic
management and of the specific management tasks (planning, organising, leading and
control). This will enable qualifying learners to develop basic business plans that
reflect an entrepreneurial approach to maximising the use of resources. These
business plans are of the type that could be used to seek funding from financing
institutions if you want to start your own business.
ii
0.3
LINK TO OTHER MODULES
This module does not stand alone; it is an integral part of the BCom degree in Business
Management and most qualifications that we are offering. Therefore, the purpose and
the learning objectives of this module are aimed at developing your expertise and
abilities in the field of business management. This module in Business Management
(MNB1501) will provide the foundation for the next module in management, namely
MNB1601 (Business Management 1B). You would normally continue your studies with
the two strategic management modules in the third year (MNG3601 and MNG3602) if
you want to specialise in management.
0.4
OBJECTIVES AND COMPETENCIES
0.4.1 Module objectives
When you have worked through this module, you will be able to
− explain how business performance relates to strategic management
− analyse a business case study and identify issues related to the managerial
tasks and skills
− differentiate between entrepreneurial and non-entrepreneurial approaches to
business management
− develop a basic business plan for a small to medium-sized enterprise
0.4.2 Our assumptions
The credit calculation is based on the assumption that students are already competent
in terms of the following outcomes or areas of learning at NQF level 5 when starting
to learn towards this unit standard:
− Learn from predominantly written material in the language of instruction.
− Read, analyse and respond to a variety of texts.
− With minimum guided support, take responsibility for own progress and be
willing to take part in learning of a personal nature.
Furthermore, we assume that you have access to a computer and the internet. Since
this is a semester (12 credits) module, we suppose that you will dedicate 120 notional
hours during the semester to study the content and complete your assessments.
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The section below provides a framework for this module and the topics that we will
cover in MNB1501.
0.4.3 Framework for the module
The framework for this module is as follows:
TOPIC
LESSON
1
The business world and business
management
1 INTRODUCTION TO BUSINESS
MANAGEMENT
2 THE MANAGEMENT PROCESS
2
Entrepreneurship
3
Establishing a business
4
The business environment
5
Corporate social responsibility
6
Introduction to general management
7
Planning
8
Organising
9
Leading
10
Controlling the management process
0.4.4 Composition of the study/learning package for the module
The study material for this module consists of the lessons uploaded on the myUnisa
site for the module, as well as Tutorial Letter 101. There is no prescribed or
recommended books that you must purchase for this module.
0.5
COMPLETING ACTIVITIES AND ASSESSMENT QUESTIONS
The best way to work through the lessons is to study one lesson at a time. The
assessment questions have been based on the different lessons of the tutorial matter.
We suggest that you make notes in a notebook or on paper and file them. Let’s refer
to this document as “the learning journal”. This process of engaging with the study
material and making notes and summaries is part of an active learning approach to
your studies.
0.5.1 Activities
In each lesson, you will find a list of activity questions based on the work covered in
the lesson. Activities are NOT formal assessments and they do not contribute to the
iv
final mark. We advise you to complete these questions diligently in a workbook since
they present opportunities to prepare you for possible assessment questions. In
addition, we created student forums where you can discuss the activities with other
students. You are encouraged to use the forums to discuss the activities with your
fellow students.
0.5.2 Continuous assessments
Continuous assessments are formal assessments that contribute to the final mark as
per percentage allocation stipulated in Tutorial Letter 101. The assessments are online
based and can only be accessed on the myUnisa site for the module. The questions
cannot be downloaded or sent to students via e-mail. In addition, the answers cannot
be sent to the lecturers via e-mail. The assessments comprise only multiple-choice
questions. For every question, there are four options, numbered from 1 to 4, of which
you must select only one. For example:
Which one of the following statements is correct?
1
Capitalism ensures a more even distribution of wealth.
2
Socialism discourages private initiative.
3
Communism ensures better utilisation of resources.
4
South Africa’s economic system tends towards socialism.
You cannot select more than one option. In other words, your answer will always be
either option 1 or 2 or 3 or 4.
Sometimes the question asks you to select the wrong statement. You should be extra
careful when answering such questions and not get confused and mark a statement
that is correct (and therefore not the answer that you are supposed to identify).
For some questions, however, there will be several statements that could be correct.
In such cases the statements will always be indicated by letters (a, b, c and d) and the
answer will still be either option 1, 2, 3 or 4, but these answers may refer to more than
one statement. For example:
v
Which of the following statements are correct?
a
A business owned and managed by one person may be a private company.
b
A partnership is usually limited to 20 partners.
c
The owner of a sole proprietorship does not pay tax on his or her business’s
profits.
d
A public company may not offer its shares for sale on an open market.
1
abcd
2
abd
3
bc
4
cd
This question requires you to indicate which of the statements are correct. If you
therefore think that statements b and c are correct, you will mark only option 3 as the
correct answer.
In all of the above examples the stem of the question asks you to identify the correct
statement(s). Sometimes the options are a continuation of the stem. For example:
The economic principle ...
1
is an endeavour to achieve the maximum with the minimum.
2
does not apply to government organisations because they do not strive for a
profit.
3
is mainly an indication of how low the operating costs were.
4
is always measured in terms of the business’s profitability.
In a question such as the above, you have to read the stem plus option 1, then you
have to read the stem again plus option 2, the stem plus option 3, and so on.
There is one other type of question that some of you may find somewhat confusing.
For example:
vi
Match the management level in the first column with the corresponding organisational
objective in the second column:
a
top management
i
the mission of the organisation
b
middle management ii
functional objectives
c
lower management
iii
operational objectives
1 a (i)
b
(ii)
c
(iii)
2 a (i)
b
(iii)
c
(ii)
3 a (ii)
b
(i)
c
(iii)
4 a (iii)
b
(ii)
c
(i)
In this question you have to match the items in one column with the items in a second
column. Let’s say that you think that top management (a) is involved in the formulation
of the mission of the organisation (i), then you already know that your answer could
be either option 1 or 2. By comparing the other options in the first column with those
in the second column, you should be able to choose between options 1 and 2.
When answering a multiple-choice question, take time to read all four options before
deciding which is the correct one. The secret is to read and decide on each option
separately. For example, look at the first of the preceding questions. The stem asks
you to identify which statement is correct. Start with statement 1. Read it and then,
without reading any other statement, decide whether the statement is correct, wrong
or that you do not know. Then read statement 2. Again, decide on the category in
which it falls.
When you have done that with every one of the four statements, you may find that you
have identified one statement as correct and three statements as incorrect. That is
then your answer. If you find that you have identified two statements as correct, then
compare the two statements and choose the one that seems to be the most correct,
or the most comprehensive.
When you have selected your answer to a particular question, it is essential that you
write down your reasons for doing so. For example, if you chose option 2 as the correct
vii
answer to the second question above, implying that statements a, b and d are correct,
you should write on a separate sheet of paper why you think statements a, b and d
are correct. Write down the actual reference in the lessons on which you base your
reasoning. However, you must even go a step further. You must also write down why
option c is wrong. Again, make specific reference to the lessons to back up your
reasoning.
This step is probably the most important learning step that you can take. We want our
students to understand the tutorial matter and to be able to explain the concepts and
apply the principles. We are not interested in whether a student has memorised
module content and can repeat it in an assessment. That is why it is so important for
you to be able to give a reason for your answer. The feedback will be made available
immediately after submission. The real learning takes place when you compare your
reasoning with that of the lecturers. So, do not take the easy way out by just answering
the multiple-choice questions.
In Tutorial Letter 101, we provide further details of the assessment requirements of
this module.
0.6
HOW TO ACHIEVE THE LEARNING OUTCOMES OF THIS MODULE
To increase your likelihood of success, you should consider the following:
− Study the prescribed tutorial matter conscientiously according to the guidelines
provided.
− Discuss the subject matter with colleagues, specialists and fellow students.
− Attempt and complete the activities and assessments.
− Apply your knowledge in practice.
− Properly prepare for the continuous assessment opportunities.
The following steps should be followed in the study process:
1
Get an overview of the lessons as a whole.
2
Draw a mind map of the lessons.
3
Read the first lesson and draw a mind map of the topics in the lesson.
4
Study the first section of the lesson. Write a summary in your own words.
viii
5
Read the next section of the lesson. Repeat steps 4 to 6 until you have
completed the lesson.
6
Tackle the next lesson and repeat steps 3 to 6 until you have completed all the
lessons.
If you have a problem of an academic nature, you are welcome to contact us.
0.7
WHAT YOU CAN EXPECT FROM UNISA
You can expect us to do the following:
− We will provide you with up-to-date and relevant study material, which we
regularly compare and benchmark against similar local and international
programmes.
− We will keep the study material in line with the needs of industry and commerce
by regularly consulting with the profession and with industry leaders and
government officials.
− We will assist you by giving you the opportunity to develop competencies and
skills at a certain level. The objectives correspond to the National Qualifications
Framework (NQF) level 5. We will assess you by taking the level descriptors of
the NQF into account.
− We will support you whenever you require academic assistance. You may
contact your lecturers by making a personal appointment on MS Teams or by
phone or via e-mail. We understand that studying through distance education
is more challenging than attending a residential university.
− We will provide you with clear indications of what we expect from you in terms
of your assessment.
− We will give you feedback on your assessments.
This is an online module and therefore your study material is available on myUnisa –
an online platform for you to access other suggested sources, participate in online
activities and communicate with other students, the lecturer and administrative
departments at Unisa. Previous examination questions are not made available to
students as assessment questions are randomly selected from a question pool.
ix
We urge all of you to make regular use of myUnisa. You can access the myUnisa web
page with a computer or a smartphone that is linked to the internet. You can also make
use of Unisa’s regional offices and access myUnisa from the computer labs there as
well as from the telecentres which are listed in the Study @ Unisa brochure.
0.8
HOW TO APPROACH MNB1501
If you are not sure where to begin or how to approach your studies in Management IA
(MNB1501), this section was inserted especially for you.
When you have listed the main topics as set out in the outcomes and layout, you
should read the entire lesson just to get a feel of what it is all about. Do not worry too
much at this stage if you do not understand every detail. The important thing here is
to make a few notes of the key issues as you read. Then draw a diagram or a simple
mind map to visualise the key issues.
You are now ready to start studying. Tackle one lesson at a time. If there is something
that you do not understand, read it again and try to comprehend what the author is
saying. DO NOT SKIP ANY TUTORIAL MATTER THAT YOU DO NOT
UNDERSTAND. Ask someone else to help you understand a sentence or paragraph,
and if you really cannot figure it out, ask your fellow students on myUnisa, or contact
one of your lecturers at Unisa.
One of the best ways to make sure that you understand the material is to make a
summary in your own words – one lesson at a time. A good summary length is about
5% of the original text. The reason for summarising your tutorial matter stems from an
adage (or saying): “A thought expressed is a thought impressed”. This means that the
more you write down (in your own words) what the message of a particular lesson is,
the more it will be impressed or imprinted on your own mind.
NB: The purpose of studying is to understand the concepts, not to memorise them.
The primary purpose of the material on your module website and particularly in the
lessons for this module is to provide you with guidelines to help you understand some
of the most important theoretical perspectives, general principles and contextual
x
factors that underlie the nature and dynamics of business management. All of this is,
however, done from a management perspective. You will find that certain terms are
repeatedly used to structure the lessons and your thinking:
− A topic represents an important component of the module and tutorial matter.
Each topic has one or more learning outcomes. These outcomes indicate the
general standard or level of competence you should achieve in respect of each
topic.
− A lesson is an identifiable part of a topic. Each topic therefore consists of one
or more lessons.
The learning outcomes are very important for the purposes of your studies. For each
topic, specific outcomes are set, WHICH YOU AS A STUDENT MUST ACHIEVE.
These learning outcomes are linked to the assessments and are therefore the means
by which you and your lecturers can evaluate the extent to which you have in fact
mastered a specific topic (i.e., your knowledge and understanding of it).
The following icons are used throughout the lessons:
Icon
Description
Learning outcomes. The learning outcomes indicate what
aspects of the particular topic or lesson you have to understand.
You should be able to demonstrate your understanding.
Study. This icon indicates the prescribed material that you need
to study and internalise.
Key concepts. The key concepts indicate which terms or
keywords are important for a particular lesson.
xi
Read. This icon will direct you to read certain information for
background information.
Activity. This icon refers to activities that you must do to
develop a deeper understanding of the learning material.
Feedback. This icon indicates that you will receive feedback on
your answers to the self-assessment activities.
Website link. This icon indicates a website link that you can
access for more information on the topic currently being
discussed.
YouTube video link. This icon indicates a link to a YouTube
video that you can access for more information on the topic
currently being discussed.
TIP: When watching videos on YouTube: if you click on the
setting (the gear or cog tool) in the bottom right corner, you can
change the playback speed to faster or slower. Under the same
setting, you can also activate the subtitles. (For some, you will
need to hover with your mouse over the video to “activate” the
functions).
Make notes from the video in your “learning journal”. This will
serve as a reference to engage with your peers in the
Discussion forum.
xii
IMPORTANT
You should always study your module lessons first and then study the relevant
material, as indicated in the lessons. The lessons uploaded on myUnisa therefore
have certain specific functions. They
− provide you with material that you have to study
− indicate which additional tutorial matter you have to study
− contain certain activities that will help you master the field of study
0.9
CONCLUDING REMARKS
You need to access myUnisa for the lessons, any additional information and study
material (for example, online activities, self-assessments, material, discussion forums,
assessments and announcements).
We hope that you will enjoy your studies! We are looking forward to being your
partners in this endeavour.
Best wishes
Your lecturers for MNB1501
Department of Business Management
Unisa
xiii
Contents
1.1
INTRODUCTION ................................................................................... 3
1.2
THE ROLE OF BUSINESS IN SOCIETY ....................................................... 4
1.3
NEEDS AND NEED SATISFACTION ........................................................... 6
1.3.1 Maslow’s hierarchy of needs ..................................................................... 6
1.3.2 Society’s scarce resources ....................................................................... 8
1.4
THE MAIN ECONOMIC SYSTEMS ............................................................. 13
1.5
THE NEED-SATISFYING INSTITUTIONS OF THE MARKET ECONOMY ............... 17
1.6
THE NATURE OF BUSINESS MANAGEMENT............................................... 18
1.7
SUMMARY ......................................................................................... 21
1.8
REFERENCES .................................................................................... 24
1
LESSON 1: THE BUSINESS WORLD AND BUSINESS MANAGEMENT
This lesson will require approximately SIX notional hours. Figure 1.1 represents an
overview of lesson 1.
1.1 Introduction
1.2 The role of business in society
1.3 Needs and need satisfaction
1.4 The main economic system
1.5 The need-satisfying institutions of the market economy
1.6 The nature of business management
1.7 Summary
Figure 1.1: Visual overview of the lesson
2
1.1
INTRODUCTION
This lesson discusses the role of business in society and explains how a business
organisation in a market economy employs the limited resources of a nation – including
its natural resources, human resources, financial resources and entrepreneurship – to
satisfy the need for products and services. The lesson gives an overview of the main
prevailing economic systems in the world and explains how the business organisation
functions in a market economy. Against this background, the purpose and nature of
business management is examined.
LEARNING OUTCOMES
When you have worked through lesson 1, you should be able to do the
following:




Critically discuss the role of business in society.
Explain the needs of society and how need satisfaction occurs.
Discuss the three main economic systems in the world.
Explain the differences between need-satisfying institutions and non-profit
institutions.

Explain the inherent nature of business management.
KEY TERMS
Maslow’s hierarchy
needs
entrepreneurship
capital
natural resources
human resources
market economy
socialism
command economy
business organisations
government
non-profit organisations
business management
mixed economy
Click on the Additional Resources tab for the comprehensive Multilingual glossary for
MNB1501.
3
1.2
THE ROLE OF BUSINESS IN SOCIETY
The business activity generally involves the transformation of resources into goods and
services to meet society’s needs. Business, however, cannot operate without society at
large. It is important to understand how closely any business organisation is linked to the
society in which it operates. Some of the roles that businesses play in society are
indicated in figure 1.2.
Provide employment
Supply products and services which satisfy consumer needs/wants
Preserve natural resources
Generate income
Social responsibility
Influence the country’s economy
Provide taxes to the government
Figure 1.2: The roles of businesses in society
Businesses provide employment to the members of the society in which they operate.
They employ people, providing them with incomes that they can spend, and in this way,
they can boost the economy of the community. Businesses increase the level of taxation
for a local community and ensure that the money remains in that society. Furthermore,
businesses decrease poverty levels in a society; more and more people become
entrepreneurs as others also get employed. Businesses contribute to a country’s
economy by bringing growth and innovation to the society where the business is
established.
4
A business also acts as a social platform by providing a place to meet or interact outside
the family, thus providing a sense of community. The needs and values of a society have
a strong influence on what a business does. For example, if the people in the society are
very aware of the need for protecting the environment, they will soon bring pressure to
bear (often through the news media) on any business that pollutes the environment with
its waste materials. Businesses should not only be aware of their influence on the physical
environment, but also of the effect their business activities have on consumers, the
economy at large and their competitors.
Through the spheres of social responsibility, consumerism (a social force that protects
consumers against unsafe products and malpractices by exerting moral and economic
pressure on businesses) and the prevention of environmental damage, for example, a
society can persuade an organisation not to pollute or damage the environment or to fix
prices. Just like a society can influence its business organisations, these organisations
can have a significant influence on the society. By developing new products, businesses
can influence the behaviour patterns of people in a particular society. Just think of the
impact that the electronics industry (with its production of smart phones, e-cigarettes and
e-printing, for example) has had on the social life of our society. The success of
businesses also has a major impact on the prosperity of a society. In a town such as
Secunda, for example, Sasol employs many of the inhabitants. If Sasol were to go
bankrupt, thousands of people would be left jobless, and the entire town would be
affected.
Open the link below to watch the video about the role of business in society.
Time: 3:11 minutes
https://www.youtube.com/watch?v=UTNuSWqNVJE
In the next section, you will learn about needs and need satisfaction.
5
1.3
NEEDS AND NEED SATISFACTION
Human beings have various – and seemingly unlimited – needs. Society, however, has
limited resources to satisfy those needs and so a choice has to be made on how best to
utilise those resources. Most of us would like to live in a mansion, drive a luxury car, own
a seaside cottage, go on an overseas trip every year, wear the latest fashion clothes and
so on, but very few people have enough money to afford all these products and services.
Most of us have limited resources (money), so we have to decide how to utilise the little
we do have to obtain the greatest satisfaction possible. The decision to obtain the greatest
possible benefit (or satisfaction) with the limited resources we have is known as the
economic principle.
1.3.1 Maslow’s hierarchy of needs
Since the business world is geared towards satisfying needs in the society, it is important
for management to know what those needs are. According to Maslow, all people have the
same basic needs, but not everybody strives to satisfy the same needs. In countries with
severe famine, for example, people will direct a great deal of their energy towards the
satisfaction of physiological needs such as hunger and thirst. However, according to
Maslow, once these needs are satisfied, people will strive to satisfy the next level of needs
(i.e. security needs) and so on.
Figure 1.3 shows the need classification by Maslow (a famous psychologist). Human
needs are classified in a hierarchy where the lowest, more basic needs must be satisfied
before the higher needs can receive attention. For example, for a hungry man whose first
basic need is to find food, all communication dealing with the satisfaction of his other
needs will fall on deaf ears. The hierarchy starts with the basic needs at the bottom and
the higher-level needs following the basic needs. The needs in Maslow’s hierarchy are
explained below:
•
Physiological needs: These are the basic survival needs such as the need for food,
water clothing, shelter and sleep.
•
Safety and security needs: These needs refer to our needs for protection from violence
and theft, health security, and financial security.
6
•
Social needs: Such needs comprise our need for love, community and belonging,
which in turn includes the need for friendship, family bonds and belonging to social
groups, intimacy, and relationships.
•
Esteem needs: These needs are all ego-driven needs and refer to the need for
prestige, achievement, recognition and status.
•
Self-actualisation or self-realisation needs: This need is at the top of the hierarchy and
relates to becoming more than what we are. It refers to our desire to reach our full
potential. According to Maslow, this need can only be met once all the other needs
have been satisfied.
5. Self-actualisation needs
4. Esteem needs – prestige, status
3. Social needs – love, friendship, acceptance
2. Safety and security needs
1. Physiological needs – hunger, thirst, sex
Figure 1.3: Maslow's hierarchy of needs (Maslow, 1954)
After reading the discussion above, complete the activity that follows.
Activity 1.1
This activity will take approximately 15 minutes to complete.
As the consumer, you are confronted with the situations below. Use Maslow’s
hierarchy of needs to classify each of the situations.
• Not having eaten lunch, you are quite hungry and thirsty.
• You are scared to sleep at night after a neighbour was murdered.
7
You are worried about your continuing relationship with your partner, as he/she
•
wants to move out of the flat that you share.
•
Your boss has screamed at you at work in the presence of fellow workers.
•
You want to enrol for further studies in the field of management in order to further
yourself in life.
Feedback:
Using Maslow’s hierarchy of needs, we can classify the above as follows:
•
Being hungry is classified as a physiological need, which is the most basic need.
•
Being too scared to sleep at night reflects a need for security, a right that is
guaranteed by the Constitution of the Republic of South Africa.
•
Having problems with your partner reflects a social need for love and affection,
which seems to be negatively affected.
•
Having had your boss shout at you in front of your fellow workers affects your selfesteem negatively. Self-esteem is a very important part of the hierarchy of needs
and may adversely affect your productivity at work.
• Finally, having aspirations to further yourself in life through education is classified
as a self-actualisation need, which is the pinnacle of the hierarchy of needs.
1.3.2 Society’s scarce resources
We live in a world of scarcity because the amount of goods and services that people
would like to consume will always exceed the amount that can be produced. Scarcity
applies to everyone and every society in the world. Since scarcity is a relative concept,
there will always be wants which are not fully satisfied – even among the most affluent
societies of the world. This is because people’s wants are continually expanding and
changing. Once their basic human needs (e.g. food, water, clothing and shelter) have
been satisfied, there will be a growing desire for more luxurious articles like cars, fridges,
stoves and many of the goods regarded as essential in highly developed countries. One
must carefully distinguish between wants and needs. Wants are human desires for goods
8
and services which are unlimited. Needs are necessities which are essential for survival,
like food, water, shelter, and so forth.
Even if people are given limitless spending power, scarcity will still exist because time is
limited. Not even the wealthiest person in the world is free of the problem of scarcity
because no one has the time to enjoy all the travelling, holidaying, and art that he/she
would like to have. Time is a prime example of a limited resource.
In the business world, there are four types of resources available to manufacture goods
or provide services. These resources are known as production factors and refer to all the
resources used for producing goods or services. Whether a certain item is a production
factor or an end product will depend on its use. For a truck manufacturing company, a
truck is not a production factor – it is the end product. However, for a transport company,
a truck is a production factor – without it, the company would not be able to provide the
basic service of transporting goods. Figure 1.4 below depicts the four production factors.
Figure 1.4: The production factors
The four production factors are discussed below:
•
Human resources or labour refer to all intellectual, physical or other human
productive efforts. Labour therefore comprises not only manual labour, but includes
the services of those who follow a profession (e.g. doctor, lawyer, teacher, etc.).
9
•
Capital refers to the machinery, tools and buildings which humans use to produce
goods and services. This could include the entire range of durable equipment – from
hammers, saws and other simple tools, to machines and computers. Capital differs
according to the worker and the type of work being done. If we refer to capital, we
mean real capital (equipment) and not money. Money is not a resource that can be
used in production.
•
Natural resources or land refer to the gifts of nature and include factors such as
climate, mineral resources, soil, metals, forests, water, and so forth, and all other
resources from nature that are at the disposal of humankind. Natural resources are
the raw materials in the production process.
•
The entrepreneur (from the French word entreprendre which means to undertake)
combines natural resources, labour and capital in the production process in order to
make a profit. Without the vision of the entrepreneur, labour and other resources
would remain largely unrealised potential. The entrepreneur is also the innovator
who comes to the fore with new goods or new production techniques. That is why
the entrepreneur is at the same time the bearer of risk – the entrepreneur’s time,
effort, reputation and own funds (and those of others) are at stake should the
innovation or business venture fail. The entrepreneur is also responsible for taking
non-routine decisions in the management of the enterprise. Such a person normally
pursues profit in starting and running a business, and in the process also accepts
risk. An entrepreneur also makes the most of opportunities in the environment; in
fact, one of the traits of entrepreneurs is that they can foresee opportunities in a
dynamic business environment much quicker than other people. Lastly,
entrepreneurs also combine expertise and resources to provide products and
services.
Open the following link to watch the video about the production
factors.
10
Time: 6:10 minutes
https://www.youtube.com/watch?v=RSyvcANRaOE
Activity 1.2
This activity will take approximately 10 minutes to complete.
Identify the factors of production from the following list:
•
Coal
•
Forklift
•
Factory
•
Oil
•
Patrice Motsepe
Feedback:
We can classify the above as follows:
• Coal forms part of land or natural resources.
• A forklift is part of the capital which humans use to produce products and services.
• A factory is also part of the capital used to produce the products and services.
• Oil is part of land or natural resources.
• Patrice Motsepe is an entrepreneur.
As mentioned above, the resources of any community are scarce and can easily be
exceeded by its needs. Society is confronted with the fundamental economic problem of
how to ensure the highest possible satisfaction of needs with the limited, scarce resources
available. This is known as the economic principle. See figure 1.5, which illustrates the
limited resources and unlimited needs.
11
Maslow’s unlimited
needs
• Physiological
needs
• Safety needs
• Social needs
• Esteem needs
• Self-actualization
needs
Limited needs
• Natural resources
• Human resources
• Capital
•Entrepreneurship
Satisfaction of society’s needs
Figure 1.5: The needs and resources of a society (Source: Author’s design)
From the preceding section it is evident that people have unlimited wants which they strive
to fulfil. The individual is continually confronted with choices – unlimited wants have to be
satisfied with limited means.
At any time an individual must decide which wants must be satisfied immediately and
which can be postponed or cannot be satisfied at all. One will have to be satisfied to have
less of one thing if one wants more of another. If, for example, one decides to buy a car,
one’s holiday (or something else), falls victim to this decision. If a ticket to a rugby/soccer
game costs the equivalent of ten loaves of bread, then the cost of attending the game is
equivalent to the ten loaves of bread that have to be sacrificed.
It is not only the individual who is forced to make choices due to scarcity – every
business/organisation has to decide between various alternatives. They have to decide
how many labourers or other inputs have to be employed in order to produce goods and
services (i.e. the output of the business/organisation).
12
The government of a country has to decide how to spend money – on, say reconstruction
and development projects. It strives to provide houses, electricity, running water, free
health services and jobs to all needy citizens. But, because resources are limited, it will
have to decide what must be done first and what will have to be postponed until later.
Factors of production are scarce and when they are used for the production of a certain
good, it means that these factors cannot be used for the production of another good or
goods. A decision to produce more of one good also means that less of another good can
be produced.
Within a society, needs satisfaction occurs within a cycle, as can be seen in figure 1.6.
Study this cycle – it is very important. One of the elements within this cycle is the
economic system determined by the community. We will have a look at the main
economic systems in the next section.
If society is not satisfied
with its need satisfyingsystem, another system
will be chosen
Society
Economic system
Must decide on their need satisfying
system (economic system).
Must achieve best need satisfaction
with limited reources. Is subject to
the economic principle.
• Economic motive
• Maslow's unlimited needs
• Limited resouces
• Market economy
• Socialism
• Command economy
(Communism)
Entrepreneurs and their businesses
which are the need-satisfying
institutions in a market economy.
• Driving source is profit
• Society's needs are satisfied or
not satisfied
Figure 1.6: The need-satisfaction cycle (Source: Author’s design)
1.4
THE MAIN ECONOMIC SYSTEMS
The world is divided into three basic economic systems: the free-market economy,
socialism and the command economy. Socialism is in the middle, between the two
extremes. Figure1.7 puts this position into perspective:
13
Free-market economy
Socialism
Command economy
Figure 1.7: The three economic systems (Source: Author’s design)
At the one end of the spectrum, we have the free-market economy, also referred to as
capitalism. This economic system is based on the principle that each individual in society
is free to choose his or her own economic activity. Private individuals mostly own the
society’s resources and they are free to utilise those resources in whatever way they wish.
Everyone is free to work where they prefer, providing whatever service they like or
manufacturing whatever they want to, and so on. There is freedom of association and the
right to strike. The profit motive is recognised and there is free competition.
At the other end of the spectrum, we have the command economy, also known as
communism. This system is based on the principle that the state (the government) owns
almost all of the country’s resources and that the state (in the form of government officials)
decides what products and services should be manufactured/provided, who should be
employed where, what each person should earn, and so on. Countries that have a
command economy are North Korea and Cuba.
In between these two systems is the system known as socialism. According to this
system, individuals may certainly own private property and choose their own form of
economic activity. The state, however, also owns many of the country’s resources and
plays a far greater economic role than in a free-market system. In South Africa, the stateowned enterprises (SOE) such as SAA and Eskom are examples of the socialist
economic system that exists.
14
Table 1.2: Economic systems
Source: Kenro’s Blog (2022)
Table 1.2 above provides a useful summary of the most important differences between
the three economic systems. It is important to note that no country in the world has an
economy that is a pure capitalist economy, or a communist economy, or a socialist
economy. The economic system of a country may range along a scale from pure
communism to pure capitalism, or vice versa.
Some countries therefore have a mixed economy. There are no clear boundaries in many
countries regarding the economic system that exists. In the United States of America
(USA), which is regarded as the purest example of a capitalist economic system, there
are also traces of socialism, while in Cuba, where communism exists, there are also
traces of capitalism. When an economy is a combination of private enterprise,
government ownership of resources and government planning of the economy, this is
15
called a mixed economy. In such economies, government sets minimum wage laws,
subsidies are given to businesses and expropriation of private property is allowed.
After reading this section, complete the activity that follows.
Activity 1.3
This activity will take approximately 15 minutes to complete.
Read the following scenario: When a giant private organisation such as Masterbond or
Saambou in South Africa or Enron in the USA goes bankrupt, critics of capitalism have
a handy stick to beat this economic system. In South Africa we often hear that the
solution to the country’s problems lies in socialism, that is, an economic system where
the rich are heavily taxed and where government intervention, ownership and control are at the
order of the day.
What is important to remember, however, is that the downfall of organisations such as Saambou
and Enron actually shows that capitalism is functioning very well. If an organisation is inefficient, it
will go bankrupt. However, if government intervenes to keep such organisations afloat, it will keep
inefficient companies going on for a longer period of time. On the other hand, state organisations
cannot fail, even if they perform badly, because they are supported by taxpayers’ money!
•
How would you classify the South African economic system? Discuss.
•
Would socialism be the answer to South Africa’s economic problems? Critically discuss.
Feedback:
Even though South Africa is often classified as a socialistic economic
system together with other developing nations such as Brazil and
developed nations such as France and the United Kingdom, very rarely do any of the
three economic systems in use occur in a pure form. Keeping this in mind, the most
appropriate description of the prevailing economic system in South Africa is a mixture
between the free-market system and the socialist system. In other words, it is moving
16
towards a market-orientated economy, yet it has a high degree of government
participation and control within the economy.
Some members of the government alliance consider socialism to be the best
alternative economic system. They state that only in a socialist South Africa will
problems of unemployment, lack of housing and other needs of society be solved. The
opinion is that without the planned, rational, equitable and sustainable use of South
Africa's resources the survival of all the people of South Africa is at risk.
In this section we looked at the three main economic systems, which include the freemarket economy, the command economy and socialism. In the next section we will look
at the need-satisfying institutions of the free market economy.
1.5
THE NEED-SATISFYING INSTITUTIONS OF THE MARKET ECONOMY
The functioning of the South African economy is affected by need-satisfying institutions
such as business organisations, government institutions and non-profit-seeking
institutions.
Business organisations are also referred to as profit-seeking businesses since their aim
is to conduct their business in such a way that it will lead to a profit for the owners. These
organisations can be sole proprietorships, partnerships, closed corporations or
companies. Most of these business organisations are privately owned – but remember
that the state also owns business organisations. These are called public corporations
(e.g. Transnet) and they function just like any other kind of business organisation.
There are also government organisations or state-owned enterprises (SOEs) that do not
operate on a profit-seeking basis. They are usually referred to as government
departments. The Department of Public Works and the South African Police Service are
examples of government departments that do not operate on a profit-seeking basis. They
provide a service to society and they obtain their funds from Treasury. In other words, the
people in the society pay for these services by means of taxes.
17
Not all non-profit-seeking organisations are state owned. There are also privately owned
organisations that do not strive to make a profit. Most of them seek to obtain just sufficient
income to cover their costs. Sports clubs, welfare organisations and religious
organisations usually fall into this category.
After reading the discussion above, complete the activity that follows.
Activity 1.4
This activity will take approximately 10 minutes to complete.
How would you classify the following organisations in the South African economy?
• Telkom
• The Treatment Action Campaign organisation (TAC)
• Pirates soccer club
Feedback:
The telecommunications organisation, Telkom, was owned by the state.
Then Telkom was privatised and its shares are now traded on the Johannesburg Stock
Exchange. However, the South African government still holds shares in the
organisation.
The Treatment Action Campaign (TAC) is a non-profit private organisation that
campaigns for the rights of South Africans suffering from HIV/AIDS. It is described as
a non-governmental organisation (NGO).
Pirates is a private profit-seeking organisation owned by private businesspeople.
1.6
THE NATURE OF BUSINESS MANAGEMENT
In the study of business management, it must first be stressed that there is a difference
between economics and business economics or, as it is called nowadays, business
management. The main difference between Economics as a subject and Business
18
Management as a subject is that the former studies the “management of the national
economy” and the latter studies the “management of a need-satisfying institution”.
Economics is a study of the broader area of economic problems in the community,
whereas Business Management focuses on the problems of individual organisations in
the same community. Business Management as a subject entails the study of how to
manage a business as productively as possible. This ties in with the economic principle,
which states that the business must strive to attain the highest income with the lowest
cost, with the difference between the income and cost being the profit. Note that the
economic principle applies as much to non-profit-seeking businesses as it does to profitseeking businesses. The difference is that any form of profit is ploughed back into the
community for which the non-profit- seeking organisation is working.
The business organisation performs a number of activities, such as researching markets
to find out whether there is a need for the product of the business; acquiring and
processing raw materials in the manufacturing process; and appointing people to operate
the machinery in the manufacturing process. Capital must be obtained and the income
generated must be managed, while creditors must be paid and workers remunerated.
These are just a few of the activities being performed in a business organisation.
Furthermore, these activities must be coordinated and managed. This is the reason why
activities are grouped into functional areas to ensure proper coordination and
management. The functional areas are described in table 1.3.
Table 1.3: Functional areas and their descriptions
Functional area
Human
Description
resources Manages all the staffing requirements and is responsible for
management
organising the management structures.
Marketing management
Responsible for establishing the need-satisfying products
and services and making them available to customers.
Purchasing and supply Responsible for all the purchasing and distribution logistics
management
required by the organisation.
Operations
Responsible for transforming the organisation’s resources
19
management
into the final goods and services that are sold to customers
Financial management
Focuses on the monetary requirements for running the
organisation.
Information
Responsible for maintaining, implementing and controlling
management
technology in the organisation.
General management is at the centre of the organisation and deals with the planning,
implementation and control of activities (management functions) that are needed to run
the business. These management functions will be dealt with in considerably greater
detail in the rest of this study guide.
Activity 1.5
This activity will take approximately 15 minutes to complete.
The following information was provided by the Governor of the South African Reserve
Bank:
•
The unemployment rate in South Africa is too high. Consumers are warned to
use credit with caution, because there is a strong case for increasing the
interest rate by 2%.
•
The labour laws of the country are very restrictive and are hampering economic growth.
1.
Which of these statements have to do with the broad South African economy and society in
general?
2.
What are the implications of these statements for South African businesses?
Feedback:
All of these statements have implications for the broad South African
economy and society in general. However, there are also implications for
business organisations, in that businesses such as retailers must be careful about
20
granting credit to consumers because an increase of 2% in the interest rate will have
a negative impact on the disposable income of consumers. This could therefore
adversely affect the turnover of these organisations. As such, this statement must be
carefully considered by the financial function of the business, which deals with the
granting of credit. The reference to the labour laws is also important for each and every
business in South Africa that is currently very hesitant about employing more workers
because of labour laws that are perceived to be restrictive.
1.7
SUMMARY
You now have basic insight into the business world, economic systems, institutions of the
free market and the nature of business management. In the next lesson you will study
entrepreneurship in business.
SELF-ASSESSMENT QUESTIONS
This activity will take approximately 15 minutes to complete.
QUESTION 1
Which one of the following statements is correct about Maslow’s hierarchy of needs?
1
Maslow’s needs hierarchy starts with the higher-level needs at the bottom.
2
Social needs refer to our need for financial security.
3
Esteem needs refer to our desire to reach our full potential.
4
Self-actualisation needs are at the top of the hierarchy.
QUESTION 2
Society is confronted with the fundamental economic problem of how to ensure the
highest possible satisfaction of needs with the limited, scarce resources available. This is
known as …
1
the entrepreneurship principle.
2
the economic principle.
21
3
the marketing principle.
4
the production principle.
QUESTION 3
Which of the following statements are correct? An entrepreneur is someone who … .
a.
pursues profit.
b.
accepts risk.
c.
makes the most of opportunities in the environment.
d.
combines expertise and resources to produce products and services.
1
ab
2
cd
3
bcd
4
abcd
QUESTION 4
Which of the following attributes are characteristics of a free-market economy as an economic
system?
a.
private ownership of production factors
b.
free competition
c.
profit motive recognised
d.
limited right to strike in state enterprises
1
ab
2
ac
3
abc
4
abcd
QUESTION 5
Which one of the following statements is incorrect?
1
All non-profit seeking organisations are state owned.
2
Welfare organisations are non-profit-seeking organisations.
22
3
Society pays for the services of the South African Police Services by means of
taxes.
4
A closed corporation is a type of business organisation.
THE ANSWERS TO THE SELF-ASSESSMENT QUESTIONS
Question 1
Option 4 is correct. Self-actualisation needs are at the top of Maslow’s hierarchy of needs.
Maslow’s needs hierarchy starts with the lower-level needs at the bottom and ends with
the higher-order need of self-actualisation. See section 1.3.1.
Question 2
Option 2 is the correct answer. The economic principle refers to how to ensure the highest
possible satisfaction of needs with limited, scarce resources available. See section 1.3.2.
Question 3
All four of the statements are correct regarding the characteristics of an entrepreneur.
Such a person normally pursues profit in starting and running a business, and in the
process also accepts risk. An entrepreneur also makes the most of opportunities in the
environment; in fact, one of the traits of entrepreneurs is that they can foresee
opportunities in a dynamic business environment much quicker than other people. Lastly,
entrepreneurs also combine expertise and resources to provide products and services.
The correct answer is therefore option 4 (a b c d). See section 1.3.2.
Question 4
In a free-market economy the economy is characterised by private ownership and free
competition, and the profit motive is recognised. There is also freedom of association and
the right to strike. So, statements a, b and c are correct, and d is incorrect. The right
answer is therefore option 3 (a b c). See section 1.4.
23
Question 5
The only incorrect answer is option 1. Not all non-profit seeking organisations are state
owned. All the other statements are correct. See section 1.5.
Make sure you have mastered the key concepts that were listed at the start of the lesson
by making brief notes so that the meaning of each term is clear.
Before proceeding to the next lesson, take some time to reflect on what you have
learned in lesson 1. Make sure you have achieved all the outcomes listed at the start of
this lesson.
1.8
REFERENCES
Kenro’s
Blog.
2022.
Economic
systems:
A
comparison.
Available
<https://kenromoriuchi0126.wordpress.com/2012/09/06/economic-systems-acomparison/> [Accessed 6 March 2023].
Maslow, A. 1954. Motivation and personality. Manhattan, NY: Harper & Row.
24
from:
Contents
2.1
INTRODUCTION ..................................................................................................... 26
2.2
DEFINITION OF AN ENTREPRENEUR .................................................................. 27
2.3
THE ENTREPRENEURIAL PROCESS ................................................................... 31
2.4
ENTREPRENEURIAL SKILLS AND RESOURCES ................................................. 33
2.5
OWNING A BUSINESS ........................................................................................... 35
2.5.1
Starting a new business .......................................................................................... 35
2.5.2
Buying an existing business .................................................................................... 37
2.6
FRANCHISING AS A BUSINESS OPPORTUNITY ................................................. 39
2.6.1
Advantages of a franchise ....................................................................................... 40
2.6.2
Challenges of a franchise ........................................................................................ 41
2.7
ENTREPRENEURSHIP AND THE FOURTH INDUSTRIAL REVOLUTION (4IR) .... 45
2.8
SUMMARY .............................................................................................................. 47
2.9
REFERENCES ........................................................................................................ 50
2.10
FURTHER READING: OPEN EDUCATIONAL RESOURCES (OERs) .................... 51
25
LESSON 2: ENTREPRENEURSHIP
This lesson will require approximately TEN notional hours. Figure 2.1 represents an
overview of lesson 2.
2.1 Introduction
2.2. Definition of an entrepreneur
2.3 The entrepreneurial process
2.4 Entrepreneurial skills and resources
2.5 Starting a business
2.6 Franchising as a business opportunity
2.7 Entrepreneurship and the Fourth Industrial Revolution
2.8 Summary
2.9 References
2.10 Open Educational Resources (OERs)
Figure 2.1: Visual overview of lesson 2 (Source: Author's design)
2.1
INTRODUCTION
Entrepreneurship has been a term batted around in business and media environments
alike. In this lesson, we will have a closer look and discuss entrepreneurship as the
fourth factor of production. We will also discuss the role of entrepreneurs and small
businesses in society and the entrepreneurial process.
26
LEARNING OUTCOMES
When you have worked through this lesson, you should be able to do the
following:
•
Define the terms “entrepreneur” and “entrepreneurship”.
•
Discuss the entrepreneurial process.
•
Explain the skills and resources required to become an entrepreneur.
•
Distinguish the diverse ways in which an entrepreneur may start a business.
•
Discuss the advantages and disadvantages of owning a business.
•
Discuss the implications of choosing a franchise as a business opportunity.
•
Understand the impact of the Fourth Industrial Revolution on entrepreneurship.
KEY TERMS
Entrepreneur
Entrepreneurship
Starting a business
Entrepreneurial process
Franchise
Existing business
Entrepreneurship skills and Fourth Industrial Revolution
resources
Click on the Additional Resources tab for the comprehensive Multilingual glossary for
MNB1501.
2.2
DEFINITION OF AN ENTREPRENEUR
Different writers in the field of management and entrepreneurship differ in their
definition of an entrepreneur, as various aspects need to be considered (Erasmus,
Rudansky-Kloppers & Strydom, 2019). Taking into account diverse elements of
definitions, we define an entrepreneur as a person who takes up a new venture and
who is willing to accept full responsibility for the outcome. Entrepreneurs take the
initiative and financial risk by harnessing the factors of production to generate products
and services, with the reward of earning a profit. However, they can also incur losses
due to unforeseen circumstances or making the wrong decisions.
27
Entrepreneurship is described as the process undertaken by an entrepreneur –
identifying, creating, or sensing an investment or business opportunity where others
do not see it. It is also a process of finding and combining resources (often owned by
someone else) to pursue the opportunity until it becomes a successful, established
business, creating employment and contributing to the economy. Entrepreneurship
is a scarce human trait since not everyone in a country has the skills or is prepared to
take risks associated with generating products and services in an uncertain economic
environment.
We will briefly examine four successful African entrepreneurs. These entrepreneurs
were innovative throughout the entrepreneurial journey and have grown and sustained
their businesses through innovation. Aliko Dangote is the founder and president/chief
executive of the Dangote Group, the largest conglomerate in West Africa. The Group
currently has a presence in 17 African countries and is a market leader in cement on
the African continent. One of the Group's subsidiaries, Dangote Cement Plc, is the
largest listed company in West Africa and was the first Nigerian company to join the
Forbes Global 2000 Companies list. Dangote was a graduate of Al-Azhar University
in Cairo, Egypt, and began his business career in 1978, trading in rice, sugar, and
cement before venturing into full-scale manufacturing. In 2013, Forbes referred to him
as the “Most Powerful Man in Africa”. In April 2014, TIME Magazine listed him among
its 100 “Most Influential People in the World”. He is also one of CNBC's “Top 25
Businessmen in the World” who changed and shaped the century. Internationally,
Dangote sits on the Corporate Council on Africa board and is a member of the Steering
Committee of the United Nations Secretary-General's Global Education First Initiative,
the Clinton Global Initiative, and the International Business Council of the World
Economic Forum. The US Chamber of Commerce appointed him as Co-chair of the
US-Africa Business Center in September 2016. In April 2017, Dangote joined the
Board of Directors of the Clinton Health Access Initiative, helping countries build the
necessary systems to provide health services to their people.
Source: https://www.dangote.com/about-us/aliko-dangote/
Richard Maponya was an entrepreneur who began his business by reselling soiled
clothing offcuts sold to him by the manager of the clothing factory he worked for, in
Soweto. In the early 1950s, Richard and his wife Marina established the Dube
28
Hygienic Dairy, which employed a fleet of boys on bicycles to deliver milk to customers
in Soweto who had no access to electricity or refrigeration. By the 1970s, the retail
empire had grown to include several general stores, car dealerships, and filling
stations. In 2007, Richard Maponya launched the Maponya Mall in Soweto. It holds
more than 200 stores and a cinema complex. Clearly, Maponya had an entrepreneurial
spirit and spotted opportunities that others did not see.
Source:https://www.thepresidency.gov.za/national-orders/recipient/richard-johnpelwana-maponya-1926
Dr Patrice Motsepe, an attorney, is a South African entrepreneur and the country’s
first black billionaire. Motsepe made his fortune through mining interests. During his
youth, he worked at his father’s store, a job that taught him essential business
management lessons. In 1994, Patrice founded a mine services company, Future
Mining, and applied all his life experience, his understanding of political and legal
structures, and his insightful spirit of entrepreneurship to his work. In 1997, he
launched African Rainbow Minerals gold (ARM gold) which in 2003 merged with
Harmony, and acquired Anglovaal Mining (Avmin). Motsepe was appointed the
Chairman of the newly reorganised ARM in 2004. By 2006, the company had
expanded beyond gold and other metals into coal mining. Motsepe is the Executive
Chair of African Rainbow Minerals (ARM) and the founder and Chair of Ubuntu-Botho
Investments, African Rainbow Capital, African Rainbow Energy and Power and UBI
General Partner (Pty) Ltd. He bought 51 per cent interest in the Mamelodi Sundowns
Football Club in 2003. In 2004, he gained complete control of the Club and he was the
President of the Club between 2004 and 2021. In March 2021, he was elected
president of the Confederation of African Football Association (CAF). He is also a nonexecutive director at Sanlam.
Source: https://www.sanlam.com/cv2.php
Source: https://www.britannica.com/biography/Patrice-Tlhopane-Motsepe
Magda Wierzycka was born in Poland in 1969. In 1981, her family defected to Austria,
where she lived in a refugee camp, escaping communist Poland for eight months. The
family relocated to South Africa in 1982. Before moving to Cape Town, she attended
Pretoria High School for Girls, winning a bursary to study actuarial science at UCT.
29
After working for several financial services companies, she became CEO of the African
Harvest Group before founding her multibillion-rand empire in the male-dominated
financial services industry, Sygnia Limited. She also co-founded a UK-based venture
capital firm, Braavos Investment Advisers. With a business model built on
transparency and low fees, it was natural for Magda to become an outspoken critic of
corporate and government corruption, exposing wrongdoing and making many
powerful
enemies.
Magda
Wierzycka
is
South
Africa’s
most
successful
businesswoman and in 2020, Forbes magazine listed her among “Africa’s 50 Most
Powerful Women”.
Source: https://www.penguinrandomhouse.co.za/book/magda/9781776096671
Activity 2.1
This activity will take approximately 5 minutes to complete.
Define an entrepreneur in your own words.
Feedback
An entrepreneur can be described as someone who takes initiative and
financial risk by harnessing the factors of production to generate
products and services to earn a profit. Entrepreneurs have the desire to succeed;
they identify or create opportunities. They have control over their actions and they
are prepared to take risks. Aspiring entrepreneurs are creative, innovative, and
motivated to work hard to succeed. We encourage you to watch the YouTube videos
of different aspiring entrepreneurs by opening the following links for examples.
VIDEO 1
Time: 6.59 minutes
https://youtu.be/7O6Ubos4eyk?t=3
30
VIDEO 2
Time: 2.39 minutes
https://youtu.be/vFveRj59GYg
VIDEO 3
Time: 4.15 minutes
https://www.youtube.com/watch?v=o0etimvtD74
Having watched the videos above, do you think the people in the videos are
entrepreneurs? You may discuss your views with your fellow students on myUnisa.
2.3
THE ENTREPRENEURIAL PROCESS
Entrepreneurship is the process of recognising, making or detecting an opportunity
where others do not notice it, and uniting resources to chase the opportunity to
establish a thriving business. According to Erasmus et al (2019), the entrepreneurial
process involves the following steps:
•
Step 1: Aptitudes, personality and skills: Does the potential entrepreneur
have the background, the necessary knowledge and persona to succeed in the
business? The entrepreneur must understand his/her strengths and
weaknesses in pursuing the business.
•
Step 2: Access to resources: Access to resources is critical in creating a new
business initiative. Does the potential entrepreneur have access to resources
or does the entrepreneur have the financial capacity and human resources to
start the business? The entrepreneur will not be able to start the business
without resources.
•
Step 3: Opportunities and ideas: What are the chances that the
entrepreneur’s business idea will be successful? Is there a possibility that the
business initiative will work? Opportunities and business ideas remain as such
until they are realised by converting them into viable products, services, or
processes.
•
Step 4: Feasibility study: The feasibility study entails gathering information to
determine whether the business idea will survive. It evaluates whether the
business idea or opportunity is realistic. What are the probabilities that the
31
business idea or initiative will succeed? The objective and practical evaluation
of the concept are essential to avoid failure, which can be costly for the aspiring
entrepreneur. He/she may find that competitors have developed the idea and
that pursuing it may not be viable.
•
Step 5: Business plan: Once the feasibility study has been conducted and
there is a probability that the idea appears feasible, the entrepreneur can ask
the following questions. Has the entrepreneur compiled a business plan to
obtain the necessary funding for the new business initiative? Does the business
plan give the potential investors and suppliers comfort regarding the probability
of success? The business plan should reassure potential investors about the
likelihood of business success. More details of the business plan are covered
in the following chapter.
•
Step 6: Managing the business: Can the entrepreneur launch or start the
company, or does the entrepreneur have contingency plans in place if
unexpected disruptions affect the business’s launch? The entrepreneur must
be prepared to manage his/her business. Various functions may need to be
performed by the entrepreneur in his/her company, for example, staff
management, ensuring that equipment is in good condition, financial
management, marketing and other tasks required to run the business.
Now that you have learned about the critical steps of the entrepreneurial process, do
the following activity.
Activity 2.2
This activity will take approximately 10 minutes to complete.
Let us assume that you have a business idea that you would like to pursue
and make a successful business out of it. How would you go about the
entrepreneurial process to achieve your dream?
Feedback
In answering the question for this activity, you needed to explain the
steps of the entrepreneurial process and assess how you would
perform in each step. The steps of the entrepreneurial process are as follows:
32
Aptitude, personality and skills: Being honest before starting a business is essential.
Aspiring entrepreneurs must know their personality, strengths, weaknesses, and
skills required to run a business.
Access to resources: The business cannot be started without resources such as
financial resources.
Opportunities and ideas: Opportunities and business ideas remain as such until they
are realised by converting them into viable products, services, or processes.
Feasibility study: The entrepreneur should ensure that the business idea is realistic
to start a business.
Business plan: A business plan must be viable and comfort potential investors who
are willing to invest in the business.
Managing the business: Managing a business requires commitment and time.
Entrepreneurs need to manage their business for it to be successful.
In the next section, you will learn about the skills and resources that entrepreneurs
should have in order to operate a business.
2.4
ENTREPRENEURIAL SKILLS AND RESOURCES
A skill is an ability to execute an action competently with determined results. It can be
acquired through knowledge, aptitude and attitude – developed through life
experiences or observation in performing a task. Entrepreneurs require certain skills
that are critical to running a business, as discussed below.
•
Strategic thinking skills: Strategic thinking skills are essential in positioning
the business in a competitive environment. It is the ability to view the company
holistically – how it fits in the marketplace – and deliver value efficiently and
effectively to its customers, compared to competitors’ ability.
•
Planning skills: Planning skills entail the ability to plan for the future of the
business. Without planning skills, the entrepreneur will not be able to prepare
for the future of the business. Planning will help the entrepreneur focus on the
objective of the business and acquire appropriate resources for the success of
the potential business.
33
•
Marketing skills: It involves the ability to evaluate the relevance of the products
or services in the target market. The entrepreneur should have an idea of who
to sell the products or services to and must be able to create and satisfy the
needs and wants of the identified market. For the business to be sustainable,
the entrepreneur should understand what attracts customers to the offering;
he/she needs to understand the target market's changing needs and wants.
The entrepreneur should also consider promoting his/her products or services,
including distribution.
•
Financial skills: It is the ability to manage the business’s finances. The
entrepreneur must understand the management of business finances to track
the business expenditure and cash flow. An entrepreneur should also be able
to evaluate investments in the business, as well as the associated risk.
•
Project management or organising skills: Organising various business
activities, including managing business resources, is vital. Attention should be
paid to reliability and consistent, timeous supply of products or services. Other
important factors include ensuring sufficient stock to meet customer demands
and making sure the quality of products or services provided to clients is
acceptable.
•
Human relations or interpersonal skills: These involve the ability to interact,
communicate, lead, motivate and form relationships with employees. Human
relations or interpersonal skills are also crucial in developing relationships with
various external stakeholders such as customers, prospective customers,
suppliers and distributors, for the sustainability and smooth running of the
business.
Resources are critical to the success of a business as entrepreneurs would be unable
to operate a successful business without much-needed financial, human, and
operating/physical resources. For example, in certain locations, a restaurant must
have a kitchen (to prepare food), a dining area, and storage facilities to keep food fresh
(physical resource). The place must be in a secure and safe location (security / human
resources / CCTV) where patrons will feel safe and relaxed while dining. A generator
in good working condition is important, as the restaurant must still be able to operate
during loadshedding. An excellent chef is needed to prepare meals; waiters must be
34
appointed to serve meals; and cleaning staff should be provided (human resources).
Financial assistance will be needed for all of the above.
In the next section, you will discover what it takes to own a business.
2.5
OWNING A BUSINESS
There are diverse options that entrepreneurs can use to implement their business
ideas. They can create a new business, buy an existing business, or enter a franchise.
2.5.1 Starting a new business
The advantages and disadvantages of buying an existing business compared to
opening a new enterprise have been debated for quite some time. There are various
dynamics to consider when establishing a new business, such as the type of
business the entrepreneur wants to start, the location of the company, potential
success of the business, as well as constant and adequate cash generation. While
owning a business can be rewarding, it comes with challenges. Some individuals dare
to take a risk and start a business. The business owners experience a sense of
achievement and satisfaction if the company is successful. Table 2.1 highlights some
advantages and disadvantages of business ownership.
Table 2.1 Advantages and disadvantages of business ownership
Advantages
Autonomy:
Disadvantages
Time-consuming:
Owning a business allows entrepreneurs Owning a business is time-consuming
to make their own decisions. The and
demands
one’s
attention.
entrepreneur does not have to take Sometimes business owners do not get
instructions from anyone. It provides time to take a break from their business
creativity – without being told what to do. as they may miss an opportunity. They
Aspiring entrepreneurs are at liberty to may struggle to divide time between
decide how they want to grow their work
and
business and they can be creative balance).
without restrictions.
35
family/leisure
(work-life
Flexibility:
Demanding:
Being a business owner allows one to be Being a business owner can be stressful.
flexible. It also gives self-control. One It comes with many responsibilities such
can decide how much time to put into the as paying employees, ensuring sufficient
business; when to work or take time off. stock,
fixing
Business owners determine how much managing
broken
security,
equipment,
taking
care
of
they want to grow their business and deliveries to clients, ensuring customer
they can be innovative in growing their satisfaction, dealing with competitors,
business.
and attracting customers. Marketing the
business can also be a source of stress
for business owners.
Profit:
Financial risk:
Owning a business can be financially Starting a business calls for financial
rewarding. Business owners can decide resources. Business owners may use
how much they want their business to their life savings to start a business
grow to make more money. They can without any guarantee that the company
devote more effort and hard work to will be successful – or they may have to
make more profit, or reinvest in the take a loan to start a business; going into
growth of their business.
debt. There is also no guarantee for
income when starting a business.
Learning:
Unpleasant tasks:
Starting a business exposes the owners Owning
a
business
comes
with
to a variety of tasks they may have to unpleasant tasks. There may be tasks
learn as they run the business. When that one may not like. Starting a business
managing a business, there are lessons may require an owner to take care of all
to be learned through trial and error. It the
business
tasks,
including
the
also requires one to understand all the functions they may not like, such as
aspects of owning and operating a cleaning the business premises or
business.
making deliveries to customers.
Fulfilment:
It
gives
personal
fulfilment
or
achievement as one sees the business
grow and the ideas come to fruition,
36
turning
into
products
or
services.
Business owners can also use their skills
and knowledge in running their business.
Source: Adapted from the University of Minnesota (2016)
2.5.2 Buying an existing business
If entrepreneurs consider purchasing an existing business, they buy a going concern
with its opportunities and problems they may not know. According to Section 197 of
the Labour Relations Act, buying or selling a business as a going concern means that
the current employment contracts are transferred under the same conditions to the
new employer. Both parties, the seller and the buyer, should ensure that all matters
regarding the conditions of employment are cleared before they sign the agreement.
These could include employee benefits and remuneration of employees. Where both
the seller and the buyer are value-added tax (VAT) vendors and have agreed on selling
the business as a going concern, such a transaction will not be charged VAT. The
South African Revenue Service defines VAT as an indirect tax on the economy's
consumption of goods and services. All trades or businesses must register for VAT to
collect revenue for the government.
The following should be considered before buying an existing business:
•
The financial status of the business
•
Assessment of competitors
•
The reason for the current owner to sell the business
•
The physical status of the business
Table 2.2 highlights the advantages and disadvantages of buying a business as a
going concern.
37
Table 2.2: Advantages and disadvantages of buying an existing business
Advantages
Disadvantages
Customers are familiar with the business The location may be undesirable or lose
location.
its value due to the developments in the
surrounding areas.
Continuation of current customers. The Changing the image of the business may
entrepreneur may benefit from the be challenging. The new owner may
existing/ established customer base.
struggle to establish a new relationship
with existing customers, which may
cause him/her to lose current customers.
Customers may also not like the new
management and the changes made.
The business will come with experienced Under Section 197 of the Labour
employees and this will reduce training Relations
costs.
Act,
existing
employment
contracts get transferred to the new
employer under the same conditions.
This means that the new owner inherits
the employees who may not fit the
growth strategy of the new employer.
The new entrepreneur’s values may not
align with the current culture of the
existing business or may be unsuitable
for the business. There may be more
employees than required to operate the
business, increasing the expenses and
affecting the entrepreneur’s profit.
Planning can be based on known It may be difficult to change how the
historical data.
business is run (the culture of the
company), which may clash with the
business plans of the new owner.
Supplier relationships will already be in The new owner might inherit past
place.
liabilities. The entrepreneur will also
38
need
to
establish
new
supplier
relationships, which might take longer.
Inventory and equipment will be in place. The inventory in place may be outdated
and need replacement by the new
owner.
Financing may be available from the Financing costs could drain cash flow
owner.
and threaten the survival of the business.
Source: Adapted from Erasmus et al (2019)
In the next section, you will learn about franchising as a business opportunity.
2.6
FRANCHISING AS A BUSINESS OPPORTUNITY
A franchise provides the entrepreneur with an opportunity of owning a business. A
franchisor grants the entrepreneur (the franchisee) a right or a licence to use the
franchisor’s established business name, products or services, knowledge, trademarks
or brand (a franchise). This allows the franchisee to own a business by selling
products or services under the franchisor’s name, such as Steers. In return, the
franchisee will pay the franchisor an initial fee and the use of licence fees or part of
the profit for the franchise and services provided by the franchisor on an ongoing basis
(Erasmus et al, 2019).
The business idea of franchising lies between starting a new business from scratch
and buying an existing one. For instance, if the aspiring entrepreneur is considering
opening a quick-service restaurant, the entrepreneur could apply for a franchise
licence from a franchisor such as Steers. Steers will then assign the business banker
to assist with the finance application if the application is approved. Once approved,
the entrepreneur (franchisee) can run a Steers restaurant as the business owner with
certain advantages. For example, the franchisor supports the aspiring entrepreneur
with the knowledge and training required to run a business, helps with selecting a
suitable location and with administrative and operational support, marketing,
manufacturing and distribution. Therefore, the entrepreneur will benefit from the above
and the established brand. However, the entrepreneur would have to manage the
restaurant the way Steers as the franchisor requires its restaurants to be operated.
Steers will conduct site visits to ensure compliance with and adherence to the
39
franchise’s standards by the franchisee. The franchisee will also have to pay the
franchisor a regular fee for the right to use its name and facilities.
Resource: https://steers.co.za/get-in-touch?own-a-steers
Activity 2.3
This activity will take approximately 10 minutes to complete.
Access the links below to watch the two YouTube videos about
franchising:
Video 1 – Time: 2.41 minutes
https://www.youtube.com/watch?v=Kp-0AhgBiDg
Video 2 – Time: 2.34 minutes
https://youtu.be/u0WsybJ3QUA
After watching the two YouTube videos, write a summary of your understanding of
a franchise and how it works.
Feedback
A franchise is an option that could assist an inspiring entrepreneur in
starting a business, such as a quick restaurant like Steers. Watching
the above videos will broaden your understanding of franchising.
According to the International Franchise Association (2019), there are certain
advantages and challenges associated with franchising.
2.6.1 Advantages of a franchise
Advantages of starting a business through a franchise as a business opportunity (IFA,
2019):
•
Experience: The aspiring entrepreneur can enter a franchise with no or little
understanding/knowledge of the franchise business – and benefit from the
experience, through guidance provided by the franchisor. In addition, the
franchisee can learn the franchise’s operations from the franchisor, with
minimum chances of failure.
40
•
Training: The franchisee can become acquainted with the franchise’s
operations through hands-on training by the franchisor. This training will
empower the franchisee to understand the business intricacies of the franchise.
Franchisees can also learn management skills or attend training in business
management through the franchisor.
•
Brand and advertising: The franchisee will benefit from the franchise's known
and established brand. The franchisor also helps the franchisee to promote the
business through advertising.
•
Purchasing power: The franchisor can buy inventory in bulk because of the
purchasing power and can negotiate lower prices. The franchisee, in return, will
benefit from the lower prices as most business start-ups cannot afford to
purchase stock in bulk.
•
Research and development: The franchisor invests in research and
development to keep the franchise relevant in the market and to improve the
products and services provided by the franchise. The franchisee benefits as the
franchisor makes these new products and services available to the franchisee.
•
Networking and collaboration: Through networking, the franchisee can learn
and benefit from other franchisees by sharing ideas or seeking solutions. The
franchisees collaborate as members of the franchise, imparting knowledge and
advice. The franchise staff members will also assist the new franchisees with
much-needed information and ongoing support.
2.6.2 Challenges of a franchise
While there are benefits to operating a franchise, there are also challenges. Aspiring
entrepreneurs who intend to enter a franchise should consider the challenges of
running a franchise (IFA, 2019).
•
Working within a franchise: Franchising can be rigid; some entrepreneurs may
find it challenging to work within a franchise. Creative entrepreneurs who might
want to change some operations will find franchising frustrating. While the
franchisee may find some flexibility in areas such as marketing, maintaining
consistency in the franchise process is critical for the franchisor.
•
Risk: Like starting any other business, there is a risk of failure in starting a
franchise. The responsibility and the success of the franchise business rest with
41
the franchisee. Therefore, the franchisee must devote time and effort to the
business to succeed. The great product and the brand will not make the
franchise a success; the commitment and hard work of the franchisee will
determine the franchise’s success.
•
Relationship: The relationship between the franchisee and the franchisor
contributes to the franchisee’s success. They both have a legally binding
relationship that goes over a lengthy period. Therefore, the franchisor and the
franchisee must have a healthy relationship for the franchise's success.
•
False expectations: Success does not come easy; sometimes, aspiring
entrepreneurs enter a franchise expecting quick results. The franchisee may
ultimately run a successful business. However, like any other business,
franchising requires tremendous time to learn the trade, commitment and
understanding of the franchise environment within which they operate.
•
Managing the business: Not all aspiring entrepreneurs like to manage; they
might find it burdensome. Aspiring franchisees should be realistic about
whether they can run the business and they must have interpersonal skills to
develop relationships with their employees. Otherwise, they should attend a
training course such as business management to develop their skills.
Activity 2.4
This activity will take approximately 15 minutes to complete.
Read the following success story of an entrepreneur from a humble
background who knew what he wanted and who was prepared to take
a risk. Then answer the questions that follow.
FROM RAGS TO RICHES
As an individual who prides himself on building a reputation from the bottom up,
Luvuyo Rani's journey is a classic rags-to-riches story. Luvuyo was born and raised
in the Eastern Cape. His entrepreneurial personality was always there as his mother
was self-employed. In 1996, he went to Cape Town to attain a tertiary education and
pursue a career in teaching. He graduated from Cape Technikon with a National
Diploma in Commercial Education and a BTech in Communicative Technology, and
42
later completed his BTech in Business Management while working as a teacher at
Khayelitsha High School in Cape Town. After three years, Luvuyo resigned and, with
his brother Lonwabo, took a risk to start his business and fulfil his dream of owning
a business. Beginning as a schoolteacher, Luvuyo knew that his destiny was to be
found elsewhere and took the plunge in the form of a R10,000 loan to start his
business. He founded his award-winning IT services company, Silulo Ulutho
Technologies, in 2004 to provide internet and computer access to a lower-income
target market. Luvuyo knew there was a demand for technology in the township and
rural areas and saw an opportunity to start his business.
Luvuyo started his business by selling refurbished computers and he soon expanded
to basic IT training and writing business profiles and plans for local companies. He
opened the first internet café in Khayelitsha township, providing much-needed digital
resources to the community. The company has over 46 stores in townships and rural
areas in the Western Cape, Eastern Cape, and KwaZulu-Natal, with 220 full-time
staff members and 18 franchisees. Luvuyo owes much of his success to the support
he got from his mother when growing up. He often cites her as his core inspiration
and why he achieved his BTech in Communicative Technology. In 2006, he enrolled
for the Associate in Management course at UCT Graduate School of Business,
which prepared him to grow his business confidently. His business propelled him
into Forbes Magazine in 2014. He was named one of JCI’s Ten Outstanding Young
Persons of the World (JCI TOYP) in business, economics, and entrepreneurial
accomplishments. In June 2016, Luvuyo received the Schwab Social Entrepreneur
of the Year award for 2016 at the World Economic Forum in Kigali, Rwanda. His
vision is “to open Silulo centres in every township and rural area in South Africa.”
Source:https://www.pyxeraglobal.org/team-member/luvuyo-rani/#:~:text=Born%20
and%20raised%20in%20the,mother%20from%20a%20young%20age
Source: https://www.homesofdistinction.co.za/news/sas-top-five-youngentrepreneurs-of-2021/
Questions:
1. Identify five management skills Luvuyo needed to run a successful business.
2. What resources did Luvuyo require to start his business?
3. How did Luvuyo identify the new business opportunity?
43
Feedback:
1. Any of the following skills would be required by Luvuyo to run a
business successfully:
•
Strategic thinking skills
•
Human relations or interpersonal skills
•
Planning skills
•
Marketing skills
•
Financial skills
•
Organising skills or project management skills
2. Resources required by Luvuyo to start his business:
•
Financial resources – he took a R10 000 loan to start his business.
•
Physical resources – such as a secure place to start his business; and
computers.
•
Human resources (person/s) collaborated with him in his business, such as
his brother Lonwabo.
3. The following are examples of how Luvuyo identified a business opportunity.
•
Luvuyo saw a demand for access to technology in the townships and rural
areas when he was teaching in the Khayelitsha township in Cape Town.
•
Growing up in the Eastern Cape and later moving to Cape Town, Luvuyo
saw a gap in the market by identifying a need for IT services in the township
and rural areas that could provide internet and computer access to a lowerincome community which was his target market.
•
Luvuyo spotted a gap in the lower-income market to provide a much-needed
resource – access to technology in the townships and rural areas. He
realised that his knowledge of technology, attained through his studies,
would help him start a business.
In the last section of this lesson, you will learn about the role played by
entrepreneurship in the Fourth Industrial Revolution (4IR).
44
2.7
ENTREPRENEURSHIP AND THE FOURTH INDUSTRIAL REVOLUTION
(4IR)
The First Industrial Revolution was in the 18th century with the invention of the steam
engine, followed by the Second Industrial Revolution with electricity, and the Third
Industrial Revolution with electronics and assembly lines. The 4IR is driven by
advanced innovation and automation processes globally. Artificial Intelligence (AI) is
crucial in leading the automation processes. The 4IR brings speed of change and
disruption at an unprecedented rate, with new inventions transforming industries at a
pace we cannot avoid. The 4IR involves vital technologies such as genetics, AI, cloud
computing, 3-D printing, mobile networks, nanotechnology and biotechnology
(Erasmus et al, 2019).
Professor Klaus Schwab, Founder and Executive Chairman of the World Economic
Forum, has been at the centre of global affairs for over four decades; he articulates
that the 4IR fundamentally changed the way we relate, work, and live and that it may
bring challenges at various levels, as indicated below.
•
Businesses may not be able to adapt their operations with speed, causing them
to be left behind.
•
Governments may fail to embrace innovative technologies, therefore, losing out
on the benefits and opportunities brought by technology.
•
Governments may also struggle to regulate this new revolution as the power
shifts away from them to the innovators.
•
Inequalities may grow as only those with the means would embrace the
opportunity brought by technology – thus, increasing inequalities in
communities.
At the World Economic Forum, Professor Schwab calls for leaders and citizens to
“together shape a future that works for all by putting people first, empowering them
and constantly reminding ourselves that these modern technologies are first and
foremost tools made by people for people” (World Economic Forum, n.d.).
Thus, during the Covid-19 pandemic, businesses were forced to adapt their business
operations as they responded to the disruption caused by the pandemic (PwC
Financial Services, 2020). The face-to-face interaction was moved to online
45
communication, and business meetings, training, and graduations were conducted
using technology such as Zoom and Microsoft Teams. Education went online full-time
during the Covid-19 lockdown. Teachers were forced to use technology, and students
had to learn using technology. At the same time, we saw inequalities in disadvantaged
communities where many students were unable to access education through modern
technology.
According to Erasmus et al (2019), Africa should – and can – embrace the 4IR by
using the opportunities presented by this rapid change. They add that Africa should
play a pivotal role in changing institutions, such as businesses and places of
education, by preparing young talent who can drive development on the continent –
assuming its rightful place in the world by taking advantage of the opportunities
presented by the 4IR.
To gain more insight into the challenges and opportunities of the 4IR, open the link
below to access the strategic intelligence wheel. Then click each circle around the 4IR
circle presented by the World Economic Forum.
https://intelligence.weforum.org/topics/a1Gb0000001RIhBEAW?tab=publications
Activity 2.5
This activity will take approximately 15 minutes to complete.
Open the link below to watch a YouTube video regarding the 4IR:
https://youtu.be/SCGV1tNBoeU
Time: 1.42 minutes
Summarise the opportunities and challenges brought by the 4IR.
Feedback:
The opportunities associated with the 4IR include system-wide
innovation and new realities presented by nanotechnology, brain
research, 3D printing, mobile networks and computing. Goods and services are
produced quickly and cheaply, and business models are transformed,
The challenges at various levels include the following:
•
Businesses may not be able to adapt their operations with speed, causing
them to be left behind.
46
•
Governments may fail to embrace innovative technologies, therefore, losing
out on the benefits and opportunities brought by technology.
•
Governments may also struggle to regulate this new revolution as the power
shifts away from them to the innovators.
•
Inequalities may grow as only those with the means would embrace the
opportunity brought by technology – thus, increasing inequalities in
communities.
2.8
SUMMARY
You now understand the concept of entrepreneurship and the entrepreneur as the
driving force behind business and economic growth. This lesson explained the
entrepreneurial process and why individuals choose to become entrepreneurs – the
advantages and challenges of business ownership. You learned about the difference
between entrepreneur and entrepreneurship. Furthermore, the skills and resources
required to be an entrepreneur were described. Diverse ways to start a business were
discussed in detail, along with the advantages and implications of choosing a specific
business opportunity. Lastly, the Fourth Industrial Revolution and Artificial Intelligence
were briefly discussed, together with their impact on businesses.
In the following lesson, you will learn about a business idea and starting a business;
the importance of a suitable business location; the advantages and possible
disadvantages of a small business; and why small businesses fail. The legal forms of
business ownership will be highlighted, as well as the advantages and disadvantages
of different forms of ownership. The importance of a well-developed business plan and
funding opportunities for small businesses will also be discussed.
Make sure you have mastered the key concepts that were listed at the start of the
lesson by making brief notes so that the meaning of each term is clear. Before
proceeding to the next lesson, take some time to reflect on what you have learned in
lesson 2. Make sure you have achieved all the outcomes listed at the beginning of this
lesson.
47
SELF-ASSESSMENT QUESTIONS
This activity will take approximately 15 minutes to complete.
QUESTION 1
Describe the entrepreneurship process.
QUESTION 2
Thandi, a visionary, has opened a hair salon for children aged between 2 and 12. She
has employed five hairdressers and two support staff members. One of her daily
management functions is supervising and interacting with her employees while
delegating their responsibilities. The most appropriate management skills are the
___________ skills to perform this function.
1.
passionate
2.
strategic
3.
planning
4.
interpersonal
5.
organising
QUESTION 3
Chris is an aspiring creative entrepreneur who likes to take control and makes his own
decisions. He is innovative and he wants to implement innovative ideas and make
changes when he sees fit. He would like to start a business through a franchise. Which
of the following statements are correct about a franchise?
a.
The franchise provides training and knowledge.
b.
The franchise allows access to lower prices.
c.
The franchise has no business risk.
d.
The franchise has an established brand.
e.
The franchise allows creativity and flexibility.
48
Choose the correct option:
1
a; b; c
2
b; c; d
3
a; b; e
4
d; b; e
5
a; b; d
QUESTION 4
Which sentence is not correct about the benefits of buying an existing business?
1
It is easy to change the image of the business.
2
It comes with customers who are familiar with the location.
3
It has inventory and equipment in place.
4
It has employees who have experience in the business.
QUESTION 5
Which one of the following points is not an entrepreneurial process of starting a
business?
1
Feasibility study
2
Job creation
3
Business plan
4
Ideas and opportunities
THE ANSWERS TO THE SELF-ASSESSMENT QUESTIONS
Question
1
Answer
Entrepreneurship is the process undertaken by the entrepreneur to
identify or create a need or to recognise an investment opportunity where
others do not see it. It is also a process of finding and combining
resources (usually owned by someone else) to pursue the opportunity to
its completion, create employment, and contribute to the economy.
2
The correct answer is Option 4. One of the daily management functions
performed by Thandi is to supervise and interact with her employees
49
while delegating responsibilities to them. Interpersonal skills involve
the ability to interact, communicate, lead, motivate and form
relationships with employees.
3
The correct answer is Option 5. The statements that are true about
franchising are a, b and d.
4
The correct answer is Option 1. It is not easy to change the image of an
existing business.
5
The correct answer is Option 2. Job creation is not one of the
entrepreneurial process points.
2.9
REFERENCES
Erasmus, B., Rudansky-Kloppers, S. & Strydom, J. 2019. Introduction to business
management (11th edition). Cape Town: Oxford.
Etheredge,
L.
2022.
Britannica
Online
Encyclopaedia.
Available
<https://www.britannica.com/biography/Patrice-Tlhopane-Motsepe>
from:
[Accessed
9 May 2022].
International Franchise Association (IFA). 2019. Advantages, challenges of
franchising.
Available
from:
<https://www.franchise.org/franchise-information/
franchise-development/advantages-challenges-of-franchising>
[Accessed
6 February 2023].
PwC Financial Services. 2020. Securing your tomorrow, today: The future of financial
services. Available from: <https://www.pwc.com/gx/en/financial-services/pdf/pwcthe-future-of-financial-services.pdf> [Accessed 19 April 2022].
University of Minnesota Libraries Publishing edition, 2016. Exploring Business by the
University
of
Minnesota.
Available
from:
<https://open.lib.umn.edu/
exploringbusiness/> [Accessed 6 February 2023].
World Economic Forum. (n.d). The Fourth Industrial Revolution, by Klaus Schwab.
Available from: <https://www.weforum.org/about/the-fourth-industrial-revolution-byklaus-schwab> [Accessed 6 February 2023].
50
2.10
FURTHER READING: OPEN EDUCATIONAL RESOURCES (OERs)
University of Minnesota Libraries Publishing edition, 2016. Exploring Business by the
University
of
Minnesota.
Available
from:
<https://open.lib.umn.edu/
exploringbusiness/> [Accessed 6 February 2023]. Focus on the following:
•
Chapter 5: The challenges of starting a business
51
Contents
3.1
INTRODUCTION ......................................................................................................54
3.2
DEFINITION OF A SMALL BUSINESS ....................................................................55
3.3
BUSINESS IDEA ......................................................................................................55
3.4
THE IMPORTANCE OF GEOGRAPHICAL LOCATION ...........................................56
3.4.1
Geographical location ...............................................................................................56
3.4.2
Location factors ........................................................................................................57
3.5
ADVANTAGES OF A SMALL BUSINESS ................................................................58
3.6
FAILURE OF A SMALL BUSINESS .........................................................................58
3.6.1
Types of small business failures ...............................................................................59
3.6.2
Reasons why small businesses fail ..........................................................................59
3.7
THE LEGAL FORMS OF OWNERSHIP IN SOUTH AFRICA ...................................61
3.7.1
Choosing a form of ownership ..................................................................................61
3.7.2
Types of ownership ..................................................................................................62
3.8
DEVELOPING A BUSINESS PLAN ..........................................................................74
3.8.1
Purpose ....................................................................................................................74
3.8.2
Objectives ................................................................................................................75
3.8.3
Business plan development principles ......................................................................75
3.8.4
The components of the business plan ......................................................................76
3.8.5
Business plan development checklist and project planner ........................................77
3.9
FUNDING FOR A SMALL BUSINESS ......................................................................80
3.9.1
Banks .......................................................................................................................80
3.9.2
Government departments and agencies ...................................................................80
3.9.3
Venture capital finance .............................................................................................81
3.9.4
Business incubators .................................................................................................82
3.9.5
Crowdfunding ...........................................................................................................82
3.9.6
Angel investors .........................................................................................................82
3.10
SUMMARY ...............................................................................................................83
3.11
REFERENCES .........................................................................................................85
3.12
FURTHER READING: OPEN EDUCATIONAL RESOURCES (OERS) ....................86
52
LESSON 3: ESTABLISHING A BUSINESS
This lesson will require approximately TEN notional hours. Figure 3.1 represents an
overview of lesson 3.
3.1 Introduction
3.2. Definition of a small business
3.3 Business idea
3.4 The importance of geographical location
3.5 Advantages of a small business
3.6 Failure of a small business
3.7 The legal forms of ownership in South Africa
3.8 Business plan development
3.9 Funding for a small business
3.10 Summary
3.11 References
3.12 Open Educational Resources (OERs)
Figure 3.1: Visual overview of lesson 3
(Source: Author's design)
53
3.1
INTRODUCTION
It has become a globally documented phenomenon that the advancement of Small,
Medium and Micro-Enterprises (SMMEs) can greatly contribute to the Gross Domestic
Product (GDP), reduce unemployment and stimulate social welfare (Ladzani & Van,
2002; Oni, Agbobli & Iwu, 2019). However, current studies in South Africa reveal that
SMMEs are only creating 28% of total employment – even though 98.5% of the
country's economy is made up of SMMEs. The goal of the National Development Plan
(NDP) for small businesses – to create 90% of the jobs by 2030 – will not be achieved
unless this important sector of the economy is accurately understood. Starting a small
business or operating one requires hard work, talent, perseverance, willpower and a
lot of research and planning.
LEARNING OUTCOMES
When you have worked through lesson 3, you should be able to do the
following:
•
Define the terms "small business" and "business idea".
•
Identify the factors that influence the location of a business.
•
Describe the advantages associated with a small business.
•
Explain the types of small business failures and the reasons why small
businesses fail.
•
Distinguish the different forms of ownership that are found in South Africa.
•
Discuss the purpose, objectives, components and the development process of a
business plan.
•
Distinguish the different funding options for a small business.
54
KEY TERMS
small business
business idea
juristic person
sole proprietorship
partnership
business location
business trust
business plan
co-operative society
close corporation
business failure
3.2
DEFINITION OF A SMALL BUSINESS
Defining a small business is problematic because aspects such as labour, turnover
and capital intensities need to be considered (Langa, & Govender, 2019; Masocha,
2019; Muriithi, 2017). The National Small Business Act 29 of 2004 defines a small
business as a separate and different business entity, such as co-operative enterprises
and non-governmental organisations. Furthermore, the entity is managed by one
owner or more, including its branches or subsidiaries, if any, and is predominantly
carried on in any sector or sub-sector of the economy. Small business in South Africa
can be classified as a micro, small or medium enterprise (SMME) (The Presidency,
Republic of South Africa, 2004).
Now that you have learned about the definition of a small business, you need to
understand what constitutes a business idea.
3.3
BUSINESS IDEA
The most important factor a person needs before starting a business is a business
idea. For some people, coming up with a great business idea is a rewarding exercise.
However, others regard this task as overwhelming. Essentially, one needs to establish
what customers want and try to satisfy a need not fulfilled by others. The key question
to ask is what customers want – instead of focusing on what the business does. A
business idea should be innovative and creative. Possible sources of business ideas
include previous work experience, personal interests, industry-related exposure,
educational courses, and suggestions from customers, family and friends. A business
55
idea can be implemented by starting a new business, buying an existing one or
obtaining a franchise.
Activity 3.1
This activity will take approximately 10 minutes to complete.
Identify a business idea that you could implement in your community
and succeed in it.
Feedback:
A business idea can come from novelty innovation or doing something
people have been doing for a very long time – selling bread,
vegetables, or clothes, for instance. We advise you to watch the following video by
opening the link below for examples of different business ideas:
https://youtu.be/AH1FN_y8IP8
From the business idea, we move on to look at the importance of geographical
location.
3.4
THE IMPORTANCE OF GEOGRAPHICAL LOCATION
3.4.1 Geographical location
The choice of geographical location for specific premises is important to all kinds of
businesses, although it may be more important for some than for others. For example,
the success of most retail organisations depends on the location of the business.
Depending on the nature of the proposed product or service to be offered, the
entrepreneur should, for example, decide whether the business needs to be located
either near its market or near its sources of raw materials, near competitors, in the city
centre, in the suburbs, in a rural area, in existing industrial areas, or according to
personal preference. Woolworths, for example, selects the premises of its stores
according to the following criteria (https://www.woolworths.co.za/):
•
The premises should be located near other national retailers, banking and other
facilities.
•
The site should provide adequate security.
•
There should be convenient parking facilities.
56
•
The building must comply with Woolworths' specifications regarding size, quality of
finish, and so forth.
It is important to know that no two businesses are alike and that different factors might
influence the choice of location, depending on the nature of the business.
3.4.2 Location factors
Location factors can be described as those aspects you need to consider when
selecting the geographical location of a new business. These factors include:
•
sources of raw material
•
availability of labour
•
the proximity of and access to the market
•
availability and cost of transport facilities
•
availability and costs of power and water
•
availability and costs of a site and buildings
•
availability of capital, attitude, regulations and tariffs of local authorities
•
the existing business environment, the social environment, climate, central
government policy and personal preferences
Activity 3.2
This activity will take approximately 15 minutes to complete.
From the list provided, identify the five most important factors that you
would consider in selecting a geographical location for a business that
you would like to establish.
Feedback:
Depending on the business idea that you have identified, some of the
most important factors that you would consider in selecting a
geographical location for your business would include:
•
sources of raw material
•
availability of labour
•
the proximity of and access to the market
•
availability and cost of transport facilities
57
•
availability and costs of power and water
•
availability and costs of a site and buildings
•
availability of capital, attitude, regulations and tariffs of local authorities
•
the existing business environment, the social environment, climate,
central government policy and personal preferences
Now that you understand the importance of geographic location for any organisation,
you will learn about the advantages of a small business.
3.5
ADVANTAGES OF A SMALL BUSINESS
A small business is more innovative due to the following factors:
•
Passion. A small business owner is concerned with the success of the business
and is more receptive to new ideas and concepts.
•
Customer relations. A small business understands its customers' needs better, and
is thus in a good position to meet those needs.
•
Agility. A small business is more likely to adapt quickly to a changing environment
than big organisations are.
•
Risk-taking. An owner of a small business is more willing to take risks.
•
The ability to operate with minimal resources. A small business is aware of its few
resources and consequently, becomes proficient at doing more with less.
•
Information sharing. A small business is more likely to have a closer social network
for sharing ideas due to its small size.
As much as starting or owning a small business comes with advantages, the failure
rate of these businesses is alarming. In the next section, you will learn about the types
of small business failures and the reasons why these businesses fail.
3.6
FAILURE OF A SMALL BUSINESS
Small businesses are at the heart of encouraging growth in Africa (Muriithi, 2017). Like
many other countries, South Africa has identified developing small businesses as one
of the solutions to developmental challenges. However, the 75% failure rate of small
businesses in the country is shocking and is, in fact, one of the highest in the world
(Langa & Govender, 2019). It is estimated that 40% of all new businesses in the
country fail in their first year of establishment, 60% in the second year and 90% within
58
the first 10 years since the start of the business (Bushe, 2019). The Global
Entrepreneurship Monitor report also emphasised that the survival rate for South
African start-up businesses since 2012 is poor compared to other countries (Bushe,
2019).
3.6.1 Types of small business failures
The term failure can have diverse meanings for different people. However, the failure
of small businesses is usually measured by the termination of the operation of the
business in the following manners:
•
The owner dies and the business ceases to operate.
•
The opportunity cost becomes high. This occurs when the owner realises that the
business is generating less profit compared to other options elsewhere to
encourage him/her for the effort that is being put into it.
A business loses money, resulting in it being terminated to avoid losses to its
•
creditors.
The business becomes bankrupt.
•
3.6.2 Reasons why small businesses fail
Most small businesses fail to the extent that they are unable to service their
commitments and as a result, become insolvent. Table 3.1 summarises the reasons
why small businesses fail.
Table 3.1: Reasons why small businesses fail
•
Managerial inadequacy
Financial inadequacy
Failure in planning (initial
•
start-up plan and
subsequent plans)
•
•
problems
•
Inexperience with managing
business operation
Cash-flow
External factors
Insufficient first
recession
•
capitalisation
•
Inadequate
Economic
Increasing
unemployment
•
financial records
Higher interest
•
Ineffective staffing
•
Poor communication skills
•
Failure to seek or respond to
insights of qualified
for the product or
criticism
accountants
service
•
Overlooking the
59
rates
•
Lack of desirability
•
•
Failure to learn from past
•
Inadequate capital
mistakes
acquisition
Overlooking the needs of
strategies
customers
•
Overlooking competition
financial issues
•
Failure to diversify customer
resulting from
base
growth
Failure to innovate
•
Ineffective marketing
Inability to compete
with imports
•
Fraud in the
business
Overlooking
•
•
•
•
Natural disasters
strategies
Source: Adapted from Cadden & Lueder (2012)
Small businesses fail because of obstacles faced in the country. Figure 3.2 depicts the
World Economic Forum's statistics about obstacles that businesses in South Africa
face.
Figure 3.2: Most problematic factors for doing business in South Africa
(Source: Schwab, 2017:46)
Tax rates, corruption, access to financing, tax regulations, inefficient government
bureaucracy and an inadequately educated workforce were found to be the most
problematic factors when it comes to doing business in South Africa. Corruption was
indicated as the second highest reason; this can be avoided if organisations were to
60
adhere to the principles set out by the United Nations Global Compact, especially
principle 10. Principle 10 encourages businesses to work against corruption in all its
forms, including extortion and bribery. Most of the reasons that result in business
failure can be eliminated through a proper business plan based on research and
empirical evidence. In the next section, you will learn about different forms of
ownership.
3.7
THE LEGAL FORMS OF OWNERSHIP IN SOUTH AFRICA
The purpose and objectives of a business idea will inform the type of ownership. Forms
of ownership differ regarding the extent to which the owners want to be liable for
financial and legal risks, how the business will be financed and who will have a
controlling interest in the business. The nature of the proposed business activities, the
size of the business, the financing needs, the accountability of participants, and tax
and legal implications, the management structure and the participation style need to
be carefully assessed before selecting any form of ownership (Erasmus, RudanskyKloppers & Strydom, 2019).
3.7.1 Choosing a form of ownership
One of the concepts that some students find difficult is the question of legal personality.
When a business has a legal or juristic personality of its own (i.e. an organisation or a
close corporation), it means that the business is just like a person in his or her own
right. A justice person enjoys limited liability. An example is when creditors sue a sole
proprietorship; the claim will be against the owner of the sole proprietorship in his or
her capacity. This is because a sole proprietorship does not have a legal personality.
However, if creditors sue a company, the claim is against the company and not against
the shareholders or the directors personally. This is because the company is a legal
personality on its own. A juristic person is also not affected by changes in its
membership and as a result, provides the business with continuity.
Choosing the right type of ownership is not an easy task. In the subsequent section,
you will learn about different types of ownership, their advantages and disadvantages.
61
3.7.2 Types of ownership
3.7.2.1 Sole proprietorship
Sole proprietorship refers to a business that is established, operated, owned and
frequently funded by one person (Gitman et al., 2018). In a sole proprietorship, the
owner makes all the important decisions and is generally responsible for all day-to-day
activities. A sole proprietorship is not a separate legal person, meaning that there is
no legal separation of the personal and business assets of the owner (Erasmus et al.,
2019). Therefore, the owner risks losing all his/her possessions if the business does
not fulfil its financial obligations. Table 3.2 summarises the advantages and
disadvantages of a sole proprietorship.
Table 3.2: Advantages and disadvantages of a sole proprietorship
Advantages of a sole proprietorship
Disadvantages of a sole
proprietorship
The owner has direct control of the The owner needs to supply all the
business
expertise
necessary
to
make
the
business a success.
The owner gets all the income earned by The business dissolves when the owner
the business
dies.
It is the easiest and less expensive to set The business depends on the owner's
up
resources for financing.
Freedom from government regulation
The owner endures unlimited liability for
any losses sustained by the business.
Easy to dissolve
Involves personal sacrifices and a huge
time commitment.
3.7.2.2 Partnership
A partnership is a business jointly owned by two or more people to generate a profit.
Setting up a partnership is more difficult than starting a sole proprietorship, but it is still
comparatively easy and inexpensive. Partners may be individuals or other businesses
operating as a juristic person. A partnership is characterised by each partner
contributing something to the business and each partner expecting a share of the
profit. A partnership does not have a juristic personality, meaning that the personal
62
assets of partners are exposed to the risks of the business (Erasmus et al., 2019).
Table 3.3 summarises the advantages and disadvantages of a partnership.
Table 3.3: Advantages and disadvantages of a partnership
Advantages of a partnership
Disadvantages of a partnership
Partnerships are easy to form. The Partners are subject to unlimited liability.
partners agree to do business together
and draw up a partnership agreement.
Brings together a diverse group of Sharing of decision making might bring
talented
individuals
who
share discomfort to other partners.
responsibility for running the business.
The business can draw on the financial Sharing the profit can be complex.
resources of many individuals.
Partners are actively involved in running Difficulty in exiting or dissolving a
the business and can respond quickly to partnership – the value of the partners'
changes in the business environment.
share must be calculated when one
partner intends to leave.
Continuity is not a problem since There is potential for conflict between
partners can agree legally to allow the partners.
partnership to survive if one or more
partners die.
3.7.2.3 Close corporation
A close corporation is a legal entity owned and controlled by one or more members,
but not more than ten. A close corporation is a juristic person with its own rights, assets
and liabilities. Therefore, it can enter binding contracts, buy and sell property, sue and
be sued, be held responsible for its actions and be taxed. The interest of a member is
expressed as a percentage and the total interest of members must be 100 per cent. A
member's interest can be transferred to another individual who will then become a
member of the close corporation (Erasmus et al., 2019). A close corporation may not
make any payments to members unless it has been determined that after payment,
the corporation's assets are still more than its liabilities. The name of a close
corporation is precedent by the abbreviation "CC" (Erasmus et al., 2019). After the
implementation of the Companies Act 71 of 2008, no close corporation can be
63
registered and no conversions from companies to close corporations will be permitted.
However, existing close corporations can be continued or be converted to companies.
Table 3.4 summarises the advantages and disadvantages of a close corporation.
Table 3.4: Advantages and disadvantages of a close corporation
Advantages of a close corporation
Disadvantages of a close corporation
Limited liability for members
There is a possibility for the agency
problem, which is the conflict of interest
resulting from a relationship in which one
party (employed managers) is supposed
to act in the best interest of the other
(members).
Better access to financial resources
Close corporations are more costly to set
up.
Close corporations can attract highly Close corporations are subject to levels
skilled and talented employees due to of regulation and government oversight
their size and their ability to pay high that can place a burden on small
sales commissions and benefits.
businesses.
There is continuity. A close corporation Membership is limited to ten persons.
has a legal life separate from the lives of
its members and can exist forever.
3.7.2.4 Company
A company refers to an entity that conducts business to generate profit as a fictitious
person with its own rights and duties. A company does not rely on the life of a natural
person or persons for its continuity. Companies enjoy all the benefits of a juristic
person associated with limited liability to the shareholders. The ownership and control
are separated as companies are owned by shareholders but managed by the board of
directors and appointed executives. The types of companies include profit and nonprofit companies.
64
a) Profit company
The most common types of company that operate mainly for profit include personal
liability companies, private companies, public companies and state-owned companies.
A personal liability company, usually ending with the word "Inc". or "Incorporated" is
another type of formation found in certain industries, whereby members are allowed
to form a business besides operating as a partnership. Personal liability companies
must adhere to the conditions relevant to private companies. Only one individual is
needed to establish a personal liability company with at least one director.
A private company has a minimum of one shareholder and a maximum of 50
shareholders. A private company must have at least one director. The company must
also meet the requirements to appoint an audit committee or a social and ethics
committee, where applicable. Private companies must have a memorandum of
incorporation stipulating certain restrictions regarding the transferability of their
securities. This means that the public, in general, cannot buy shares from a private
company. A memorandum of incorporation must be drafted, stipulating that creditors
may hold directors equally and individually liable for contractual debts and liabilities of
the company.
A public company requires at least seven persons and can raise capital from the
general public. The securities of a public company are freely transferable and shares
are sold to the public to raise capital. The name of a private company ends with the
words "(Pty) Ltd", while the name of a public company ends with "Ltd". A public
company must have a minimum of three directors and is strictly controlled through
legal regulations compared to private companies.
State-owned companies have the state as the main shareholder. These companies
are registered in terms of the Companies Act 71 of 2008 and listed as a public entity
in terms of the Public Finance Management Act 29 of 1999 or owned by a municipality
(Erasmus et al., 2019). Company secretaries and audit committees must be appointed
to the state-owned companies and their names must include the expression "SOC
Ltd".
65
b) Non-profit company
Non-profit companies use the income generated to promote the specific purpose for
which the company was established and do not distribute any profit to its members.
These companies are usually established for a philanthropic or public purpose; for
example, the advancement of a specific culture, sport or charity. Non-profit companies
do not need to have any members, but they must have at least three directors.
Directors can only expect reasonable remuneration for their services and may not gain
any other benefits. Table 3.5 summarises the advantages and disadvantages of
companies.
Table 3.5: Advantages and disadvantages of companies
Advantages of companies
Disadvantages of companies
Legal and natural persona may be
A high degree of legal regulation
shareholders or members of companies.
There is a separation of control and
High operational costs
ownership.
Shares are easily transferable.
Conflict of interest resulting from a
relationship in which one party
(directors) is supposed to act in the best
interest of the other (shareholders)
The business can continue indefinitely.
Financial affairs are available to the
public.
There is limited liability for members and Directors may be held personally liable
shareholders.
for the company's debts if they fail to
meet their legal obligations.
Companies can raise huge capital.
Profits distributed to shareholders are
taxable.
3.7.2.5 Business trust
A business trust is formed through a trust deed in terms of which the initiator of the
trust places assets under the control of a trustee to benefit the beneficiaries (Erasmus
et al., 2019). There is no limit to the number of beneficiaries and they can be natural
or juristic persons. A trust is not owned by anyone and it is registered like companies.
66
The termination of a trust can be done through an agreement or if it is sequestrated
due to its failure to service its debts. Trustees are liable only to the trust assets, not
personal assets. Table 3.6 summarises the advantages and disadvantages of a
business trust.
Table 3.6: Advantages and disadvantages of a business trust
Advantages of a business trust
Disadvantages of a business trust
Natural and juristic persons may be There is potential for conflict between
parties to trust as founder, trustee or parties.
beneficiary.
It offers extreme flexibility.
There is limited access to capital.
It is easy to establish.
There is a loss of direct control of assets.
There are fewer legal regulations.
There are administration costs involved
in the form of trustee fees.
There is limited liability.
There might be costs involved when
transferring assets into a trust.
There is continuity.
3.7.2.6 Co-operative society
A co-operative society is a juristic business, jointly owned and normally structured by
farmers or consumers, mainly in the agricultural sector; however, it can be used for
different kinds of businesses. The co-operative society is formed and operated for the
benefit of its owners. Members of a co-operative have limited liability for the debts of
the co-operative. The co-operative society's name must always specify the main
business of the co-operative and must include the words "co-operative" or "co-op" and
"limited" or "Ltd", unless the liability for members is not limited. A co-operative society
should not restrict its membership based on racial, social, political, gender or religious
discrimination, provided that all interested parties are willing to use their services and
accept the responsibilities of membership (Erasmus et al., 2019). A board of directors
is appointed to manage the operations of a co-operative, which should remain
subordinate to the members in general meetings. Table 3.7 summarises the
advantages and disadvantages of a co-operative society.
67
Table 3.7: Advantages and disadvantages of a co-operative society
Advantages of a co-operative society
Disadvantages of a co-operative
society
They can use economies of scale.
They do not lead to strong business
ventures.
Equity
is
generated
(co-operative There is a lack of resources and support.
societies play an important role in land
reform schemes).
There are increased incentives for There is potential for conflict between
workers.
parties.
The public good is encouraged at a They usually lack managerial skills.
higher level because the co-operative
creates employment opportunities with a
ripple effect of positive spin-offs for small
towns.
The is limited liability.
There is incongruence of interests.
There is continuity.
There are no restrictions on the number
of members.
Less strict legal requirements apply.
68
Activity 3.3
This activity will take approximately 15 minutes to complete.
Complete the table below regarding the main differences between the forms of ownership. Some of the information
required has not been discussed in this lesson, therefore, you need to do a bit of desktop research to be able to
complete this activity.
Number of
Legal
Liability of
Capital
Name of the
Continuity of the
owners,
personality
owners,
acquisition
organisation
organisation
members or
members or
potential
rules
shareholders
shareholders
Sole
proprietorship
Partnership
Close
corporation
Profit company
Private company
Non-profit
company
Business trust
Co-operative
69
Feedback:
The forms of ownership can be differentiated as follows:
Number of
Legal
Liability of
owners,
personality
owners,
members,
members or
shareholders
shareholders
Capital
Name of the
acquisition organisation
rules
Continuity of
the
organisation
or directors
Sole
One owner
proprietorship
Is not a
Unlimited
Depends on No particular
Lack of
separate
liability
the owner’s
arrangement
continuity
juristic person
financial
strength
and
credibility
Partnership
At least two
Is not a
Unlimited
Each
No particular
Depends on
partners
separate
liability
partner
arrangement
the continued
juristic person
makes a
involvement
contribution
of partners
Close
One to ten
Is a juristic
Limited liability;
Member
The name
Not affected
corporation
members
person
a close
contribution
ends with the
by the entry
corporation has expressed
abbreviation
or withdrawal
its own rights,
“CC”.
of members
70
Public
At least three
Is a juristic
company
directors
person
assets and
in
liabilities
percentage
Limited liability
May raise
The name
Exists
capital by
ends with the
independently
issuing
abbreviation
from its
shares to
“Ltd”.
members or
the public
shareholders
and has the
potential for
long-lasting
existence.
Private
At least one
Is a juristic
Creditors may
Capital
The name
Exists
company
director
person
hold directors
raised by
ends with the
independently
jointly liable.
directors as
abbreviation
from its
the
“(Pty) Ltd”.
members and
company
has the
cannot list
potential for
shares on
perpetual
the stock
existence.
exchange.
71
Non-profit
At least three
Is a juristic
company
directors
person
Limited liability
Donations
No particular
Can be
arrangement
dissolved
when it has
fulfilled its
mandate.
Business trust
The owner
Is a juristic
appoints a
person
Limited liability
Founder
No particular
It does not
places
arrangement
terminate
trustee to
assets
unless by
administer the
under the
agreement.
trust for the
control of a
benefit of
trustee.
beneficiaries.
No limit on
beneficiaries.
Co-operative
A minimum of
Is a juristic
five natural
person
Limited liability
persons
72
Funded by
The name
Membership
members
includes the
withdrawal
and open to
main
does not
all persons
activities of
affect the
able to use
the co-
continued
their
operative, as
existence of
services
well as the
words “co-
the co-
operative” or
operative.
“co-op”
followed by
“limited” or
“Ltd”.
73
Once you have decided on the appropriate form of legal ownership that your business
would take, you need to develop a business plan. This brings us to the next section –
developing a business plan.
3.8
DEVELOPING A BUSINESS PLAN
In this section, you will learn about the purpose, objectives, principles, components
and development of a business plan for an organisation – as depicted in figure 3.3.
1. Purpose
•Internal purpose
•External purpose
2. Objectives
•Identifies the nature and context of a business opportunity
•Explains how an opportunity will be developed
•Attracts investors
3. Principles
•Communication
•Credibility
4. Components
5. Checklist and
project planner
•Cover page and executive summary
•Content
•Financial analysis
•Essential initial research
•The business model
•Initial business plan draft
•Making the business plan realistic
•Making the business plan appeal to stakeholders
•Finishing the business plan
•Preparing to pitch and present the business plan
Figure 3.3: Business plan
3.8.1 Purpose
Business plans are developed for both internal and external purposes. Internally,
entrepreneurs develop business plans to assist them to combine the parts of their
business. The external purpose relates to the need to raise capital (Swanson, 2017).
3.8.1.1 Internal purposes
As a blueprint for the development of a business, a business plan outlines the vision
for an organisation, institutes the strategy and explains how the strategy will be
implemented. In addition, a business plan offers a structure for the analysis of main
issues, offers a plan for the development of a business and assists entrepreneurs to
establish and monitor critical success factors.
74
3.8.1.2 External purposes
A business plan offers the most comprehensive source of information when it comes
to business assessment. Therefore, it is regularly used to sell an organisation to
external audiences, including potential sources for financing and prospective
employees. It should provide external stakeholders with the current state of the
organisation, its opportunities, and its needs for resources such as capital and
employees – to enable them to understand the organisation better (Swanson, 2017).
3.8.2 Objectives
The main objectives of a business plan are the following:
•
It identifies the nature and context of the business opportunity. This relates to why
the opportunity exists.
•
It explains how the entrepreneur will develop this opportunity. The business plan
will, through its components (general organisation description, products and
services plan, marketing plan, management plan, operating plan and financial
plan), explain how the entrepreneur will develop the opportunity to its fullest
potential.
•
A third objective of the business plan is to attract investors or to convince a bank
or other institution or a person who provides financial resources to lend the
entrepreneur the money needed to establish a new business.
3.8.3 Business plan development principles
3.8.3.1 Communication
A business plan must be written in such a way that it meets the expectations of the
targeted audience regarding what they need to know to support the proposed
business. A business plan should also outline the indicators that investors or other
targeted audiences would like to know. Entrepreneurs must clearly outline the
business model, the environment within which the proposed organisation will operate,
and the opportunity.
3.8.3.2 Credibility
When writing a business plan, entrepreneurs should establish and maintain their
credibility by emphasising the most important and most relevant information regarding
the team that will be responsible to manage the start-up process. A business plan
75
should elaborate on the plans as outlined in the document to ensure that the targeted
audience has the information they need to assess the credibility of the plan. To
establish and maintain credibility, entrepreneurs must incorporate scenarios to
demonstrate that they have made objective assumptions to establish what the future
holds for their proposed venture. Entrepreneurs should also offer complete and
realistic financial links between all relevant components of the plan. Lastly, they must
outline the value that the targeted audience should expect to gain if they invest in the
business.
3.8.4 The components of the business plan
3.8.4.1 Cover page and executive summary
It is important to make a good impression on the cover page of your business plan.
Another important part of the business plan is the executive summary because it holds
together and unifies all the other components of the plan. As investors or other
stakeholders often read only the executive summary, it should provide an accurate
overview of the rest of the plan and should be written last.
3.8.4.2 Content of the business plan
The entrepreneur must first give a brief but accurate description of the new venture.
Then follows the body of the business plan. It is important for entrepreneurs not to
become obsessed with their product or service and simply believe or hope that there
is a market for it. Therefore, you must include the analysis of the new venture's market
and the development of a marketing strategy.
3.8.4.3 Financial analysis
Financial analysis is another crucial component of the business plan. The
entrepreneur's projections of a new venture's profits, its required assets and its
financial requirements over the next one to five years should be supported by
substantiated assumptions and explanations of how the costs, profits and financial
requirements are determined. To make the necessary financial projections, the
entrepreneur must first have a good understanding of financial statements and how to
interpret the financial statements.
76
3.8.5 Business plan development checklist and project planner
Study Appendix A, "Business plan development checklist and project
planner" (pages 70 – 76) in Swanson, L. A. 2017. Business plan
development guide [Online]. 8th edition. Openpress: Usask, CA.
Available from: < https://open.umn.edu/opentextbooks/textbooks/495> [Accessed 7
November 2020]. This is an open-book licensed as a Creative Commons AttributionShare Alike 4.0 International License.
Activity 3.4
This activity will take approximately 20 minutes to complete.
Summarise the most important elements of the business plan
development checklist and project planner.
Feedback:
The checklist provides the necessary aspects that need to be attended
to when developing a business plan – such as conducting initial
research, adopting the business model, compiling the initial business plan, ensuring
that the business plan is realistic and appealing, finalising the business plan and
preparing to present the business plan. We will now take a look at these aspects.
3.8.5.1 Essential initial research
The initial research that entrepreneurs should conduct must include the societal level
using the Political, Economic, Social, Technological, Ecological and Legal (PESTEL)
analysis, the industry level by applying Porter's five forces model analysis, marketlevel analysis and firm-level analysis using tools such as the Strength, Weaknesses,
Opportunities and Threats (SWOT) analysis and the Value, Rarity, Imitability and
Organisation (VRIO) framework analysis. You will learn more about these analyses
when you go to the second and third levels with management studies.
77
3.8.5.2 The business model
Use the Business Model Canvas (BMC) or a similar tool to describe and analyse the
proposed venture's business model. You will learn more about the BMC when you
progress further with your studies in the field of Business Management. For example,
you will be expected to apply the BMC if you register for the Business Management
honours research module, HRBUS83.
3.8.5.3 Initial business plan draft
The initial business plan draft should include aspects such as your own template, work
from essential research and the business model, introduction, operational plan, human
resource plan, marketing plan and financial plan.
3.8.5.4 Making the business plan realistic
In general, the draft plan will have many weaknesses and many gaps to fix, but it
should offer a great foundation upon which to build a desirable and realistic business
plan. You can make the business plan realistic by adjusting the proposed business
model, plans and strategies outlined in both the written and financial parts of the plan.
3.8.5.5 Making the business plan appeal to stakeholders
A second full draft of the business plan is expected to be more realistic compared to
the first draft. However, there is a possibility that the plan is not yet desirable to the
entrepreneur or appealing to prospective investors. This stage aims to retain, and
possibly improve, the realism of the plan while making it desirable and appealing to
both the entrepreneur and prospective investors. This can be done by doing the
following:
•
Establishing the medium-term and long-term goals of the business
•
Incorporating all the required aspects of the business plan to attract targeted
investors and make them want to invest in the organisation
•
Completing what-if analyses on the financial spreadsheets and continuing to
simultaneously adjust the goals, strategies and plans in the written and financial
projections
•
Using a copy of the spreadsheets and adjusting the main figures to see what
happens
78
•
Establishing the impact on the business if the critical success factors are
affected in a manner not anticipated
•
Deciding whether there is a need to modify goals, strategies and plans in the
business plan to reduce vulnerability to changes to the critical success factors
•
Deciding how to present your analysis of your critical success factors
•
Including three sets of projected financial statements in the business plan,
namely most likely, optimistic, and pessimistic if it is appropriate to the business.
3.8.5.6 Finishing the business plan
This stage is all about revising the goals section to make sure that the goals will best
meet the purposes and will resonate with the targeted audience. In most cases, the
goals are likely to change dramatically between the first draft and when the plan is
completed. In addition, an executive summary should be provided. The document
should be proofread to ensure that the written and financial parts of the plan are
completely consistent and to remove spelling, grammar, formatting, calculation or
other errors. If required, appoint a skilled proofreader to complete this task with the
entrepreneur.
3.8.5.7 Prepare to pitch and present the business plan
When presenting the business plan, do the following:
•
Prepare and practise the pitch. It should be clear why the plan is being pitched,
and customised to meet those goals.
•
Use a tool like PowerPoint or Prezi to prepare a presentation when formally
presenting the plan.
•
Business cards should be readily available for those who express an interest in
the business.
Before you proceed to the next section, we advise you to access the following link to
watch
the
YouTube
video
about
writing
a
business
plan:
https://youtu.be/Fqch5OrUPvA
Once the business plan is complete, the next step is to obtain financing to set up the
organisation if self-funding is not possible. In the next section you will learn about
funding alternatives for small businesses in South Africa.
79
3.9
FUNDING FOR A SMALL BUSINESS
Figure 3.2 shows that lack of business financing is one of the most problematic areas
when doing business in South Africa. Many businesses fail, or never get started,
because of a lack of funding. It is important to note that obtaining funding for small
businesses is relatively difficult in South Africa as many entrepreneurs and small
business owners are looking for funding. Therefore, entrepreneurs need to clearly
demonstrate that their business ideas are viable and feasible by producing a sound
business plan and a detailed breakdown of how much money is needed to operate the
business. The two types of business financing are debt (borrowed funds) that must be
repaid with interest over a stated period, and equity or funds raised through the sale
of stock in the business (Gitman et al., 2018). Besides self-funding, owners of small
businesses can approach banks, government departments, venture capital finance,
business incubators, crowdfunding platforms and angel investors.
3.9.1 Banks
All the big banks in South Africa (such as First National Bank, Absa Group Limited,
Standard Bank, African Bank and Nedbank) have departments that deal with loans for
small businesses. Consultants specialising in small business funding in these banks
can provide entrepreneurs with advice and review their applications. However,
financial institutions have traditionally been risk-averse when it comes to providing
finance and other services to the often fragmented, risky and geographically micro and
small businesses (The Presidency, Republic of South Africa, 2004).
3.9.2 Government departments and agencies
Various departments and agencies established by the South African government
provide support to start-up businesses, including small and big loans. Table 3.8
provides examples of government departments and agencies that offer financial
support to small businesses depending on the type of business and industry.
80
Table 3.8: Government departments and agencies providing small business
funding
National departments
Website
Department of Trade and Industry
Department
of
Agriculture,
http://www.thedtic.gov.za/
Land https://www.dalrrd.gov.za/
Reform and Rural Development
Department of Sports, Science, Art http://www.dac.gov.za/
and Culture
Department of Tourism
https://www.tourism.gov.za/Pages/home.a
spx
Department
of
Small
Business http://www.dsbd.gov.za/
Development
Agencies
Website
National Youth Development Agency
Small
Enterprise
http://www.nyda.gov.za/
Development http://www.seda.org.za/
Agency
Small Enterprise Finance Agency
https://www.sefa.org.za/
Industrial Development Corporation
https://www.idc.co.za/
Technology Innovation Agency
https://www.tia.org.za/
National Empowerment Fund
https://www.nefcorp.co.za/
Land Bank
https://landbank.co.za/Pages/Home.aspx
National Lotteries Commission
https://www.nlcsa.org.za/
3.9.3 Venture capital finance
Venture capital finance refers to private equity capital used as seed funding for
businesses that are considered to have high growth and high potential. The scope of
funding differs, for instance, funding for research and development to ensure that a
business's product is ready for the market. Venture capital companies tend to have a
higher expectation of generating a return on their investment compared to angel
investors.
81
3.9.4 Business incubators
Business incubators are initiated to assist entrepreneurs to establish and operate their
businesses by providing them with financial backing and support. Big companies in
the country have established incubator programmes in industries such as banking,
mining and telecommunication. The programmes are usually in place for a short period
or a few years. The Department of Trade and Industry initiated the Incubation Support
Programme (ISP) to develop incubators into successful enterprises with the potential
to revitalise communities and strengthen local and national economies.
3.9.5 Crowdfunding
Crowdfunding is a system that some entrepreneurs use to raise capital by involving
friends, family, customers and individuals to invest in their business collectively. Many
first-time entrepreneurs are sponsored by friends and family, at least in the initial
phases. The entrepreneur might offer tokens of appreciation in exchange for funds or
an ownership stake for extensive funding.
3.9.6 Angel investors
Angel investors are typically people who have excess money to loan to start-up
entrepreneurs and businesses with ideas that are perceived as feasible. In most
cases, the investors require a share in the business, provided that the investment has
the potential to succeed even though banks regard these investments as too risky.
Most angel investors run successful businesses and, in addition to making a profit from
the investment, their objective is to help other aspiring business owners to succeed.
Funding for small businesses usually comes with strict conditions. Therefore, it is
important to first understand the terms and conditions, the costs, and commission
payable before signing any agreement. Some investors may require small business
owners to either pay back the loan or to give them a share in the business or a
percentage of the profits or involvement in how the business is operated.
Notwithstanding that great attention has been directed to financing SMMEs, small
businesses still experience survival and growth challenges as banks tend to be
hesitant to provide loans and financial assistance. This is because banks conclude
that most small businesses cannot repay loans due to the level of ambiguity of
information when they assess small businesses' financial statements (Langa, 2019).
82
In the following section, you will learn about different forms of ownership in South
Africa. When establishing a new business in South Africa, it is important to distinguish
between the different forms of ownership. One also needs to be aware of the key
considerations that are applicable when choosing a form of ownership. This brings us
to the following section that deals with the legal forms of ownership.
3.10
SUMMARY
Now that you have gone through this lesson, you can define a small business, and
explain the importance of a business idea and the location factors. Furthermore, you
gained insight into the advantages and types of small business failures, different forms
of ownership, how a sound business plan for new ventures can be developed, and
funding opportunities for small businesses. In the next lesson, we will have a closer
look at the business environment. No business functions in a vacuum. Businesses
influence and are influenced by the environment in which they function.
SELF-ASSESSMENT QUESTIONS
This activity will take approximately 10 minutes to complete.
QUESTION 1
In your own words, define the term "small business".
QUESTION 2
After completing your qualification with Unisa, you decide that the information you
accumulated will enable you to start your own small business. Which factors are the
advantages of a small business?
a.
Passion
b.
Access to multiple resources
c.
Customer relations
d.
Agility
e.
Risk-taking
f.
Management capacity
g.
Delay of information
h.
Information sharing
83
Choose the correct option:
1
a; b; c; d; e
2
a; c; d; e; h
3
b; c; e; f; h
4
c; d; e; f; g
QUESTION 3
What is the most important objective of a business plan?
1
To identify and describe the nature of the business opportunity
2
To present a written plan of how the opportunity is to be exploited
3
To provide instruments that the entrepreneur can use to lead the venture
4
To attract investors to provide capital
QUESTION 4
Which sentence about the term "legal personality" is incorrect?
1
It exists independently of its members.
2
It is recognised as a legal subject alongside natural persons or individuals.
3
Its existence is affected by changes in its membership.
4
It has its own rights, assets and obligations.
QUESTION 5
Which types of businesses are juristic persons?
1
Companies and co-operative societies
2
Companies and sole proprietorships
3
Sole proprietorships and partnerships
4
Partnerships and co-operative societies
84
THE ANSWERS TO THE SELF-ASSESSMENT QUESTIONS
Question
Answer
Reference
(section)
1
A small business can be defined as a separate and distinct
3.2
business entity, including co-operative enterprises and nongovernmental organisations, managed by one owner or
more, which, including its branches or subsidiaries, if any, is
predominantly carried on in any sector or sub-sector of the
economy mentioned in column I of the schedule and which
can be classified as a micro-, a small or a medium enterprise
by satisfying the criteria mentioned in columns 3 and 4 of the
schedule.
2
2
3.5
3
1
3.7
4
3
3.9
5
1
3.9
3.11
REFERENCES
Bushe, B. 2019. The causes and impact of business failure among small to micro and
medium enterprises in South Africa. Africa's Public Service Delivery and
Performance Review, 7(1), a210. doi:10.4102/apsdpr.v7i1.210
Erasmus, B., Rudansky-Kloppers, S. & Strydom, J. 2019. Introduction to business
management (11th edition). Cape Town: Oxford.
Gitman, L.J., McDaniel, C., Shah, A., Reece, M., Koffel, L., Talsma, B. & Hyatt, J.C.
2018. Introduction to business [Online]. Houston, Texas: OpenStax. Available from:
<https://openstax.org/details/books/Introduction-Business>
18 November 2020].
85
[Accessed
Ladzani, W.M. & Van, V.J.J. 2002. Entrepreneurship training for emerging SMEs in
South Africa. Journal of Small Business Management, 40(2): 154–161.
doi:10.1111/1540-627x.00047
Langa, M.T. & Govender, K.K. 2019. The need for agile relationship lending between
small business and banks, towards a more engaged relationship: A case study in
Khayelitsha, South Africa. Asian Business Research Journal, 4: 29–34.
doi:10.20448/journal.518.2019.41.29.34
Masocha, R. 2019. Social sustainability practices on small businesses in developing
economies:
A
case
of
South
Africa.
Sustainability,
11(3257):
1–13.
doi:10.3390/su11123257
Muriithi, S.M. 2017. African small and medium enterprises (SMMEs) contributions,
challenges and solutions. European Journal of Research and Reflection in
Management Sciences, 5(1).
Oni, O., Agbobli, E.K. & Iwu, C.G. 2019. Entrepreneurial orientation and performance
of small business in Vryburg region, North West Province, South Africa. Journal of
Reviews on Global Economics, 8: 63–71.
Swanson, L.A. 2017. Business plan development guide [Online]. 8th edition.
OPENPRESS.USASK.CA.
Available
from:
<https://openpress.usask.ca/
businessplandevelopmentguide/> [Accessed 7 November 2020].
The Presidency, Republic of South Africa. 2004. National Small Business Amendment
Act No. 29 of 2004. Government Gazette Vol 474, Issue No. 27101.
3.12
FURTHER READING: OPEN EDUCATIONAL RESOURCES (OERS)
Cadden, D. & Lueder, S.L. 2012. Small Business Management in the 21st Century
[Online].
Available
from:
<https://open.umn.edu/opentextbooks/formats/298>
[Accessed 12 November 2020]. Focus on the following:
•
Chapter 1: Foundations for Small Business
•
Chapter 2: Your business idea: The Quest for Value
•
Chapter 5: The Business Plan
86
Saylor.com Academy. 2020. Exploring business [Online]. The Saylor.com Academy.
Available
from:
<https://saylordotorg.github.io/text_exploring-business-v2.0/>
[Accessed 17 November 2020]. Focus on the following:
•
Chapter 4: Selecting a Form of Business Ownership
•
Section 5.4: Advantages and Disadvantages of Business Ownership
•
Section 5.5: Starting a Business
•
Section 5.6: The Business Plan
Business Faculty from Ontario Colleges and Ecampusontario Program Managers.
2018. Fundamentals of business: Canadian edition [Online]. Available from:
<https://ecampusontario.pressbooks.pub/businessfuncdn/>
[Accessed
1 June 2020]. Focus on the following:
•
Chapter 5: Forms of Business Ownership
•
Chapter 6: Entrepreneurship: Starting a Business
Gitman, L.J., McDaniel, C., Shah, A., Reece, M., Koffel, L., Talsma, B. & Hyatt, J.C.
2018. Introduction to business [Online]. Houston, Texas: OpenStax. Available from:
<https://openstax.org/details/books/Introduction-Business>
[Accessed
18 November 2020]. Focus on the following:
•
Section 1.1: The Nature of Business
•
Chapter 4: Forms of Business Ownership
•
Chapter 5: Entrepreneurship: Starting and Managing Your Own Business
87
Contents
4.1
INTRODUCTION AND AIM OF THE LESSON ............................................ 90
4.2
THE BUSINESS AND ENVIRONMENTAL CHANGE .................................... 91
4.3
THE BUSINESS ENVIRONMENT .......................................................... 92
4.3.1 Defining the business environment ......................................................... 93
4.3.2 The three sub-environments of the business environment ............................... 93
4.3.3 Characteristics of the business environment .............................................. 95
4.4
THE COMPOSITION OF THE BUSINESS ENVIRONMENT ............................ 97
4.4.1 The micro-environment ....................................................................... 97
4.4.2 The market or task environment........................................................... 104
4.4.3 The macro-environment .................................................................... 106
4.5
ENVIRONMENTAL SCANNING........................................................... 109
4.6
SUMMARY ................................................................................... 113
4.7
REFERENCES .............................................................................. 115
88
LESSON 4: THE BUSINESS ENVIRONMENT
This lesson will require approximately SEVEN notional hours. Figure 4.1 represents
an overview of lesson 4.
4.1 Introduction
4.2. The business and environmental change
4.3 The business environment
4.4 The composition of the business environment
4.5 Environmental scanning
4.6 Summary
4.7 References
Figure 4.1: Visual overview of lesson 4 (Source: Author's design)
89
4.1
INTRODUCTION AND AIM OF THE LESSON
The business environment is dynamic and changes daily, whether on a global scale
or from a South African perspective. A company exporting to or importing from the
European Union (EU) or the United States experiences constant fluctuations in the
economic environment. An example is the daily change in the official exchange rate
of the rand against the euro and the US dollar. Another variable that affects
organisations and customers alike is the dramatic changes in the price of petrol. Petrol,
an essential commodity, currently costs more than R20 a litre, thus having a negative
effect on the inflation rate and, ultimately, on economic activity. Climate changes in
South Africa may also have a negative effect on businesses as well as private
customers. Periods of drought, cold spells and wet spells influence prices of basic
foodstuffs such as vegetables. Global pandemics, like the Covid-19 pandemic, have
the potential to not only influence and affect the business environment, but to change
the environment, having an impact on consumers, businesses and even governments
in an encompassing manner.
This lesson introduces you to the environment in which the business organisation
functions and explains how the environment influences business.
LEARNING OUTCOMES
When you have worked through lesson 4, you should be able to do the
following:




Explain the meaning of environmental change.
Explain the nature and composition of the business environment.
Discuss each of the components of the environmental model.
Explain how each of the environmental variables can affect an industry or an
individual business.

Describe some ways in which management should respond to the influences of
the environment.
90
KEY TERMS
Business
Micro-environment
Market environment
Macro-environment
Environment
Composition of the business environment
Environmental change
SWOT analysis
Environmental scanning
Click on the Additional Resources tab for the comprehensive Multilingual glossary for
MNB1501.
4.2
THE BUSINESS AND ENVIRONMENTAL CHANGE
The business environment and world are changing at a rapid pace: technology is
taking rapid strides, customer trends and needs evolve at a faster pace than ever
before and market regulations are continuously being updated and launched. If a
business cannot cope with the pace of such changes, it will not survive (Haiilo, 2022).
Change can be described as an alteration in the status quo – in a business sense
implying that there are alterations in the business environment, which the business
must take note of. Practical examples of the increase in the rate of change are to be
found in the convergence of different elements of telecommunications. Today’s
cellphone is a minicomputer, giving you, for example, access to your e-mail – a
function that was previously only possible on your computer. With the advent of
applications, mobile phones have evolved to offer a complete solution to the majority
of consumers’ wants and needs. More and more we see that changes in technology
are occurring at a faster rate. The long-playing vinyl records of the 1960s were
replaced by compact disks (CDs), which were then replaced by DVDs and MP3
equipment. Now, MP3s are being replaced by online music streaming services such
as Deezer or Spotify which are downloaded directly onto a mobile phone. Smart
watches can facilitate credit card payments and smart homes are able to manage
households by controlling heating, safety and lighting.
The three most common types of organisational change include the following (Haiilo,
2022):
91
•
Development change involves any organisational change that improves and
optimises previously established processes, strategies and procedures.
•
Transitional change occurs when an organisation moves away from its current
state to a new state to solve a problem. Examples of transitional changes include
mergers, acquisitions, and automation.
•
Transformational change is radical and fundamentally alters the culture, core
values and operations.
Under normal circumstances, affecting change in the workplace is quite challenging
and workplace transformation needs to be more agile. Indeed, research by McKinsey
found that the failure rate of enterprise transformation efforts is higher than 60%. This
figure does not take into account the effect of Covid-19, which has necessitated many
organisations to fundamentally change how they operate and perform.
To deal with the high failure rate of transformation efforts, many organisations are
leaning on change management, which offers a formal approach to managing change
in organisations.
Open the link below to watch a YouTube video about environmental change in the
business world.
Time: 3:20 minutes
https://youtu.be/ABu-quMKa18
In the next section, you will learn about the business environment.
4.3
THE BUSINESS ENVIRONMENT
It has been stated that the business environment is dynamic and that the business
must adapt to changes in the environment. Before you begin with this section, start by
watching a YouTube video giving an overview of the business environment.
92
Time: 5:31 minutes
https://www.youtube.com/watch?v=Q1yw7Tchsc8
4.3.1 Defining the business environment
The business environment, in which the business operates, can be defined as the sum
of all those variables which may influence the successful existence of the organisation.
It includes all the internal and external factors that affect how the organisation
functions – including employees, customers, management, supply and demand, and
business regulations.
4.3.2 The three sub-environments of the business environment
The functioning of the business environment is explained by subdividing the business
environment into three sub-environments: the micro-environment, the market
environment and the macro-environment.
The business environment and its three sub-environments are visually depicted in
Figure 4.2:
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The micro-environment:
- Mission and objectives
- Functional areas
- Business resources
The market environment:
- Consumers
- Suppliers
- Intermediaries
- Competitors
The macro-environment:
- Technological
- Economic
- Social
- Physical
- Institutional-political
- International
Figure 4.2: The business environment and its sub-environments (Source:
Author's design)
The micro-environment refers to the business itself – the workers and managers, and
the functional areas in which a business is divided, such as the financial section and
the marketing section. The main characteristic of the micro-environment is that
management has almost complete control over things that happen in this environment.
Management can, for instance, decide on the price that they will charge for the product
that they sell, or how they are going to market the product to the customer. However,
this environment only has a slight influence on the macro-environment and can only
influence the market environment through business strategies.
The market environment refers to the immediate external sub-environment that has a
direct influence on the business. For most businesses, this environment comprises
consumers (also called customers), competitors and suppliers. It may also include
intermediaries (or distributors). For example, Ford Motor Corporation manufactures
and markets vehicles in South Africa. The actual selling of the vehicles, however, is
done through a network of independent dealers (i.e. the intermediaries). Management
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can exert some control over this environment, but certainly not as much as they can
over the micro-environment.
The macro-environment refers to the greater external environment that will influence
the business to a lesser or greater extent. Take the impact of an economic recession,
for example. A recession may have a tremendous effect on future expansion plans,
production volumes, purchases and labour employment for the business.
Management probably has the least control over what happens in the macroenvironment. The effect of an increase in the interest rate by the Reserve Bank must
be accepted by the business and they must live with the consequences of this
increase.
4.3.3 Characteristics of the business environment
The business environment has some distinctive characteristics:
•
The variables are mutually related; that is, changes in one variable will often bring
about changes in another. To illustrate the point, a shortage of crude oil and the
resultant increase in the international oil price will negatively affect (i.e. increase)
the inflation rate of South Africa. The oil supply forms part of the global
environment and the inflation rate forms part of the economic environment. For
some businesses, the oil supply can also be seen as part of the market
environment, that is, the suppliers!
•
There is evidence of increasing instability in the sense that nothing stays the
same for very long. Look, for instance, at the daily fluctuations in the rand-US
dollar exchange rate.
•
There is growing uncertainty about the future – even the immediate future is
difficult to predict because of the lack of information or the unreliability of
information. Who knows what the rand-US dollar exchange rate will be next year?
•
It is a complex environment because of the many variables that may cause and
influence change. Various components in the three sub-environments may
change at the same time. There could be a strike at the business, which affects
the output and profitability of the business; at the same time, the retailers that
are stocking the product may be demanding increased supplies, while the
Chinese exporters are exporting more competitive products to South Africa. We
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see here that variables in the micro-environment, the market environment and
the macro-environment are simultaneously at play and influencing this business.
Activity 4.1
This activity will take approximately 15 minutes to complete.
Identify the three sub-environments of the business environment for an
organisation such as Shoprite and briefly describe the influence of each
of these sub-environments on this business.
Feedback:
Shoprite is the largest supermarket chain in Africa and one of the ten
largest in the world. As such Shoprite is exposed to all the variables
that were mentioned as part of the business environment above. Let us look at the
influence of the three sub-environments on Shoprite's operations:
•
Micro-environment. In this sub-environment, we see that essentially
Shoprite has complete control internally over the running of the business. It
can formulate its vision and objectives, determine its objectives and set up an
organisational structure that makes it easier to manage this vast business
which is represented in a major number of African countries. It also has
control over resources such as capital and human resources. One of its major
problems is the scourge of HIV/Aids and how this affects its most valuable
resource, namely its employees. Because of the size of the organisation, it
has a limited influence on the market environment as it sells a major share of
grocery products in the countries in which it operates.
•
Market environment. The market environment consists of the customers
and the suppliers of grocery products, such as the manufacturers of the range
of McCain frozen vegetables. Intermediaries are also involved, such as the
transporters of the groceries from the manufacturer to Shoprite’s
warehouses. There are also the competitors in this environment, such as Pick
n Pay and the Spar chain of supermarkets. They are all competing for the
money in the customer’s pocket. The market environment influences
Shoprite’s micro-environment, especially the intensity of the competition and
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the changing needs of the customer.
•
Macro-environment. This is the sub-environment in which matters such as
an increase in taxation or a lowering of the interest rate influence the market
environment, for example, putting more or less money into the customer’s
hands. These changes in the macro-environment will thus have an indirect
influence on the profitability of the Shoprite group.
Visit the website of the Shoprite group (https://www.shoprite.co.za) for more
information on this group.
In the next section, you will learn about the components of the business environment.
4.4
THE COMPOSITION OF THE BUSINESS ENVIRONMENT
The three components of the business environment include the micro, macro and
market environment as discussed below.
4.4.1 The micro-environment
By now, you should be able to identify the micro-environment of a business: that is;
the factors or elements in an organisation’s immediate environment which affect its
performance and decision-making. This includes the organisation’s mission and
objectives, its functional areas and human resources. This sub-environment has the
following three components.
a.
The mission and objectives of the business
In order to achieve organisational goals, it is important for the business to set a mission
statement with clear objectives. The mission statement focuses on what the
organisation is currently doing and the functions the organisation performs to achieve
it. The mission statement is seen as a short statement detailing why the organisation
exists, what its overall goal is, what kind of product or service it provides, its primary
customers or market and its geographical region of operation. Most mission
statements are action-based and provide clarity behind the “what”, the “who”, and the
“why” of the organisation. Mission statements are short and should not exceed 100
words; preferably they should only be one to three sentences.
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Some examples of mission statements are as follows:
•
Tesla – “To accelerate the world’s transition to sustainable energy”.
•
Ted Talks – “Spread ideas”
•
LinkedIn – “To connect the world’s professionals to make them more productive
and successful.”
•
Amazon – “To be Earth’s most customer-centric company, where customers
can find and discover anything they might want to buy online, and endeavours
to offer its customers the lowest possible prices.”
•
Standard Bank – “Our purpose is to drive Africa's growth, we are a catalyst for
inclusive and sustainable economic growth in the countries we operate and we
make life better for our fellow Africans by doing business the right way.”
•
MTN – “Our mission to utilise innovative information and communication
technologies to empower our communities’ grows from strength to strength.”
Activity 4.2
This activity will take approximately 15 minutes to complete.
Identify the mission statement of your three favourite brands, products or
companies. Evaluate how successful they are, given your experience
with the company.
Feedback:
Depending on your experience with the company you have chosen, you
might have a different opinion on their mission statement than some of
your fellow students. Take a couple of minutes to share your views on this topic with
your fellow students in the discussion forums.
Once the organisation has developed its mission statement, appropriate objectives
are developed. Business objectives represent the results the business needs to
achieve so that it can accomplish its longer-term company vision. For organisations
in a market economy, the primary objective will be the profit motive. However, this
is not the sole objective of a business and is often supplemented by various other
types of objectives. Some examples of business objectives are listed below (Root,
2019):
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•
Getting and staying profitable (the profit motive): to ensure that profitability is
maintained, it is necessary to make sure that revenue remains ahead of the
expenses incurred to run the organisation. To achieve this objective, it is
equally important to focus on controlling costs and expenses in production
and operation as well as to maintain the profit margin on products sold.
•
Productivity of people and resources: organisations must focus on overall
productivity to be successful. The objective should be to provide employees
with the required resources in order for them to be as productive as possible.
Productivity includes aspects such as employee training and development,
employee engagement, employee wellness, pay structure, leadership, job
satisfaction, culture and work environment, equipment maintenance, as well
as the purchasing of new equipment.
•
Excellent customer service: Keeping their customers happy should be one of
the primary objectives of any business. The organisation improves customer
retention and can generate repeat revenue by providing customers with
excellent customer service.
•
Employee attraction and retention: high employee turnover rates are linked to
low productivity, high costs and a holistic working environment. By creating a
productive and positive employee environment, the organisation can reduce
the turnover rate.
•
Mission-driven core values: as mentioned in section 4.2.1, the mission
statement describes the organisation’s core values. It summarises
organisational beliefs regarding customer interaction, responsibility towards
the community and employee satisfaction. Therefore, it is important for the
organisation to align its core values with business objectives to create a
positive corporate culture.
•
Sustainable growth: a company should aim to achieve sustainable growth by
developing objectives based on historical data and future projections.
Company resources, such as finances and human resources, should be
carefully used to ensure that growth is generated sustainably.
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Open the link below to watch the YouTube video about business objectives.
Time: 4:11 minutes
https://www.youtube.com/watch?v=RdQuKwhCzGU
Make sure that you understand what business objectives are. The important factor
that you should know about setting business objectives is that the objectives should
be SMART (Specific, Measurable, Achievable, Relevant and Time-bound).
b.
Organisational functions
Among other things, organisational functions refer to purchasing the necessary
supplies and the logistics of getting the supplies to the right place, the marketing efforts
needed to meet the wants and needs of the organisation, and the financial expertise
needed to ensure that profits are made and that taxes paid to the South African
Revenue Service are correctly calculated and paid over on time.
c.
Human resources
The business’s human resources are an essential asset that must be carefully
nurtured and developed to succeed. Without the necessary skilled and enthusiastic
personnel, some companies have been forced to close their doors.
One of the major problems faced by South African businesses is the impact of
HIV/Aids on the workplace and employees. Although the HIV/Aids problem can be
seen as part of the macro-environment and, more specifically, as part of the social
environment, managers must take notice of its implications for the business they are
managing. It is a fact that South African businesses cannot afford to lose highly skilled
workers to this debilitating illness. Companies vary in their approach to managing
HIV/Aids in the workplace. Business practices that contribute to mitigating the effects
of the illness and preventing its spread include the following:
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•
Gathering information from partnerships and collaborations. Partnerships or
collaborations with external experts, local and international NGOs, academic
institutions, government bodies, multilateral institutions, labour unions or
employee associations are critical to the development and implementation of an
HIV/Aids programme.
•
Creating an HIV/Aids policy. A written statement by the organisation describes
their policy on HIV/Aids; if possible, people living with HIV/Aids should be
involved in drawing up this statement. In businesses where employees are at
risk of workplace exposure to HIV/Aids, the policy should spell out training
requirements, and safety procedures and equipment, and have a plan for
responding to workplace exposure to the virus.
•
Involving multiple stakeholders in policy and programme development. The
organisation should seek feedback from local and international NGOs,
academics, health experts, unions and employees to ensure that the policy is
thorough, fair and just and answers workers’ concerns. During programme
development, the Ford Motor Company of Southern Africa held a series of
round-table discussions with stakeholders to gain the community’s support and
feedback on its HIV/Aids policy.
•
Approaching HIV/Aids as any other debilitating disease. From a policy
perspective, approaching HIV/Aids as any other progressive disease will help
remove its stigma and make employees living with HIV/Aids less likely to suffer
discrimination and, therefore, more willing to come forward for treatment.
•
Designing workplace HIV/Aids programmes to fit local cultures. The
organisation should develop policies and programmes to deal with the
circumstances of HIV/Aids prevalence, the primary mode of transmission, the
level of workforce education and cultural norms, by considering local cultures
and conditions.
•
Ensuring that the HIV/Aids policy is a living document. The organisation should
ensure that the policy is driven by all levels and units within the organisation so
that it is not viewed as only a human resource policy.
•
Using a comprehensive approach. It is essential to follow an approach that looks
at prevention, education and treatment. A programme that focuses only on
providing access to drugs while ignoring behaviour will ultimately not have a
significant impact on workers’ behaviour.
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•
Intervening early. Early intervention is one of the most important strategies of
any HIV/Aids programme. Organisations such as Eskom, with education
programmes dating back to the late 1980s, claim to have lower prevalence rates
in their workforce than other businesses in their community because they made
HIV/Aids a business priority early on.
•
Getting support from the organisation’s leadership. Clear support from
leadership
is
critical,
particularly
concerning
obtaining
resources
for
comprehensive programmes.
•
Providing ongoing education and training. The organisation should reinforce
and expand their HIV/Aids policy by providing education and training for all
employees, starting with the orientation of new employees. Include information
on the illness, how to prevent HIV infection, appropriate workplace conduct and
legal issues that may arise; and guide managers and supervisors on complying
with laws and regulations, managing benefits, accommodating employees with
HIV/Aids and helping employees who ask for counselling.
•
Ensuring legal compliance. The organisation should fully understand the laws
and regulations governing workplace practices with respect to HIV/Aids and be
certain to learn about new legal developments as they occur.
•
Supporting employees with HIV/Aids. Employees with HIV/Aids should be
supported to balance their job demands and stresses associated with illnessrelated issues by offering support groups, flexible work scheduling,
telecommuting and extra time off. Nutrition and exercise programmes have
proven to enhance lifestyle and productivity.
•
Giving employees opportunities to support the fight against HIV/Aids. Where
culturally appropriate, employees should get regular opportunities to contribute
positively by creating fund-raising ventures and volunteer opportunities with
local HIV/Aids-support groups – and be given time off to participate in these
activities.
•
Helping build local capacity. The organisation should work with local
governments, NGOs and healthcare providers to strengthen local infrastructure
and capacity to create sustainable healthcare access for employees and the
broader community.
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It is clear from the above that management can, to a large extent, determine the
business’s success. When things go wrong for the company, one of the most common
reasons can be traced back to poor management practices.
Activity 4.3
This activity will take approximately 15 minutes to complete.
Why is it necessary for South African businesses to actively get involved
in tackling HIV/Aids in the workplace?
Feedback:
There are various reasons why South African businesses must get
involved with the management of HIV/Aids in the workplace. Some of
these reasons are the following:
•
Better opportunities for growth in markets: Signs of long-term, negative
economic effects of HIV/Aids suggest that business opportunities for growth
in South Africa may be constrained if steps to counteract the pandemic are
not taken. Business-sponsored HIV/Aids prevention programmes in
workplaces and local communities help to reduce the accumulated costs and
the extent of the pandemic.
•
Increased productivity: There are varying estimates about the loss of
productivity each year due to the absence of individuals with HIV/Aids from
the workforce. Productivity is negatively affected by increased absenteeism,
the loss of skilled employees, the need to invest in training replacements and
declining morale.
•
Decreased costs of healthcare and other employee benefits: The healthcare
and related costs sustained by companies having employees with HIV/Aids
can be a significant burden. A Harvard University survey of companies in
Durban, South Africa, concluded that companies might need to set aside as
much as 7,5% of their annual payroll to fund losses incurred by the disease.
Companies that develop HIV/Aids training and education for employees can
contribute to the reduced prevalence of HIV/Aids and to reducing long-term
health costs. Studies of South African firms indicate that cost savings due to
investment in prevention and education programmes are as high as 3, 5 to
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7,5 times the cost of intervention.
•
Reduced employer liability: South African businesses can reduce their risk of
legal liability by implementing a formal HIV/Aids policy that prohibits
discriminatory behaviour, providing training and education to reinforce this
policy, and ensuring accommodation for employees with HIV/Aids.
•
Continued workforce diversity: Rates of HIV infection worldwide are highest
among the youth and women. Women now account for half of all HIV/Aids
cases, and in Africa, it is estimated that 0% of all HIV-infected persons are
women. Businesses that place particular emphasis on HIV/Aids education
and support for employees in these particularly at-risk populations will benefit
from being able to maintain a workforce that represents multiple perspectives,
talents and skills, as well as being more reflective of the general population.
•
Lower rates of employee turnover: Company efforts to prevent HIV infection
and to support employees with HIV/Aids will reduce the number of employees
lost to this disease.
•
Improved employee morale: The most immediate reported benefit of
workplace HIV/Aids education is improved morale. In addition to providing
information that allays fears and offers guidance on preventing infection,
support programmes signify that employers are knowledgeable about the
issues and care about their employees. Formal policies on HIV/Aids also raise
morale by clarifying responsibilities and expectations.
4.4.2 The market or task environment
The more common term used in management terminology to describe this
environment is the “market environment” because it refers to the immediate consumer
market, the supplier market and the intermediary market in which competitors also
operate. However, because the profitable development of this market is often seen as
management’s most important task, it is sometimes referred to as the task
environment. As stated above, the market environment consists of the following
components:
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a.
Customers
The consumer (also called the customer) is the main reason the business operates.
Without the support of the consumer to buy the product or service of the business, that
business will eventually fail. So, the company must understand the wants and needs
of the customer. Therefore, information about the customer is needed and the
organisation must ensure that they keep track of changes in this market.
b.
Suppliers
Suppliers are categorised as supplying material, capital and labour to businesses in
South Africa. Material is a broad term referring to the raw material required by the
manufacturers of products and the energy supplier used by most businesses. Capital
is supplied to companies through various alternative sources of which banks (e.g.
Absa, Nedbank, Standard Bank and First National Bank) are the most important.
Labour is supplied to businesses through organised labour which, especially in South
Africa, has an important say in what the workers are paid and what the conditions of
service are.
c.
Intermediaries
Intermediaries are institutions that bridge the gaps between the manufacturer and the
customer. Some of the most critical intermediaries are the wholesalers that sell
grocery products to small businesses, such as the spaza shops in the townships.
Agents who sell real estate are another form of intermediaries that bridge the gap
between the buyer and seller of a property.
d.
Competitors
Competitors are rival businesses competing for the custom of the consumer.
Example: The most direct competitor of a Checkers supermarket situated in
Edenvale, Gauteng, is usually the nearest Pick n Pay supermarket or Spar
supermarket. The Woolworths store or the convenience stores at the closest petrol
stations may be more indirect competition.
Porter’s Five Forces refer to the five market environment elements that influence the
industry’s competition and profits. It is an important theory to understand when
studying an organisation’s market environment.
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Access the link below to learn about Porter’s Five Forces.
https://penpoin.com/porters-five-forces/
Also, watch the YouTube video below for a practical example of how Porter’s Five
Forces can be used.
Time: 7:44 minutes
https://www.youtube.com/watch?v=OCnlArFuU-E
The market environment has a direct influence on the business because this is where
competitors compete, where the customer is found and where the suppliers and
intermediaries operate. So, crucial business transactions take place in this
environment. Therefore, most of a business’s opportunities or threats are found here.
For example, a strong competitor could be a very serious threat to the existing
businesses operating in the same market. At the same time, if a business finds it
difficult to compete with a strong competitor, it may identify other needs that it can
satisfy in the community – and in so doing exploit (or utilise) an opportunity in that
market. Cell C was a late entrant in the cellular phone marketplace and from the start
was under threat because it was competing against two established competitors
(Vodacom and MTN). Cell C identified the need for a different and more cheaply
structured package for cellphone users, providing substantial savings to prepaid as
well as contract customers. Today Cell C is a niche player in the market and has
carved out a viable target market against tough competition.
4.4.3 The macro-environment
The wider macro-environment consists of variables that influence the business directly
and indirectly. The changes in the macro-environment are called megatrends because
they influence all businesses in all the countries of the world. There are six variables
in the macro-environment:
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a.
Technological environment
Technology is one of the main drivers of change in the world. New inventions replace
old technology, creating opportunities and threats for businesses. One example is the
telegraph service which was offered by the post office. This service was replaced by
new technologies such as faxes and e-mails, creating efficient tools for businesses but
also making what was a viable service of the post office obsolete.
b.
Economic environment
This environment has a direct influence on other variables in the micro-environment,
the market environment and the macro-environment. For example, a dramatic
increase in bank interest rates may negatively affect the disposable income of
consumers who have borrowed money from banks. This may then have a negative
impact on the country’s social structure when fewer people are able to buy necessities
such as food, which may result in social unrest.
c.
Social environment
This environment is influenced to a great extent by the technological and economic
environment. For example, we are all aware of growing urbanisation – with more
people moving to cities because of increasing unemployment in the rural areas and
the belief that better-paying jobs are available in the major cities of South Africa. This
has resulted in the rapid growth of informal settlements, with resultant demands on the
infrastructure of the cities and the development of new retailing outlets in the form of
spaza shops and shebeens. HIV/Aids is another social problem; one that has massive
social and economic implications for South African businesses.
d.
Physical environment
This environment focuses on the physical resources that businesses and we as
consumers use. The scarce resources we must manage in South Africa are essential
aspects of the physical environment. South Africa is a semi-arid country and there is
speculation that we will not be able to supply the minimum needs of the population by
the middle of this century. Businesses must consider the impact of the physical
environment, as some manufacturing businesses primarily use water for their
production.
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e.
Institutional/political-governmental environment
The South African government significantly influences the landscape of business, for
instance, labour legislation, on employment and minimum wages.
f.
International environment
This environment also significantly influences the other variables in the macroenvironment, the market environment and the micro-environment. One example of the
influence of the international environment on South African businesses is the changing
price of crude oil and its impact on the price of fuel and the inflation rate. We have
seen dramatic increases in the fuel price and the knock-on effect on the prices of food
and other commodities.
Access the link below to watch the two YouTube videos about the macro-environment.
Time: 4:03 minutes
https://www.youtube.com/watch?v=7hoa77wpT7s
Time: 4:03 minutes
https://www.youtube.com/watch?v=pFMsHZxMq0I
After watching the videos above, do the following activity.
Activity 4.4
This activity will take approximately 8 minutes to complete.
How would you classify the following developments as part of the six subenvironments of the macro-environment?
•
The government announces the date of the general election.
•
Inflation is on the rise.
•
Unemployment figures are on the rise.
•
More women are going out to work.
•
A wonder cure for influenza has been found.
•
There is an increase in oil spills on the South African coastline.
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Feedback:
• Government forms part of the political sub-environment
• Inflation is part of the economic environment.
•
Unemployment is part of the economic sub-environment but also influences the
social environment.
•
Working women are part of the social environment.
•
A cure for influenza refers to technology – thus, part of the technological
environment.
•
Pollution is one of the problems encountered in the physical environment.
Now that you understand the components of the environment, in the next section, you
will learn about the process of environmental scanning.
4.5
ENVIRONMENTAL SCANNING
Environmental scanning is described as the process of the measurement, projection
and evaluation of change in the different sub-environments. In layman’s terms, it is the
constant and careful analysis of the internal and external environment, allowing the
organisation to detect opportunities, threats, trends, lessons and weaknesses that can
influence the current and future strategies of the organisation.
Environmental scanning is generally considered one of the major managerial
responsibilities and is often used to react to change more easily. It can therefore be
used to keep abreast of external social, economic, technological and political
developments which may be difficult to observe or predict but which management dare
not ignore. It entails the identification and monitoring of every opportunity or threat. It
may range from a simple information system to a formal environmental scanning
division or unit whose sole task is to monitor external environmental factors.
Because of dynamic changes in the business environment, the organisation must scan
its environment continuously. As stated previously, the scanning process may differ
from one business to another. For example, many large organisations will hire
dedicated employees specifically to research and learn about market changes that
may influence the organisations. These employees then provide top management with
prudent information gleaned from said research so that the organisation does not lag
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behind marketplace changes. Management then uses this knowledge when making
decisions about the organisation’s future.
Some examples of environmental scanning are the following (Bhasin, 2019):
•
Market research is performed and data collected from market research is
studied to provide input for the planning of future actions.
•
The performance of competitors is compared to the organisation’s performance
to learn about competitors’ strategies and business ideas.
•
Executives from the organisation may be approached to learn about the
organisation’s environmental aspects.
•
Demographic data obtained from the market is analysed and business decisions
are based on such data.
•
Information is collected from articles, websites, journals, magazines and
newspapers and these information sources are used to create a picture of the
business environment.
The 2018 Global Risk Perception Survey (GRPS) predicted that several trends in the
external environment will force complex organisations to approach the future with a
varied resilient response to ensure their capacity to adapt and prosper despite
ongoing, high-impact low-probability risks. In this regard, transformative resilience
requires transformation to mitigate some risks. Organisations will need to proactively
change, or they will be forced to do so by outside forces. This process requires
organisational foresight, which can be achieved through continuous environmental
scanning that allows organisations to engage with the uncertainty of various futures.
Managers and consultants also use environmental scanning to ensure that the
organisation develops products that consumers want. By systematically and
intentionally analysing the organisation’s internal state and the external competitive
environment, the organisation becomes aware of any changes that may have an
impact on its business operations.
In addition to the above, environmental scanning and analysis provide many
advantages to the organisation, helping it to stay safe from any losses and be ahead
of the competition (Bhasin, 2019):
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•
Environmental scanning provides the organisation with valuable knowledge
regarding its strengths and opportunities. It also makes the organisation aware
of the threats in the industry.
•
Doing environmental scans provides the organisation with information on how
well it uses its resources. The organisation can also determine if any resources
are being wasted and, if so, how to curb wastage.
•
The organisation can learn and discover competitors’ strategies, to help them
formulate their strategy.
•
The data collected from environmental scanning should play an essential role
in long-term business planning.
•
Environmental scanning assists the organisation in staying connected with its
customers. The organisation can learn about changing consumer expectations
and adjust its products and services accordingly.
Various techniques in the organisation’s toolkit can be used to conduct environmental
scanning:
•
Research: Many organisations conduct research to learn about the latest trends
of the industry (or even threats) – to take the necessary steps to exploit the
opportunity or reduce the possible impact of the threat.
•
Expert opinion: Management may also approach experts who have deep
knowledge of the industry and thus can provide key analyses of the
opportunities and threats which may arise.
•
SWOT analysis: SWOT stands for Strengths, Weaknesses, Opportunities and
Threats. This analysis is a strategic technique used by organisations to explore
their internal strengths and weaknesses. It also analyses the industry’s
(external) opportunities and threats. This is a valuable technique for business
planning.
•
PEST analysis. Very similar to the SWOT analysis, the PEST or PESTLE
analysis aims to collect data about the external macro environment: political,
economic, social, technological, legal and environmental factors are
investigated. It helps the organisation to make informed decisions about its
strategic planning.
•
Analysis of industry: depending on the organisation, there might be different
businesses that are direct or indirect competitors. Analysing the industry is a
111
type of environmental scanning done to learn and understand the competitors’
business strategies. This is done to assist the organisation in developing
counterstrategies to ensure that they remain ahead of the competition.
Activity 4.5
This activity will take approximately 5 minutes to complete.
Answer the following questions:
1.
Is environmental scanning the same for all types of businesses?
Explain.
2.
When conducting a SWOT analysis, which components will you be
looking at?
Feedback:
1.
Although the process of environmental scanning covers the
same aspects of the business environment, some unique requirements
need to be considered when you do an environmental scan for a particular
business. Remember that different environments affect businesses
differently. A computer manufacturer, for example, will be affected far more
by the technological environment than will, say, a bakery. The political
environment influences a public organisation more than a bicycle repair shop.
A farming business will be far more influenced by the physical environment
(i.e. the climate) than a firm of accountants. What may be a factor in the
macro-environment for one business could be a significant factor in the
market environment of another company. The gold price (international
economic environment) will be part of a gold mine's market environment, but
part of a shoe factory's macro-environment.
2. The SWOT analysis is used to analyse an organisation’s strategic and
competitive situations. It stands for strengths, weaknesses, opportunities
and threats. Organisations use the SWOT analysis to understand what they
are good or bad at and what factors external to the organisation might
present changes for success or failure. Some components that can be
included in a SWOT analysis are:
112
Strengths
Weaknesses
Opportunities
Threats
Employees
Outdated
Underserved
Competitor
Patents
technology
markets
actions
Cash
Employee skill
New social
Economic
Brand
gaps
trends
downturns
Unique selling
High operating
Technological
Government
points /
costs
advances
regulations
capabilities
Inside the firm
Outside the firm
This brings us to the end of this lesson.
4.6
SUMMARY
You now have basic insight into the business organisation and environment. In this
lesson, you learned about the business environment, its components and
environmental scanning. In lesson 5, you will learn about corporate social
responsibility.
SELF-ASSESSMENT QUESTIONS
This activity will take approximately 15 minutes to complete.
Read the following scenario and answer the questions that follow:
You are the CEO of the Chicken Spice fast-food franchise with 20 company-owned
stores in South Africa and 50 franchisees operating Chicken Spice stores under
license. You have drawn up a SWOT analysis of the business environment in which
the company is operating. You are preparing for a meeting with the board of directors
of the business.
Write down the key points you will cover at the board meeting regarding the SWOT
analysis. Use the current business environment in South Africa as your point of
departure.
113
THE ANSWERS TO THE SELF-ASSESSMENT QUESTIONS
The South African fast-food business is a vibrant sector with numerous
success stories, such as Nando’s, Kentucky Fried Chicken and Chicken
Licken, to name but a few. Against this background, let us look at the
Strengths, Weaknesses, Opportunities and Threats of this company (do a SWOT
analysis).
Strengths of the company may be:
•
a good product
•
good relationships with customers
•
good management team
Weaknesses may be:
•
small operation with limited reach – there are other fast-food franchises
with more than 100 outlets, making it difficult to compete
•
because of small operations, no economies of scale regarding aspects
such as bulk buying and reaping the benefits of cheaper prices
•
regular cash flow problems
Opportunities may be:
•
rapidly growing new middle class with the money to buy chicken products
at fast-food stores
•
changing tastes of consumers and recognition in the market that chicken
is a healthier alternative than red-meat products such as hamburgers
•
diversifying into a number of product lines, such as low-fat French fries,
salads and low-fat ice cream
Threats may be:
•
growing competition from rivals in this sector
•
a slowdown in the economy, reducing demand from consumers
•
negative publicity from the Minister of Health on the consumption of fastfood products containing chicken
•
increase in Aids-related deaths in the middle-income market, reducing the
number of households that are able to buy chicken fast-food products
114
Make sure you have mastered the key concepts that were listed at the start of the
lesson, by making brief notes so that the meaning of each term is clear.
Before proceeding to the next lesson, take some time to reflect on what you have
learned in lesson 5. Make sure you have achieved all the outcomes listed at the
beginning of this lesson.
4.7
REFERENCES
Bhasin, H. 2019. Environmental Scanning – Importance of environmental scanning.
Available
from:
<https://www.marketing91.com/environmental-scanning/>
[Accessed 21 June 2022].
Haiilo. 2022. Change management: Definition, best practices and examples.
Available
from:
<https://blog.smarp.com/change-management-definition-best-
practices-examples#three-types-of-organizational-change>
[Accessed
20 April 2022].
Root, G.N. 2019. 10 Most important business objectives. Available from:
<https://smallbusiness.chron.com/10-important-business-objectives-23686.html>
[Accessed 26 April 2022].
115
Contents
5.1
INTRODUCTION .......................................................................................... 118
5.2
INTRODUCING CORPORATE SOCIAL RESPONSIBILITY (CSR) ............. 119
5.3
TERMS AND TRENDS................................................................................. 121
5.3.1 Triple bottom line .......................................................................................... 122
5.3.2 Sustainable development ............................................................................. 122
5.3.3 Corporate citizenship.................................................................................... 123
5.3.4 Corporate social investment (CSI)................................................................ 123
5.3.5 Sustainability ................................................................................................ 124
5.3.6 Corporate governance.................................................................................. 124
5.4
THE CORPORATE SOCIAL RESPONSIBILITY (CSR) IMPERATIVE ........ 125
5.4.1 Global drivers ............................................................................................... 125
5.4.2 South African initiatives and imperatives ...................................................... 129
5.5
THE BUSINESS CASE FOR CORPORATE SOCIAL RESPONSIBILITY
(CSR) ........................................................................................................... 132
5.6
CORPORATE GOVERNANCE .................................................................... 134
5.7
STAKEHOLDERS AND STAKEHOLDER ENGAGEMENT .......................... 137
5.8
THE LINK: DOES CSR RELATE TO THE VARIOUS BUSINESS
FUNCTIONS? ............................................................................................. 139
5.8.1 CEO / top management................................................................................ 139
5.8.2 Operations .................................................................................................... 140
5.8.3 Finance ........................................................................................................ 140
5.8.4 Procurement ................................................................................................. 141
5.8.5 Human resources ......................................................................................... 143
5.8.6 Risk management ........................................................................................ 144
5.8.7 Marketing and public relations ...................................................................... 144
5.9
SUMMARY ................................................................................................... 146
5.10 SELF-ASSESSMENT QUESTIONS ............................................................. 146
5.11 REFERENCES ............................................................................................. 148
116
LESSON 5: CORPORATE SOCIAL RESPONSIBILITY
This lesson will require approximately EIGHT notional hours. Figure 5.1 represents an
overview of lesson 5.
5.1 Introduction
5.2. Introducing corporate social responsibility (CSR)
5.3 Terms and trends
5.4 The corporate social responsibility (CSR) imperative
5.5 The business case for corporate social responsibility (CSR)
5.6 Corporate governance
5.7 Stakeholders and stakeholder engagement
5.8 The link: Does CSR ralate to the various business functions
5.9 Summary
5.10 Self-assessment questions
5.11 References
Figure 5.1: Visual overview of lesson 5 (Source: Author's design)
117
5.1
INTRODUCTION
Businesses operate in a wider social environment, causing both positive and negative
impacts on the communities and environment around them. They therefore have a
responsibility towards these communities and the environment, and as a result they
need to become involved in solving problems faced by society, such as poverty,
unemployment and pollution.
LEARNING OUTCOMES
When you have worked through lesson 5, you should be able to do the
following:

distinguish between the different terms and concepts in the field of corporate
social responsibility



discuss the imperatives for good corporate social responsibility
explain the business case for corporate social responsibility
discuss corporate governance in the South African context, including the King
Report on Corporate Governance

draw up a stakeholder map for an organisation, indicating the different
categories of stakeholders

explain the link between corporate social responsibility and the various
business functions
KEY TERMS
corporate social responsibility
corporate social citizenship
corporate governance
sustainable development
stakeholder engagement
triple bottom line
corporate citizenship
sustainability
stakeholder mapping
environment
social
economic
Click on the Additional Resources tab for the comprehensive Multilingual glossary
for MNB1501.
118
5.2
INTRODUCING CORPORATE SOCIAL RESPONSIBILITY (CSR)
Being a citizen of any country brings with it certain rights and responsibilities. For
instance, we have the right to vote, and to associate with whomever we please; we
enjoy the freedom of religion and political orientation; and so forth. At the same time,
we must observe a few basic rules – these are our responsibilities. We must obey
law and order, we must respect other people’s privacy and possessions, we must not
interfere with the rights of other citizens, and so forth.
In the corporate sector, the same basic principles apply. Corporates – just like
ordinary citizens – have particular rights and responsibilities. Abiding by the laws of
a country is an important component of corporate social responsibility; however,
corporate social responsibility goes beyond legal compliance. Being a citizen means
being part of a community. As a good citizen, you want to contribute to the welfare of
the people in your community, because you realise that your life will be better if
people around you are having better lives.
Within the business context, corporate social responsibility is a concept that
recognises that:
(i)
companies have a responsibility for their impact on society and the natural
environment;
(ii)
companies have a responsibility for the behaviour of others with whom they
do business; and
(iii)
business needs to manage its relationship with the wider society.
Nowadays businesses consider corporate social responsibility as a fundamental
piece of a company’s business plan, affecting its bottom line, share price and longterm viability. Companies that do not have a strong corporate responsibility strategy
find themselves at a competitive disadvantage.
What is corporate social responsibility and how do different companies implement its
principles? Generally speaking, corporate social responsibility is about proactive
efforts by companies to make a positive contribution to society. As a form of selfregulation, CSR entails a company’s voluntary business, as well as its social and
environmental actions to correctly and ethically interact with the surrounding
environment, which includes not only the natural environment but also stakeholders.
119
Open the following link to watch a YouTube video about the definition, examples and
benefits of CSR.
Time: 9:19 minutes
https://www.youtube.com/watch?v=Zc102xiah1M
There is a combination of reasons why companies implement corporate social
responsibility programmes and these are influenced by certain social, governmental,
market and ethical drivers.
Ethical drivers greatly affect the implementation of CSR measures and can be
summarised by grouping the four types of responsibilities in Carroll’s CSR pyramid
(Agudo-Valiente, Garces-Ayerbe & Salvador-Figueras, 2017):
•
Economic responsibility – the business needs to be profitable.
•
Legal responsibility – the business must operate within the sphere of the
law.
•
Ethical responsibility – the business must conduct itself in an ethical
manner.
•
Philanthropic responsibility – the business has a duty to be a good
corporate citizen.
Figure 5.2 visually depicts Carroll’s CSR pyramid.
120
Figure 5.2: Carroll’s CSR pyramid (Source:
https://www.toolshero.com/strategy/carroll-csr-pyramid/)
The YouTube video below explains how Carroll’s CSR pyramid works.
Time: 3:38 minutes
https://www.youtube.com/watch?v=u5t9Qv-dhmE
5.3
TERMS AND TRENDS
A number of terms are applied to corporate social responsibility, and the differences
and overlaps can become quite confusing! Let’s have a look at some of the more
common terms and what they refer to.
121
5.3.1 Triple bottom line
While a company’s bottom line traditionally refers to its financial profit or loss, the triple
bottom line refers to the need to consider the social and environmental impacts as
well. What effect do the operations of the company have on the people it comes into
contact with (the social side) and on the physical environment in which it operates?
This approach is known as the triple bottom line: it measures the financial, social and
environmental impacts of business. All are equal and all are interconnected.
Open the YouTube video below to learn about the triple-bottom-line pillars.
Time: 4:13 minutes
https://www.youtube.com/watch?v=2f5m-jBf81Q
5.3.2 Sustainable development
Sustainable development is the overarching aspiration and framework for corporate
citizenship. In 1987, the Brundtland Report emphasised the importance of sustainable
development and defined it as “development that meets the needs of the present
without compromising the ability of future generations to meet their own needs”. Some
of the most important meetings and agreements that have brought sustainable
development to the mainstream include the Rio Earth Summit 1992, the United
Nations Global Compact, Millennium Development Goals (MDGs) 2000–2030 and the
World Summit on Sustainable Development (WSSD) 1992–2022.
Sustainable development is becoming increasingly important as the impact of global
warming becomes more widespread across the world. Sustainable development can
be achieved if human activities are restricted, and the rate of consumption is reduced
to not overtake the rate of salvation (in other words, we should not use more resources
than what we are saving). Similarly, the rate of consumption of renewable resources
should not surpass the production rate, all types of pollution should be minimised and
natural resources should be used more sensibly. Some examples of sustainability
include wind and solar energy, crop rotation, sustainable construction, efficient water
fixtures, dedicated green spaces and sustainable forestry.
122
Source: https://byjus.com/commerce/meaning-and-features-of-sustainabledevelopment/
Open the following YouTube videos to learn about sustainable development.
Time: 4:24 minutes
https://www.youtube.com/watch?v=Cp1cfMl7Z8o
Time: 7:51 minutes
https://www.youtube.com/watch?v=IgPxLMRk28I
5.3.3 Corporate citizenship
The term “corporate social responsibility” can be considered synonymous with
corporate citizenship. However, the emphasis on “social” may be misleading, since it
emphasises one element of the triple bottom line above the others.
5.3.4 Corporate social investment (CSI)
Do not confuse corporate social responsibility with corporate social investment (CSI).
CSI is primarily a South African term that refers to companies’ philanthropic
initiatives, such as sponsorships for students or support to health clinics in areas
surrounding a company’s factory. CSI is only one component of corporate citizenship;
corporate citizenship comprises much more than that. One way to describe this is
that CSI is about spending a small part of your profits (such as 1% of pre-tax profit)
on good causes, while corporate citizenship is about how you make your profits in
the first place. An example of an CSI project is the FinEazy digital financial literacy
course presented by Momentum. This project is targeted at schoolgoers and young
adults and aims to teach participants relevant financial skills.
123
5.3.5 Sustainability
Sustainability reporting refers to the increasing expectations for companies to publicly
report not just on financial matters, but also on social and environmental issues. The
self-assessment questions at the end of this lesson include a real-life example of
sustainability reporting – be sure to participate!
5.3.6 Corporate governance
Corporate governance refers to how a company’s objectives, strategy and decisionmaking structures are developed, implemented and monitored. It also relates to the
way, and the extent in which, a company is accountable to its shareholders, as well
as its other stakeholders. Good corporate governance is an important aspect of
corporate social responsibility.
Activity 5.1
This activity will take approximately 15 minutes to complete.
Write a paragraph in which you explain what you understand by the
concept of corporate social responsibility and what the key elements of
this concept are.
Feedback:
There is no one correct answer to this activity. You could have
referred to the various definitions mentioned above, but you should
have stated in your own words what you understand by corporate social
responsibility. You should have included the following elements in your definition:
• responsibility
• stakeholders
• laws
• social impact
• environmental impact
• economic impact
• society
In the next section, you will learn about what it means to be a corporate citizen and
how corporate social responsibility ties in with the CSR imperative.
124
5.4
THE CORPORATE SOCIAL RESPONSIBILITY (CSR) IMPERATIVE
In this section, you will learn what the South African and global drivers for corporate
social responsibility are and the reasons why organisations need to embrace corporate
social responsibility.
5.4.1 Global drivers
Over the past 10 years, the pressure on companies to demonstrate good corporate
social responsibility practices has increased dramatically. Initiatives such as the United
Nations Global Compact (www.unglobalcompact.org) and the Kyoto Protocol
(http://unfccc.int/2860.php) constitute a global shift towards greater accountability of
business to a wider range of stakeholders on issues relating to the environment, social
justice, human rights, labour rights and climate change. Let’s look at a number of
initiatives that play a role at an international level.
a. The United Nations Global Compact
The United Nations Global Compact, as summarised in table 5.1, was first proposed
by the then UN Secretary-General Kofi Annan in early 1999 in an address to the
World Economic Forum, which is a meeting of some of the world’s most important
economic leaders.
125
Table 5.1: The 10 principles of the United Nations Global Compact
Source: https://www.unglobalcompact.org/what-is-gc/mission/principles
Today, hundreds of companies from all regions of the world, international labour and
civil society organisations are engaged in the Global Compact. As far as South
African companies are concerned, the following are included (note that this is not a
comprehensive list):
•
Clicks
•
Anglo-American
•
Discovery Limited
•
AngloGold Ashanti
•
Investec
•
GIBS
•
Naspers
•
Bidvest
You can access the dedicated South African Global Compact site here:
https://globalcompactsa.org.za/
126
b. United Nations – Sustainable Development Goals (SDGs)
In 2015, all 193 members of the United Nations adopted a new plan for creating a
better future by laying out a 15-year plan to end extreme poverty, fight inequality and
injustice and to protect our planet. Agenda 30 then outlines 17 Sustainable
Development Goals (SDGs) which define the world we should strive to create.
The SDGs were developed from an inclusive process where governments included
businesses, civil societies and citizens from the outset. To achieve the SDGs,
responsible business and investment will be essential and should be rooted in the 10
principles of the United Nations Global Compact (see table 1). It is only through
dedication that transformational change can be achieved.
The 17 SDGs can be seen in figure 5.3. For a detailed description, important initiatives
and resources, visit the website: https://www.unglobalcompact.org/sdgs/17-globalgoals
Figure 5.3: The 17 Sustainable Development Goals (SDGs)
(Source: https://www.unglobalcompact.org/sdgs/17-global-goals)
127
c. The Global Reporting Initiative (GRI)
The Global Reporting Initiative (GRI) was launched in 1997 and has pioneered the
development of the world’s most widely used sustainability reporting framework. It
aims to provide a set of reporting guidelines and indicators that cover all the key
issues of concern regarding corporate citizenship. By developing these guidelines,
the GRI wants to encourage companies worldwide to be more systematic and
comprehensive in their approach to sustainability reporting. It is recognised as the
provider of global best practices for impact reporting.
GRI Africa is based in Johannesburg, South Africa and strives to promote market
transparency. The organisation drives accountability for organisational impacts in
sub-Saharan Africa. The organisation is mostly active in Ghana, Kenya, Mauritius
and Nigeria.
Visit their website https://www.globalreporting.org/ for a plethora of resources on
reporting standards.
d. AA1000 Framework
The AA1000 Framework was launched in 1999 by AccountAbility, a UK-based
membership organisation advising and advocating on corporate social responsibility
issues. The AA1000 Assurance standard is used for assessing and strengthening
the credibility and quality of an organisation’s social, economic and environmental
reporting. The purpose of the framework is to help “users to establish a systematic
stakeholder engagement process that generates the indicators, targets, and
reporting systems needed to ensure its effectiveness in overall organisational
performance” (see www.accountability.org.uk). It does not describe what should be
reported, so its guidance is considered complementary to that of the GRI Reporting
Guidelines.
Source: https://www.nefconsulting.com/training-capacity-building/resources-andtools/aa1000-assurance-standard/
128
e. Other initiatives
A number of other relevant initiatives include:
•
ISO 14000 series. This is a series of standards issued by the International
Organization for Standardization; it focuses on corporate environmental
management systems.
•
Organisation for Economic Co-operation and Development (OECD)
Guidelines on Multinational Enterprises. The work of this organisation
concerns
the
disclosure
of
information,
employment
relations,
environmental management, bribery, competition, consumer interests, and
science and technology diffusion.
•
SA 8000. This standard focuses on labour conditions and was developed
by Social Accountability International.
The South African initiatives and imperatives are discussed next.
5.4.2 South African initiatives and imperatives
Although South African legislation does not make CSR obligatory for companies, the
foundation of corporate social responsibility is compliance with all relevant national
legislation. The following section discusses a couple of South African imperatives
that were established to encourage CSR.
a. King Code on Corporate Governance in South Africa
The third King Report on Corporate Governance for South Africa, better known as
the “King III Report”, was launched by the Institute of Directors on 1 September 2009.
It has since been replaced by the King IV, which builds on the King III Report.
The King IV Report is very important for corporate social responsibility of South
African companies and is internationally recognised as being a progressive
document. It was launched to bring the report up to international governance codes
and best practices. The report provides organisations with guidance on good
corporate governance practices and it explicitly defines and substantiates concepts
such as “corporate citizenship”, “social responsibility”, “triple bottom line”
performance, “stakeholder engagement” and “sustainability reporting”. It is also
aligned with shifts in the approach to capitalism; that is, a shift to more inclusive,
integrated thinking across the globe. The new report also takes into account
129
corporate governance developments such as increased compliance requirements
and new governance structures, emerging risks and opportunities from new
technologies as well as new reporting and disclosure requirements.
Source: https://home.kpmg/za/en/home/insights/2016/10/king-iv-summaryguide.html
The King VI Report is also discussed under corporate governance in this lesson.
b. JSE Socially Responsible Investment Index
A further recent development in South Africa, which also affects other African
countries, relates to the role of investors in corporate social responsibility and the
emerging requirements of investors and civil society for companies to demonstrate
more socially responsible behaviour. The JSE Socially Responsible Investment Index
was launched in 2004 as a means of identifying an index of listed companies that
integrate the concept of triple-bottom-line reporting into their business activities. This
index then comprises criteria to measure the triple-bottom-line performance of those
companies in the FTSE/JSE All Share Index. The criteria are provided in terms of the
triple-bottom-line categories of environmental, economic and social impacts, as well
as a separate category for corporate governance.
Open the link below to watch the YouTube video about the JSE Sustainability and
Climate Change Disclosure guidance.
Time: 4:05 minutes
https://www.youtube.com/watch?v=8zeO0N6VCKg&t=31s
c. Industry charters
Over the past few years, a number of sector-specific charters were adopted to
promote socio-economic transformation and establish an equitable economic playing
field. For example:
•
The Tourism BEE Charter and Scorecard
•
The Financial Sector Charter
•
The Mining Charter and the revised B-BBEE Codes
130
Ensuring operational legitimacy or a “licence to operate” requires more than simply
a business license. Non-compliance with these codes and guidelines will have a
serious impact on the future position of businesses in local and global markets, and
every organisation has to take note of the specific relevance of these imperatives to
their business.
Activity 5.2
This activity will take approximately 15 minutes to complete.
List three international and three local imperatives that promote the
implementation of corporate social responsibility in organisations. Briefly
explain the significance of each factor.
Feedback:
The answer to this activity can be found in Section 5.4. You could have
discussed any of the following elements:
International elements
•
United Nations Global Compact
•
United Nations Sustainable Development Goals (SDGs)
•
The Global Reporting Initiative (GRI)
•
AA1000 Framework
•
ISO 14000 series
•
Organisation for Economic Co-operation and Development (OECD)
Guidelines for Multinational Enterprises
•
SA 8000
South African elements
•
King Code on Corporate Governance in South Africa
•
JSE Socially Responsible Investment Index
•
Industry charters such as the Tourism BEE Charter and Scorecard,
Financial Sector Charter and The Mining Charter and the revised B-BBEE
Codes
131
5.5
THE BUSINESS CASE FOR CORPORATE SOCIAL RESPONSIBILITY
(CSR)
Corporate social responsibility is not about being nice. Applying corporate social
responsibility strategies is simply good business sense as it has the potential to limit
expenditure, maintain or improve employee and community relations, control risk and
promote reputation. The business case for corporate social responsibility refers to
the argument that being a good corporate citizen can contribute to a company’s
profitability. The business case, therefore, argues that incorporating good corporate
social responsibility practices will eventually have positive implications for the
financial bottom line. These benefits can come in a variety of forms:
•
For example, a company that uses energy-saving technology will save money
on its monthly electricity bill. This benefit is often referred to as cost savings.
•
Being a good corporate citizen can also have positive implications for a
company’s reputation. This reputational gain can also have positive financial
benefits through customer loyalty, attracting higher-quality employees or
improving relationships with investors.
•
Eco-efficiency can save a company costs by, for example, using recycled
materials in building design, employing solar panel technology to generate
energy and using fuel-efficient technologies in vehicles.
•
Competitive advantage and value creation: a company that ignores ethical,
environmental or social issues may actively destroy value through the
inadequate management of risks, but may also limit value through missing
opportunities. While focusing on the risks will protect existing business
interests, and thus conserve value, such a purely defensive approach will not
open up new opportunities to create value.
By performing a simple SWOT analysis of the strengths, weaknesses, opportunities
and threats facing an organisation, management can identify areas where risks
should be managed (threats) and areas where there is potential to create value
(opportunities).
Table 5.2 below identifies the key strategic opportunities and threats in the
environmental and social field.
132
Table 5.2: Key strategic opportunities and threats in the environmental and
social field
Threat
Labour shortages
Opportunity
Access to new pools of labour from
education and training programmes and
community involvement
Low productivity and quality because of
Higher productivity levels because of
poor labour practices and skills levels
better-trained staff and higher standards
Missing new market opportunities and
New markets through
the erosion of traditional markets
understanding of consumer needs
an improved
Product obsolescence through low levels New products and markets through the
of innovation and inappropriate
application of new technologies
technology
Failure to anticipate new social and
First-mover advantage by anticipating
regulatory requirements
the impacts of social pressures
Vulnerability because of low investor
Lower cost of capital because of greater
confidence
investor confidence in the company’s
ability to manage change
Higher cost levels from increased
Lower compliance costs by being ahead
regulation of old technology
of regulations
Recruitment and customer retention
Enhanced reputation leading to greater
problems through poor reputation
staff, customer and investor loyalty
Some aspects of corporate social responsibility may not have any economic benefit
for companies. This is why the business case for corporate social responsibility
cannot be the only reason why companies should be good corporate citizens –
national laws and ethics also play an important role.
In the South African environment in particular, companies have a huge role to play in
making socio-economic progress, and compliance with these rules, regulations and
codes will go a long way to ensuring that companies retain their licence to operate.
Use the link below to watch the YouTube video for examples of CSR programmes
implemented by various companies.
133
Time: 9:13 minutes
https://www.youtube.com/watch?v=lVBXrRWctlE
In the next section, you will learn about corporate governance.
5.6
CORPORATE GOVERNANCE
Corporate governance refers to the way in which an organisation makes decisions
such as how to manage its affairs. The King Report (as per its various iterations)
defines corporate governance as “the exercise of ethical and effective leadership by
the governing body”. Corporate governance can therefore be seen as the policies
and guidelines that serve as the rules for engagement. The foundation of corporate
governance lies not only in overseeing critical decisions but also in ensuring that the
organisation has adequate resources and an effective strategy to thrive. This means
that corporate governance covers:
•
Policies for hiring and firing senior executives
•
Oversight of business activities to ensure compliance with laws and ethical
structures
•
Ensuring that there is transparency in terms of business actions for
stakeholders
•
Establishing corporate strategy, compensation and risk management
Source: https://www.diligent.com/insights/corporate-governance/
Corporate governance primarily consists of four principles:
•
Accountability ensures that the organisation is able to justify every action
taken. This enables the organisation to build confidence among
stakeholders and assists in taking ownership of risks.
•
Transparency is vital for confidence. Without transparency, informed
decision-making will not be possible. Transparent processes allow
stakeholders to make informed and powerful decisions when required.
•
Fairness. Good corporate governance requires the equal treatment of all
stakeholders. Fairness entails both good business sense and ethics – as
134
unequal treatment leads to a lack of support of and interest in the
organisation. Investors will no longer invest in organisations with a
reputation for treating stakeholders differently.
•
Responsibility. The organisation is responsible and accountable for all its
actions. Poor performance has consequences and failing to lead the
organisation will be detrimental its success.
Source: https://www.diligent.com/insights/corporate-governance/
Open the links below to watch the two YouTube videos to learn more about what
corporate governance is all about.
Time: 1:50 minutes
https://www.youtube.com/watch?v=QNYMsCpX7Rw
Time: 2:10 minutes
https://www.youtube.com/watch?v=0sD0WrnXw-I
To assist organisations in practising good corporate governance, the King Report
was established. One of the focal points of the most recent report, the King VI Report,
is transparency – where sound corporate governance is an essential element of good
corporate citizenship. Following the principles set out in the King IV Report, the
following aspects regarding corporate governance should be noted:
•
Good governance is about effective leadership.
•
Sustainability is the primary moral and economic imperative for the 21st
century.
•
Innovation,
fairness
and
collaboration
are
important
regarding
sustainability.
•
Integrated sustainability and social transformation will give rise to greater
opportunities for the company and society.
•
Sustainability reporting is a key facet of good corporate governance.
135
It is evident then that good corporate governance does not operate on its own, but
rather forms an integral part of society – where it holds accountability towards current
and future stakeholders. The King IV report is therefore an important tool when it
comes to corporate governance, as it (Agudo-Valiente et al., 2017):
•
creates an ethical culture in the organisation
•
improves performance and increases value creation
•
ensures that there are adequate and effective controls in place
•
builds trust between all stakeholders
•
ensures that the organisation has a good reputation
•
ensures legitimacy
Source: https://www.michalsons.com/focus-areas/information-technology-law/kingreport-king-code-on-corporate-governance#:~:text=The%20King%20Report%20and
%20King,ethical%20and%20effective%20leadership%20is.
The King IV Report reinforces the notion that corporate governance is holistic and
interrelated and should not be viewed as a “tick-box” exercise. It must be applied
mindfully, taking into account the industry in which the organisation operates.
Summary of the King IV Report:
•
The report consists of a set of voluntary principles and leading practices.
•
It has been revised to include all organisations, irrespective of their form
of incorporation.
•
Proportionality is explained and advocated.
•
Principles and practices are linked to desired outcomes. This allows the
benefits of good corporate governance to become evident.
•
There is a differentiation between principles and practices. Principles
are achievable by mindful consideration and application of the
recommended practices.
Key new or enhanced features of King IV relate to:
•
Fair, responsible and transparent organisation-wide remuneration
•
Responsible and transparent tax strategy and policy
•
Balanced composition of governing bodies and independence of
members of the governing body
136
•
Delegation to management
•
Delegation to committees
•
Corporate governance services to the governing body
•
Performance evaluations of the governing body
•
Audit committee disclosures
•
Risk governance
•
The combined assurance model
•
Social and ethics committees
•
Performance evaluations
•
Responsible institutional investors
•
Technology and information
Source: https://www.pwc.co.za/en/publications/king4.html
In the next section, you will learn about stakeholders and how companies can engage
with them.
5.7
STAKEHOLDERS AND STAKEHOLDER ENGAGEMENT
Stakeholders are those groups or people who are affected by or who can have an
effect on a company. Business is about people. Stakeholders can be found either
inside the organisation (called internal stakeholders, such as executive board
members, management, and other employees) or outside the organisation (external
stakeholders – here we are thinking about shareholders, the consumer public,
customers/clients, suppliers and the wider community in the area where the business
operates, etc.). Primary stakeholders are those whose ongoing support of the
company is vital to the company’s survival. These stakeholders commonly have
some contractual or financial relationship with the company, that is, shareholders and
employees. A company cannot survive if shareholders or employees withdraw their
support of the company.
Often government is also a primary stakeholder. Local communities can also be a
primary stakeholder, especially if they own the land that a company needs. For
instance, opposition or sabotage by the local community may make it impossible for
a mine to operate.
137
Secondary stakeholders have a less direct impact on the company and include
environmental NGOs or the media. A secondary stakeholder can become a primary
stakeholder if the conditions change. For instance, a local group that is small and
powerless probably has little impact on a company, but if it gets more local support
or if it has a convincing legal argument, it may quickly become a primary stakeholder.
Stakeholder engagement is at the heart of good corporate social responsibility. The
stakeholder engagement process allows stakeholders to determine what they want
from the company and what they consider to be the issues and culture of the
company. The stakeholder engagement process consists of six basic steps
(Erasmus, Rudansky-Kloppers & Strydom, 2017):
1. Prepare – identify and understand the territory to be explored through the
engagement process. During this step, it is important to identify the most
important issues as well as which kinds of stakeholders would be most
appropriate to engage with.
2. Plan – objectives and parameters for the engagement process are set and
stakeholders are prioritised. In addition, persons accountable for the
engagement should be identified and the best mode of discussion should be
determined. It is also important to establish how to measure the success of the
process during this step.
3. Design – the engagement plan, agenda and logistics should be developed to
meet the objectives set in step 2. Decisions during this step include deciding
how and when to invite stakeholders, the best way to conduct the sessions,
whether a third-party facilitator will be required, the rules and logistics to be
used and if the sessions will need to be audited afterwards.
4. Engage – the engagement plan must now be executed.
5. Evaluate – assess the outcomes of the engagement session from both
company and stakeholder perspectives. During this step, it is important to
determine if additional sessions will be required. Consider the outcomes of the
engagement session and establish whether the process was successful or not.
138
6. Apply – information must be shared and integrated into business processes,
where appropriate. It is important to decide on how to ensure that that the
results of the engagement reach the appropriate internal decision-makers. If
further follow-up engagement sessions are required with stakeholders, they
should be duly informed.
A company wishing to embark on a stakeholder engagement process should start by
mapping all external and internal stakeholders, defining their role in and their impact
on the organisation, and determining the most appropriate methods to engage with
each stakeholder group. The methods can include the use of questionnaires, focus
group meetings, surveys, market research, personal visits, joining existing networks,
and so on.
Access the link below for an example of a real-life engagement policy.
https://www.coca-cola.com.sg/policies/transparency
Finally, in the next section you will learn how CSR is linked to the functions of a
company.
5.8
THE LINK: DOES CSR RELATE TO THE VARIOUS BUSINESS
FUNCTIONS?
If we look at the various business functions in more detail, it becomes clear that
corporate social responsibility touches on every single business terrain and
management function. In this section, we will briefly refer to some of the areas where
corporate social responsibility has an impact on the different business functions.
5.8.1 CEO / top management
The CEO and the top management team are responsible for managing issues that
pertain to the entire organisation, such as strategy, financial performance, mergers
and acquisitions, and governance. In addition, they oversee all the functional areas.
Accordingly, the CEO and the top management team will be concerned both with the
139
issues presented above and with specific ways in which more corporate social
responsibility practices can be helpful, for instance by improving stock price, financial
performance, corporate reputation and risk management. These elements will now
be discussed in more detail.
5.8.2 Operations
Operating managers are responsible for ensuring that their organisations can
produce products and services in a timely, cost-effective way and can beat their
competitors on price, innovation and quality.
Good corporate social responsibility practices can create market opportunities and
increase the competitiveness of companies that use innovation to develop products
or services based on sustainability criteria. Recognising and responding to emerging
niche markets allow companies to translate good corporate social responsibility into
corporate social opportunity. Organic coffee, ecotourism, sweatshop-free clothing
(e.g. Nike) and fuel cell technologies are but a few examples of product innovations
that have successfully penetrated new markets. These products have effectively
responded to changing consumer preferences.
Total quality management (TQM) forms an integral part of the operations function
and focuses on the development and delivery of quality products by involving the
entire company. Total quality should be defined not only with reference to financial
considerations but should also include the social and environmental characteristics
of the products. Similarly, priorities for continuous improvement should be
determined with reference to the preferences of clients/customers and the activities
of competitors, but also to constant monitoring of the product’s impact on society and
the environment.
5.8.3 Finance
Generally speaking, the financial director is a very powerful individual who has
significant influence in an organisation. This implies that he or she will also indirectly
exercise a strong moral influence on the behaviour of employees in the workplace.
In addition, strategic priorities (profit maximisation, expanding market share, cutting
costs, etc) can be very strong influences on morality. Traditionally, the finance
manager is the most difficult to convince of the advantages of implementing good
140
corporate social responsibility practices in an organisation, since not all benefits can
be converted into rands and cents.
When it comes to the role of the finance function with regard to the investment
decision, one must acknowledge that access to capital is critical for any company
wanting to invest and grow. Good corporate social responsibility practices –
particularly corporate governance structures and risk management systems –
provide important opportunities to unlock capital. Investors, financial institutions and
multilateral lenders will invest in and lend to companies that have a good reputation.
This reputation is built not only through sound financial performance but also through
demonstrated transparency, disclosure, integrity concerning shareholder rights,
strong stakeholder relations and sound risk management practices.
For example, the International Finance Corporation (IFC), which is the private sector
arm of the World Bank Group, has stringent lending criteria in place. The IFC insists
that prior to lending money to companies for large projects, an adequate impact
assessment be undertaken. Projects must be environmentally and socially sound,
satisfying IFC environmental and social standards as well as those of the host
country.
5.8.4 Procurement
A group of external stakeholders that has a very close relationship with the business
is the suppliers. Unfortunately, the attitude of organisations when dealing with
suppliers is all too often: “We tell them what we need, we pay them, and that’s about
it.” How can a company maximise its positive impact through its suppliers?
Consider, for instance: How does the organisation, first of all, choose its suppliers?
Do the selection criteria provide for more than just the best price? What is the right
or ethical thing to do, and how can the organisation maximise its impact through its
suppliers?
Here we are talking about something as simple as complying with legislation:
•
The Preferential Procurement Act 5 of 2000 stipulates that a preferential
point system must be followed to promote sustainable black economic
empowerment.
141
Black economic empowerment through the supply chain has seen many
•
individuals and communities become financially independent for the first
time in their lives. BEE charters, such as those for the finance sector,
mining sector and tourism sector, impose specific requirements on the
respective industries.
But it is also about more than just adhering to the letter of the law. Does the business
know how its suppliers are running their businesses? Where and how do they obtain
the products that they provide to the enterprise, and are the values of the organisation
aligned with those of its suppliers? After all, by buying from them, the organisation is
keeping its suppliers in business and adding its vote of confidence to its suppliers’
business practices!
Some relevant legislation:
•
Preferential Procurement Policy Framework Act 5 of 2000
•
National Black Economic Empowerment Act 53 of 2003
•
Companies Act 61 of 1973 and Closed Corporations Act 69 of 1984
•
Constitution of the Republic of South Africa, 1996
Table 5.3 below comprises the JSE impact classification table.
Table 5.3: JSE impact classification table
High impact
Medium impact
Low impact
Aerospace and defense
General retailers
Banks
Automobiles and parts
Health
Insurance
Chemicals
Household goods and textiles Investment companies
Construction and building Information technology and
materials
hardware
Electricity
Leisure,
entertainment
Investment entities
and Life assurance
hotels
Food and drug retailers
Media and photography
Forestry and paper
Real estate
Mining
Software
and
services
142
computer
Specialty and other finance
Oil and gas
Telecommunications services
Tobacco
Water
5.8.5 Human resources
The real value of a company lies in its people – without sound HR practices, any
organisation, however big or small, will sooner or later find itself in big trouble. CSR
can help to increase employee satisfaction and loyalty, improve recruitment and
retention, and build a long-term pipeline of employees.
Employees form the internal stakeholder group of an organisation. How does the
business treat this stakeholder group? Does it have proper policies and procedures
in place that meet the real needs of its employees? This goes beyond service
contracts and normal benefits such as leave, maximum working hours and overtime
– it includes factors such as training opportunities, disciplinary practices and nondiscrimination. Does management promote sound health and safety measures in the
workplace? Does the employer encourage its staff to take part in organised employee
actions, such as unions? Also, how does it deal with the unions – is there regular,
honest consultation, and do these unions have an input in decision making?
On the other hand: How do employees treat their employers? Do they adhere to a
code of conduct? Is there a corporate culture of anti-corruption and anti-bribery, and
are employees participating in initiatives beyond their call of duty, for instance,
volunteer programmes within the community in which they operate?
Staff involvement in corporate social responsibility should not be a separate or an
optional aspect of an entity; the assessment of the social and environmental impact
of employees’ activities should form an integral part of their key performance areas
(KPAs) and their performance evaluation. Some relevant legislation:
•
Labour Relations Act 66 of 1995
•
Employment Equity Act 55 of 1998
•
Basic Conditions of Employment Act 75 of 1997
•
Occupational Health and Safety Act 85 of 1993
•
National Black Economic Empowerment Act 53 of 2003
143
5.8.6 Risk management
The management of organisational risk has become more difficult – for several
reasons:
•
Globalisation of risks. Companies are competing in a global environment,
with risks coming at them from multiple sources and multiple geographies.
It is more difficult to keep abreast of potential risks and to know how to
respond if they occur.
•
Heightened surveillance. Companies are being watched by more groups,
with more diverse agendas, than ever before. These groups are linked
across the globe by the internet, allowing instant transmission of fact (and
falsehood) to millions of consumers.
•
Increased
demands
for
transparency.
Consumers,
labour
and
communities have moved from a “trust me” to a “show me” stance,
demanding to know more about what a company is doing and how it
affects them.
Social and environmental factors pose an increasing risk to the environment in which
organisations operate. Here we are talking about factors such as unemployment,
crime, the use of non-renewable resources, poverty and ill health. Of course,
HIV/Aids is currently the most significant health challenge facing South Africa.
HIV/Aids is but one social risk factor that can have an enormous impact on the
financial bottom line of companies: shouldn’t companies seriously rethink their risk
management focus?
5.8.7 Marketing and public relations
Marketing deals mainly with the effective development and delivery of a satisfactory
product offering to the market – in such a way that it meets the needs of the
organisation, the consumer and the community. How should organisations then use
their marketing function responsibly and ethically to ensure maximum benefit to
everyone involved: the business, customers/clients, employees and the wider
community?
We all know that marketing is about much more than advertising. However,
advertising is a good example of a visible marketing initiative that is directed at
144
consumers. How responsible are the advertising practices of companies? An
example that most of you might be familiar with is the television advertisement of a
certain cellphone manufacturer, where the boyfriend uses cellphone technology to
deceive his girlfriend’s father. It might make you smile, but what message does it
send out about the values associated with that product? Is that responsible
advertising?
An example of an advertisement where a product is associated with a good cause is
the Isuzu ad where the KB280D small truck is used to rescue a beached whale.
However, we do not know what business practices underlie this claim of corporate
social responsibility – and that is where the real impact will be found. Responsible
marketing is also about how the organisation positions its brand. For instance:
•
Is the product properly labelled?
•
Does the brand – through its marketing – actively promote social and
environmental well-being?
An interesting new development, which is gaining huge popularity worldwide, is that
of brand citizenship and cause-related marketing. Broadly speaking, this is where
businesses and charities form a partnership to market an image, product or brand for
mutual benefit, using the power of the brand to make a difference in society. Consider
the following examples:
•
Woolworths – think of the My School card: Woolworths benefits; and many
schools in less fortunate environments benefit.
•
Avon beauty products donate a part of their profits to the fight against
breast cancer, especially through the proceeds on their pens that are sold
specifically for this purpose.
•
Coca-Cola sponsors the Coke Football Stars Tournament.
•
Tiger Brands and the Unite Against Hunger campaign – this is a classic
example of business, government and charities working together for
mutual benefit.
Of course, corporate social responsibility entails much more than public relations
(PR). If a company chooses to put a marketing spin on flaunting the company’s good
corporate social responsibility practices, it should always be underpinned by
demonstrated triple-bottom-line benefits. CSR can very easily be misused and turned
145
into a pure PR initiative without any substance. Some relevant legislation:
•
Promotion of Access to Information Act 2 of 2000
•
Competition Act 96 of 1979
This brings us to the end of this lesson.
5.9
SUMMARY
You now have a basic understanding of the concepts underlying corporate social
responsibility. We have examined the imperatives for implementing corporate social
responsibility in organisations and discussed why and how stakeholder engagement
is key to the process. Finally, the concepts of “corporate governance” and
“sustainable development” were defined and we have highlighted the link between
corporate social responsibility and the various business functions. When you revisit
the lessons in this study guide, always be aware of how corporate social responsibility
relates to the other key business management concepts. The next lesson gives you
an introduction to general management.
5.10
SELF-ASSESSMENT QUESTIONS
This activity will take approximately 20 minutes to complete.
Question 1
Consider the following case study. Is this example merely a PR
exercise, or a true CSR benefit? Does it need to be “either/or”, though?
146
Many companies (notably listed companies for whom sustainability reporting is
becoming an increasingly important requirement) are publishing not only an annual
report but also a sustainability report which focuses specifically on the social and
environmental aspects of their business. Although the information in such a report
should always be honest and truthful, reflecting the real impact of the company’s
business dealings on the triple bottom line, the very fact of issuing such a report is
good PR in itself in that it positions the company as a “good corporate citizen” in the
eyes of its stakeholders.
You
can
find
some
very
www.nedbankgroup.co.za,
good
examples
www.sab.co.za,
of
sustainability
reports
www.angloplatinum.com
on
and
www.mtn.co.za.
Question 2
Review Coca-Cola’s sustainability report (you can access it here: https://www.cocacolacompany.com/reports/business-sustainability-report-2019) and discuss your
views with your fellow students on myUnisa. If you were a top-level manager at the
company, is there something you would do differently? Why? Do you think Coca-
147
Cola has considered the four principles of corporate governance? Highlight examples
from the report to support your views.
Question 3
Also review the 2021 Business & Environmental, Social and Governance report
released
by
Coca-Cola
(you
can
access
it
here:
https://www.coca-
colacompany.com/reports/business-environmental-social-governance-report-2021).
Can you spot any improvements and differences? Do you think there has been
progress since the 2019 report? Discuss your findings with your fellow students on
myUnisa.
Make sure you have mastered the key concepts that were listed at the start of this
lesson, by making brief notes so that the meaning of each term is clear.
Before proceeding to the next lesson, take some time to reflect on what you have
learned in lesson 5. Make sure you have achieved all the outcomes listed at the
beginning of this lesson.
5.11
REFERENCES
Agudo-Valiente, A.M., Garces-Ayerbe, C. & Salvador-Figueras, M. 2017. Corporate
social responsibility drivers and barriers according to managers’ perception;
evidence from Spanish firms. Sustainability, 9:2–24.
Erasmus, B., Rudansky-Kloppers, S. & Strydom, J. 2019. Introduction to Business
Management (11th edition). Cape Town: Oxford University Publishers.
148
Contents
6.1
INTRODUCTION ................................................................................................... 151
6.2
DEFINING MANAGEMENT ................................................................................... 152
6.3
THE PROCESS OF MANAGEMENT .................................................................... 153
6.4
LEVELS OF MANAGEMENT ................................................................................ 154
6.4.1
Top management .................................................................................................. 154
6.4.2
Middle management .............................................................................................. 154
6.4.3
Lower management ............................................................................................... 155
6.5
FUNCTIONAL MANAGEMENT AREAS ................................................................ 157
6.6
SKILLS AT DIFFERENT MANAGERIAL LEVELS ................................................. 158
6.6.1
Technical skills ...................................................................................................... 158
6.6.2
Interpersonal skills ................................................................................................. 158
6.6.3
Conceptual skills ................................................................................................... 159
6.7
THE ROLES OF MANAGERS ............................................................................... 160
6.8
DIFFERENT SCHOOLS OF MANAGEMENT THOUGHT ..................................... 162
6.8.1
The scientific approach.......................................................................................... 163
6.8.2
The management process approach ..................................................................... 163
6.8.3
The behavioural approach ..................................................................................... 163
6.8.4
The quantitative approach ..................................................................................... 164
6.8.5
Systems approach ................................................................................................. 164
6.8.6
Contingency approach........................................................................................... 164
6.8.7
Strategic management approach ........................................................................... 164
6.8.8
Total Quality Management..................................................................................... 165
6.8.9
Re-engineering ...................................................................................................... 165
6.8.10 Diversity management ........................................................................................... 165
6.9
SUMMARY ............................................................................................................ 165
6.10
REFERENCES ...................................................................................................... 168
6.11
OPEN EDUCATIONAL RESOURCES (OERS) ..................................................... 168
149
LESSON 6: INTRODUCTION TO MANAGEMENT
This lesson will require approximately EIGHT notional hours. Figure 6.1 represents an
overview of lesson 6.
6.1 Introduction
6.2 Defining management
6.3 Functions of management
6.4 Levels of management
6.5 Functional management areas
6.6 Skills at different management levels
6.7 Roles of management
6.8 Different schools of management thought
6.9 Summary
6.10 References
6.11 Open Education Resources (OERs)
Figure 6.1: Visual overview of the lesson
150
6.1
INTRODUCTION
Our society consists of all types of organisations (small and large), such as
businesses, schools, hospitals, sports clubs, churches, and political parties, which
contribute to the functioning of a people. All these organisations need to be managed
for them to be successful. Upon completing this lesson, you will be able to discuss the
principles involved in the management of any of these organisations. More specifically,
you will have a better understanding of the management principles involved in running
a business. You will be able to define the term "management" and discuss the
functions, levels, functional areas, skills, and roles of management. In the last section,
you will learn how to differentiate between the different management approaches.
LEARNING OUTCOMES
When you have worked through lesson 6, you should be able to do the
following:
•
Define the term “management”.
•
Discuss the processes, levels, functional areas, skills and roles of management
in an organisation.
•
Differentiate between the various schools of thought in management
KEY TERMS
conceptual skills
lower management
contemporary approach
management
contingency approach
management approaches
decision-making role
roles of management
information role
middle management
interpersonal role
top management
levels of management
quantitative school
functions of management
management process
Besides the reasons that were provided in lesson 3 as the main causes of business
failure, poor management is one of the reasons why some businesses fail. Before
going in depth into this topic, you should have a clear understanding of what
151
management is all about. The next section will provide a more comprehensive
overview of the task of management by looking at a definition of what management
entails.
6.2
DEFINING MANAGEMENT
Management is the process of planning, organising, leading, and controlling the
resources such as financial, human and physical resources of an organisation to
achieve stated goals as efficiently as possible. Management is dynamic by nature and
develops to fulfil the needs and deal with the challenges presented by the internal and
external environments of an organisation.
Managers are responsible for developing and implementing a management process.
Research found that managers in practice switch frequently from task to task,
changing their focus of attention to respond to issues as they arise, and engaging in a
large volume of tasks of short duration (Gitman, McDaniel, Shah, Reece, Koffel,
Talsma, & Hyatt, 2018).
The four functions of management include planning, organising, leading, and
controlling. These functions enable managers to improve the effectiveness and
efficiency of the organisation. Effectiveness is the ability to produce the desired
outcome, while efficiency refers to utilising the smallest possible number of resources
to achieve the desired outcome. For example, producing a target of 100 pairs of shoes
per day in a factory relates to effectiveness because the target has been reached. To
be efficient, though, managers need to use minimum resources, such as labour, input,
time, and equipment to reach the set target of 100 pairs of shoes per day. However,
this should not be done in a way that compromises quality.
To demonstrate your understanding of the definition of management, complete the
following activity:
Activity 6.1
This activity will take approximately 5 minutes to complete.
In your own words, define the term management and share it with your
peers on myUnisa.
152
Feedback: Management is the process of planning, organising,
leading, and controlling the resources such as financial, human and
physical resources of an organisation to achieve stated goals as
efficiently as possible.
Did you notice any differences and similarities between your definition and others
provided by your peers?
After studying the next section, you will be able to explain the process of management.
6.3
THE PROCESS OF MANAGEMENT
As you will remember from the previous lessons, management operates in a dynamic
environment. In this lesson, you will learn about how management manages an
organisation in the changing environment. The reason for establishing a business is
to achieve objectives that would be too difficult for individuals to achieve on their own.
It is important to remember that the success of any organisation depends mostly on
how the organisation is managed.
The effective performance of any business requires management to perform the four
steps as depicted in figure 6.2, namely planning, organising, leading and controlling.
Figure 6.2: The management process
153
Planning enables management to take a business concept beyond the idea stage.
However, planning alone is incomplete. People and other resources in the
organisation should be allocated to various activities (organising). In addition,
management should provide leadership and motivate employees to do their work well
(leading). Finally, to determine whether the planned activities were carried out
effectively and efficiently, systems should be put in place to measure the results and
compare them with what was planned (controlling). These steps of the management
process are also known as management functions and they will be discussed in detail
in the subsequent lessons. Planning will be discussed in lesson 7, organising in lesson
8, leading in lesson 9 and controlling in lesson 10. These functions of management
are conducted at various levels in an organisation. After going through the next
section, you will be able to explain the levels of management in an organisation.
6.4
LEVELS OF MANAGEMENT
Levels of management include top management, middle management and lower
management. These levels – and the responsibilities of managers at each level – are
explained below.
6.4.1 Top management
Top management refers to a small group of people who lead the organisation (for
example, CEO, president, chairman, board members and vice president). The main
responsibility of top management is to develop strategic plans and long-term goals for
the organisation by focusing on issues such as the industries to compete in, the way
market share will be improved, and actions to be implemented to invest. These
managers are also responsible for designing and approving the policies, representing
an organisation externally and defining the values and ethics of an organisation.
6.4.2 Middle management
Middle management is responsible for the implementation of strategic plans in their
functional areas (the functional areas of management will be discussed in section 6.5).
Examples of middle management include departmental managers, division heads,
and regional sales managers. These managers are responsible for designing and
carrying out tactical plans in specific areas of the organisation, allocating resources
and overseeing lower-level managers to meet organisational goals.
154
6.4.3 Lower management
Lower management is found at the bottom of the managerial pyramid, which is also
known as the supervisory level. These managers design and carry out operational
plans for the ongoing daily activities of the organisation. Supervisors are responsible
for guiding and motivating the employees reporting to them to produce the goods and
services.
Figure 6.3 summarises the three levels of management and the related responsibilities
of each.
Top-level management
- Scan the internal and
external environments
- Set goals and formulate
plans
- Manage middle-level
managers
Middle-level management
- Report to top managment
- Develop functional goals and
plans
- Manage lower-level
managers
- Allocate resources
Lower-level management
- Report to middle-level
managers
- Involved in day-to-day
operations
- Coordinate activities
- Supervise front-line staff
members
Figure 6.3: Levels of management
Note that some organisations will have only one or two levels of management (e.g. in
a sole proprietorship), whereas very large organisations may have as many as eight
or more management levels. Even with so many levels of management, they can still
be classified into three broad categories, namely, top, middle and lower management.
155
STUDY
Study the section titled, "Levels of Management: How Managers Are
Organized" (pages 275 – 277) in Saylor.com Academy. 2020. Exploring
business [Online]. The Saylor.com Academy. Available from: <https://resources.
saylor.org/wwwresources/archived/site/textbooks/Exploring%20Business.pdf>
[Accessed 31 January 2022].
Activity 6.2
This activity will take approximately 5 minutes to complete.
The following image depicts the management structure of the
Education, Training and Development Practices Sector Education and
Training Authority (ETDP SETA). Identify the names of the employees
at the three levels, namely top, middle and lower management.
Source: ETDPSETA 2019-20 annual report (http://www.etdpseta.org.za/education/
sites/default/files/annual-reports/ETDP-SETA-2019-20-Annual-Report.pdf)
156
Feedback:
The employees who are part of the management structure of the ETDP
SETA can be classified as follows:
•
Top management: Mrs Nombulelo Sesi Nxesi
•
Middle management: Ms Nonhlanhla Dick, Mr Mzikayise Dondolo and Dr
Timothy Makofane
•
Lower management: Ms Zokhanyo Pikashe, Ms Velile Msane, Mr Moloti
Nkune, Ms Lihle Mndebela, Ms Winnie Kananda, Mr Mabu Raphotle and Mr
Tommy Baloyi
Now that you have a better understanding of the different levels of management and
their respective responsibilities, you need to know the different functional management
areas.
6.5
FUNCTIONAL MANAGEMENT AREAS
The different functional areas of management are distinguished as follows:
•
General management – controls the management process and the general
principles of management as applied by top management.
•
Marketing management – activities are undertaken to create, communicate,
deliver and exchange products and services that have value for customers,
clients, partners and society at large.
•
Financial management – provides information to individuals and groups (both
inside and outside the organisation) to help them assess its financial
performance.
•
Production and operations management – activities involved in transforming
raw material and other inputs into final goods or services.
•
Purchasing management – management of networks in the organisation
linked to each other through buying and selling of material, products and
services.
•
Human resource management – consists of all the actions that an
organisation takes to attract, develop and retain suitable employees.
157
•
Public relations management – involves planned actions aimed at managing
the transfer of information between an organisation and the public to influence
the public perception or reputation.
Since most first-year courses in Business Management are presented in terms of
these functions, you need to know what the functions of a business are and how they
work together to attain the set objectives of the organisation. Special reference must
be made to the function of the general manager. General management differs from
other functions because every manager, regardless of the specialised function in
which he or she operates, exercises general management.
The following section will enable you to discuss the skills required of managers to carry
out the management functions.
6.6
SKILLS AT DIFFERENT MANAGERIAL LEVELS
6.6.1 Technical skills
Technical skills are skills that are needed to perform specific tasks and are mostly
used during the early years of one's career. These skills are normally developed during
one's formal education but can also be developed through job training and work
experience. Examples of technical skills include preparing financial statements as an
accountant, preparing promotional campaigns in marketing, operating a certain
machine, and so forth. Technical skills are very useful when someone is promoted to
a first-line managerial role whereby the person will be expected to supervise the task
performance of his or her subordinates.
6.6.2 Interpersonal skills
Interpersonal skills (also known as human relations skills) are the ability to
understand, get along with and motivate other people. This is critical for middle-level
managers as they play a pivotal role by reporting to top-level managers and
overseeing the activities of first-line managers. Middle-level managers must use these
skills to build trust, foster teamwork, manage conflict and inspire employees to improve
their performance. Managers with poor interpersonal skills usually adopt an
authoritarian leadership style and as a result, employees feel alienated.
158
6.6.3 Conceptual skills
Conceptual skills refer to the ability to reason abstractly and analyse complex
situations. This includes the ability to see the organisation as a whole, to understand
how its different sub-elements are mutually dependent, and to assess how the
organisation is linked to other stakeholders in the external environment. Top
management is expected to "think outside the box" to arrive at creative solutions to
complex, and sometimes ambiguous, problems.
Note the different management skills required at different levels, particularly as
illustrated in figure 6.4.
Conceptual skills
Top management
Very important
Interpersonal
Technical
skills
skills
Important
Not as important
Middle management Important
Important
Important
Lower management
Important
Very important
Not as important
Figure 6.4: Skills at different levels of management
Figure 6.4 depicts the various "blocks" of skills next to each level of management. This
figure, for example, illustrates that top management requires a few technical skills and
interpersonal skills (compared with lower management), but concrete conceptual skills
and diagnostic/analytical skills. For lower management, the skills required are the
other way round, while middle management requires a relatively equal proportion of
all the listed skills. Some of the most famous managers moved through the ranks;
meaning they started out working at a technical level (lower management) and worked
themselves up into middle management and eventually top management positions.
After studying the following section, you will be able to differentiate between the
different roles that managers play in an organisation.
159
6.7
THE ROLES OF MANAGERS
In addition to the four management functions of planning, organising, leading and
controlling, managers also have to play a number of supporting roles, namely the
interpersonal role, the decision-making role and the information role. In Mintzberg's
seminal study, it was found that most managers and their jobs were clustered around
these three supporting roles. The interpersonal role refers to the need for managers
to interact with others inside and outside the organisation to achieve the organisational
goals. In performing the interpersonal role, managers meet with business prospects
and partners; host receptions and take clients and customers to dinner; conduct hiring
and performance interviews; and form alliances, friendships, and personal
relationships with many others. The informational role relates to the manager's
responsibility to gather, collate, analyse, store and disseminate information. Managers
perform decisional roles when they make decisions on behalf of both an organisation
and all the stakeholders of the organisation.
Within these three major roles, the manager also fulfils sub-roles. Table 6.1 contains
the different sub-roles of managers, their descriptions and practical examples.
Table 6.1: Sub-roles of managers
Role
Description
Example
1. Informational roles
Monitor
Searching for and
Conducting a market analysis
collecting information
to determine if a certain
relevant to the organisation product will be suitable for the
market
Disseminator
Providing information in
A line manager informing his
the organisation where it is
subordinates about the new
needed
roster
160
Spokesperson
Conveying information to
A branch manager using a
people outside the
local social media platform to
organisation.
inform the clients about a
technical glitch with their
system.
2. Interpersonal roles
Figurehead
Representing the company
A manager attending a career
symbolically
exhibition on behalf of the
organisation
Leader
Guiding and motivating
During performance reviews, a
employees to achieve the
manager realises that one of
goals of the organisation
the employees struggled to
achieve the required standard.
The manager then drafts a
plan to help the employee to
improve.
Liaison
Acting as a middleman
A team leader who
between individuals inside
communicates with a client
and outside the
and then conveys the client's
organisation
requirements to team
members
3. Decisional roles
Entrepreneur
Disturbance handler
Looking for new
Acquiring and implementing a
opportunities and driving
new production process using
change in the organisation
new technology
Managing unforeseen
College management deciding
events and crises
to move from blended learning
to an online delivery model
due to the Covid-19 pandemic.
The role of the disturbance
handler also includes resolving
conflict between employees.
161
Resource allocator
Allocating financial,
A line manager selecting a few
human, and other
staff members to form an
organisational resources to innovation team and allocating
Negotiator
various activities
a budget to the team.
Representing the
A manager taking part in
organisation during
negotiations for a salary
negotiation processes
increase for employees
The following section will enable you to differentiate between different management
approaches as they evolved over the past decades, which will also help to explain the
present status of management.
6.8
DIFFERENT SCHOOLS OF MANAGEMENT THOUGHT
This section deals with the different approaches to management. You need to
understand the approaches of the various schools of thought because this will help
you to understand the contemporary approaches to management.
Activity 6.2
This activity will take approximately 30 minutes to complete.
Study the section titled "Management theories" from page 11 to 20 of
the following article:
Olum, Y. 2004. Modern management theories and practices. Paper
presented at the 15th East African Central Banking Course, held on 12 July 2004,
at Kenya School of Monetary Studies. Available from:
<https://ahmadladhani.files.wordpress.com/2008/12/management.pdf> [Accessed
26 May 2021]
Summarise the management approaches that have been discussed in the article.
Feedback:
The feedback for this activity is contained in the section below as the
different approaches to management have been summarised.
162
Compare your answers with the following discussion about the different
management approaches.
Figure 6.5 depicts different management approaches and the period they each started.
1900 - 1910
1980 - 1990
1990 - 2000
•The scientific
approach
•Total Quality
Management
•Re-engineering
1910 - 1920
1970 - 1980
2000 -
•The management
process
•Strategic
approach
•Diversity
management
1930 - 1940
1960 - 1970
•The behaviour
approach
•Contingency
approach
1940 - 1950
1950 - 1960
•The quantitative
approach
•The systems
approach
6.8.1 The scientific approach
The scientific school tends to view employees as machines, who would all respond in
the same way if they were "tuned" correctly. According to this approach, it is believed
that an "expert" should work out the best way to perform a task and workers should
then be taught and supervised to ensure that they work in the prescribed manner.
6.8.2 The management process approach
This school identifies the most important functional areas in the organisation, such as
the production/operations function, the marketing function and the financial function.
6.8.3 The behavioural approach
The human relations or behaviourist school sees workers as people who need to be
"treated" properly, that is, with respect and consideration. The assumption made by
this school of thought is that when workers are treated well and made to feel happy,
they will give their best.
163
6.8.4 The quantitative approach
This school sees the main function of management as using a system of mathematical
models and processes. One such example is in the field of marketing where marketers
would like to know the differences between different groups of people (target markets).
This information can be gained by doing discriminant analysis, which uses some
aspects of mathematics and statistics. Management, however, is much more than that
and, at most, quantitative techniques are no more than an aid to management.
6.8.5 Systems approach
This approach sees the organisation as a system of many parts that must be managed
in an integrated manner. All the functional areas in the organisation (e.g. financial
department and marketing department) must work together to attain the objectives of
the organisation.
6.8.6 Contingency approach
The contingency approach suggests that how an organisation is managed depends
on the nature of employees that an organisation has. Some employees will be
productive if their work procedures are clearly laid out for them, others will give their
best if they are given freedom, while there are also people who will perform well if they
are given the opportunity to prove how good they are. According to this approach,
managers must adapt their management style to the particular characteristics of
individual employees.
6.8.7 Strategic management approach
Due to the pace of technological changes between 1960 and 1970, organisations were
forced to align their goals and objectives with the developments in the business
environment (Erasmus, Rudansky-Kloppers & Strydom 2019). Management aimed to
build a distinct competence in a particular market by considering the strengths and
weaknesses of the organisation, to take advantage of the opportunities and overcome
threats in the environment.
164
6.8.8 Total Quality Management
The Total Quality Management (TQM) approach revolves around ensuring that every
aspect of an organisation is of high quality, to produce quality goods and services.
6.8.9 Re-engineering
This approach forced organisations to embrace their core activities while non-core
activities were outsourced to external providers. Activities such as security, cleaning,
gardening services, and so forth, were contracted to organisations that focus on those
functions, to cut costs and improve efficiency.
6.8.10 Diversity management
The diversity management approach in South Africa has been necessitated by the
promulgation of the Employment Equity Act 55 of 1998 that forced organisations to
employ people from different backgrounds (Erasmus et al 2019). As a result, there is
a need to have a management approach with a body of knowledge that makes
provision for the needs and cultural diversity of those who are involved in the running
of an organisation.
Management approaches and theories are important instruments to broaden
knowledge. Understanding the evolution of the management process gives us a broad
perspective of the vastness of the body of knowledge on research, principles and
problems of management and approaches to management from which managers can
draw.
6.9
SUMMARY
Now that you have studied lesson 6, you should be able to define the word
“management”. You further need to be able to discuss the management process,
levels of management and roles of management. Lastly, you are expected to
differentiate between various approaches to management that have evolved over the
years. In the next lesson, you will study the first management function, namely
planning.
165
SELF-ASSESSMENT QUESTIONS
This activity will take approximately 10 minutes to complete.
Answer the questions that follow.
Question 1
Which one of the following relates to the decision-making role of a manager?
1 Entrepreneur
2 Leader
3 Spokesperson
4 Representative figure
Question 2
As CEO of Drip Footwear, Lekau Sehoana had to make the decision to upgrade
existing stores, in line with its growth strategy of a long-term real estate expansion
plan in the future. In the position of CEO, Lekau needs to have sufficient
___________________ skills in order to view the business in a holistic manner.
1 technical
2 interpersonal
3 conceptual
4 coercive
Question 3
Khaya Dlanga is the marketing manager at Rain Mobile. As such, he is responsible
for setting the functional objectives for the marketing department. As head of a
functional area within the business, Khaya is a member of _____________________
management.
1 top
2 middle
3 lower
4 first-line
Question 4
Joanna is a manager at the Sweet and Tasty Bakery. She is in the process of allocating
the different resources to the various sections of the bakery, and she is defining the
166
duties of the employees and the procedures they need to follow in order to ensure that
the bakery meets its goals. Joanna is in the __________________ phase of the
management process.
1 planning
2 organising
3 leading
4 control
THE ANSWERS TO THE SELF-ASSESSMENT QUESTIONS
Question 1
The correct answer is option 1. Being an entrepreneur is one of the decision-making
roles of a manager and the other three options are not (leader and representative
figure relate to the interpersonal role, while spokesperson relates to the informational
role).
Question 2
The correct answer is option 3. Conceptual skills refer to the manager’s ability to think,
plan and view the business and its parts holistically. Options 1 and 2 are incorrect as
technical skills relate to the ability to use the knowledge of a particular discipline,
whereas interpersonal skills refer to the ability to work with others. Coercive is not one
of the managerial skills, hence option 4 is also incorrect.
Question 3
The correct answer is option 2. As a marketing manager, Khaya is responsible for
managing his functional area (marketing department), which falls under middle
management. Middle management is primarily accountable for executing the policies,
plans and strategies in their departments. Option 1 is incorrect, as top management
consists of a board of directors and the CEO, who are mostly responsible for the
organisation as a whole as opposed to a department. Options 3 and 4 are also
167
incorrect because lower/first-line managers are responsible for smaller segments of
the organisation. A lower manager, in this case, would report to Khaya.
Question 4
The correct answer is option 2. Organising is about ensuring that employees, budget
and infrastructure are allocated to the relevant department as stipulated in the given
scenario. Duties are defined, and procedures fixed to enable the organisation to reach
its goals. This is done after the planning phase; hence, option 1 is incorrect. Options
3 and 4 are incorrect because leading entails motivating employees and control is
about determining whether the organisation is on a proper course to achieve its goals.
6.10
REFERENCES
Erasmus, B., Rudansky-Kloppers, S. & Strydom, J. 2019. Introduction to business
management (11th edition). Cape Town: Oxford.
Gitman, L.J., McDaniel, C., Shah, A., Reece, M., Koffel, L., Talsma, B. & Hyatt, J.C.
2018. Introduction to business [Online]. Houston, Texas: OpenStax. Available from:
<https://openstax.org/details/books/introduction-business>
[Accessed
31 January 2022].
Olum, Y. 2004. Modern management theories and practices. Paper presented at the
15th East African Central Banking Course, held on 12th July 2004, at Kenya School
of Monetary Studies.
6.11
OPEN EDUCATIONAL RESOURCES (OERS)
Business Faculty from Ontario Colleges and Ecampusontario Program Managers.
2018. Fundamentals of business: Canadian edition [Online]. Available from:
<https://ecampusontario.pressbooks.pub/businessfuncdn/chapter/leadership/>
[Accessed on 31 January 2022]. Focus on Chapter 6: “Management and
Leadership”.
Gitman, L.J., McDaniel, C., Shah, A., Reece, M., Koffel, L., Talsma, B. & Hyatt, J.C.
2018. Introduction to business [Online]. Houston, Texas: OpenStax. Available from:
<https://openstax.org/details/books/introduction-business>
[Accessed
31 January 2022]. Focus on Chapter 6: "Management and Leadership in Today's
Organizations”.
168
Openstax. 2019. Principles of management [Online]. Houston, Texas: Openstax.
ISBN: 978-0-9986257-7-5. Available from: <https://openstax.org/details/books/
principles-management> [Accessed 31 January 2022]. Focus on Chapter 1:
“Managing and Performing”.
Saylor.com Academy. 2020. Exploring business [Online]. The Saylor.com Academy.
Available
from:
<https://resources.saylor.org/wwwresources/archived/site/
textbooks/Exploring%20Business.pdf> [Accessed 31 January 2022]. Focus on
Chapter 6: “Managing for Business Success”.
169
Contents
7.1
INTRODUCTION ....................................................................................................172
7.2
DEFINING PLANNING ...........................................................................................173
7.3
THE IMPORTANCE OF PLANNING ......................................................................173
7.4
DISADVANTAGES OF PLANNING ........................................................................176
7.5
THE PLANNING PROCESS...................................................................................176
7.6
ORGANISATIONAL GOALS ..................................................................................179
7.6.1
Strategic goals........................................................................................................180
7.6.2
Functional or tactical gaols .....................................................................................183
7.6.3
Operational goals ...................................................................................................183
7.7
ORGANISATIONAL STRATEGIES AND PLANS ...................................................185
7.7.1
Strategic plans........................................................................................................185
7.7.2
Tactical or functional plans .....................................................................................191
7.7.3
Operational plans ...................................................................................................192
7.8
FACTORS THAT INFLUENCE GOALS AND PLANS .............................................193
7.8.1
Purpose ..................................................................................................................193
7.8.2
Values ....................................................................................................................193
7.8.3
Environment ...........................................................................................................194
7.8.4
Management experience ........................................................................................195
7.9
SUMMARY .............................................................................................................195
7.10
REFERENCES .......................................................................................................197
7.11
OPEN EDUCATIONAL RESOURCES (OERs) .......................................................198
170
LESSON 7: PLANNING
This lesson will require approximately TEN notional hours. Figure 7.1 represents an
overview of lesson 7.
7.1 Introduction
7.2. Defining planning
7.3 The importance of planning
7.4 Disadvantages of planning
7.5 The planning process
7.6 Organisational goals
7.7 Organisational strategies and plans
7.8 Factors that influence goals and plans
7.9 Summary
7.10 References
7.11 Open Educational Resources (OERs)
Figure 7.1: Visual overview of the lesson
(Source: Author's design)
171
7.1
INTRODUCTION
In the previous lesson, we discussed the general principles involved in the
management of organisations and more specifically, the management principles
involved in running a business. This lesson focuses on the management function of
planning. Planning is the starting point of the management process. Managers need
to know where they are heading; therefore, planning enables an organisation to have
direction.
LEARNING OUTCOMES
When you have worked through this lesson, you should be able to do the
following:
•
Define planning.
•
Explain the importance of planning in an organisation.
•
Differentiate between a goal and a plan.
•
Provide the disadvantages of planning.
•
Discuss the steps in the planning process.
•
Discuss different types of organisational goals.
•
Explain the SMART framework to be followed when setting goals.
•
Distinguish between the different organisational strategies and plans.
•
Explain the factors to be considered when formulating organisational goals and
plans.
KEY TERMS
planning
lower management
tactical goals
operational goals
vision
planning process
goal
strategic goals
management by objectives (MBO)
top management
corporate strategy
generic strategy
middle management
SMART
172
7.2
DEFINING PLANNING
Planning is a management process whereby organisational goals are formulated. This
process entails a systematic and clear description of the direction that a business must
take to accomplish its organisational goals. Plans have two main components, namely
outcome or goal statements and action statements (Openstax, 2019). Outcome or goal
statements symbolise the end state – the targets and outcomes that an organisation
aims to achieve. Action statements refer to how organisations move forward to reach
their goals. Planning starts by predicting prospective problems or opportunities that an
organisation may come across (Gitman, McDaniel, Shah, Reece, Koffel, Talsma &
Hyatt, 2018). Managers formulate strategies to alleviate current problems, avoid future
problems
and
exploit
opportunities.
Effective
planning
involves
collecting
comprehensive information about the external environment in which an organisation
operates, as well as its internal environment (Gitman et al., 2018). Successful
managers anticipate change in the environment and they plan accordingly.
Now that you are able to define planning, we move to the next section, where you will
learn about the importance of planning.
7.3
THE IMPORTANCE OF PLANNING
"Before anything else, preparation is the key to success." – Alexander Graham Bell
This quotation says a lot about why planning is needed. Without a plan, it is difficult to
be successful at anything. The reason is simple: if you do not know where you are
going, you cannot go ahead. Planning is the starting point in any management
process. It has two components, namely the activities involved in determining an
organisation's goals and showing the way forward (the plan), and how to achieve these
goals. Today's environment is characterised by constant change – the more turbulent
the environment, the greater the need for planning. Even though managers cannot
predict the future, they need to anticipate changes in the environment and adjust their
goals and plans accordingly. Below are some of the main reasons why planning is
important:
•
Planning directs an organisation's goals. It provides a road map showing an
organisation where to go and how to get there.
173
•
Planning helps to get the different functional areas to work together. For
example, for a manufacturing company, planning will ensure that the production
department is informed about the required number of units to be manufactured;
it assists the marketing department to create a demand for the product and
facilitates the process of selling the product; and it gives the financial section a
better idea about capital needs and cash flow required to run a business
properly. Therefore, we can say that planning helps with the coordination,
cohesion and stability of an organisation.
•
Planning reduces the impact caused by external environmental changes.
Managers can anticipate threats and opportunities in the external environment,
thus reducing uncertainty and risks.
•
Planning forces an organisation to take a hard look at what the future holds for
the organisation. Many managers get so involved in the day-to-day running of
a business that they tend to forget about the future. There is an old saying that
nothing in the future will be the same as it is today. This is true for any business.
One of the most dramatic changes that we see in the business world is the rise
in technology. Technological changes are taking place rapidly and an
organisation must look to the future, anticipate changes and reflect on how they
will influence a business.
•
Planning ensures effective control. Organisational goals and plans formulated
during this stage enable managers to implement effective control mechanisms.
Activity 7.1
This activity will take approximately 10 minutes to complete.
Read the case study and answer the question.
After 25 years of mining with an open-cast zinc mine, a deep-level mine
was built to further exploit the ore body. This resulted in huge challenges
due to the different mining practices required to mine a deep-level mine.
Consequently, the projected production targets were never met. Management
realised that a significant intervention was required to unlock the potential of the
mine in terms of production, costs and skills.
174
Accordingly, management decided that they needed to reduce direct costs by 15%,
increase production by 20% to achieve projected output and improve asset
utilisation by 10%. A management operating system was developed and
implemented to focus on corrective, preventative decisions and activities. The
managers also decided to redesign the engineering function to ensure effective
preventative and breakdown maintenance. Management further trained and
coached 75 managers and supervisors in accountability for key performance areas
centred on the three core elements of production, safety and cost management. By
the end of the 35 weeks of implementing the new system and activities,
management had reduced direct costs by 18%, increased production by 22% and
improved asset utilisation by 15%.
From the information provided in this case study, would you say that the
organisation’s management fulfilled the basic tenets of planning as we have
discussed in this section? Justify your answer.
Feedback:
In the case study the management engaged in planning. The
organisation was faced with the challenges of having to change how
they operate; not achieving their targets. Steps were taken to formulate goals and
plans to achieve those goals were put in place. The goals assisted in terms of
providing direction to the organisation, reducing the impact caused by external
environmental changes, forcing the organisation to review its operations and
ensuring that effective control systems are implemented. When the goals of the
organisation are clear, it is simple for employees to know where they are going and
to monitor their performance accordingly.
Watch the following video for a funny story of why planning is important:
https://www.youtube.com/watch?v=WYSG2kKiX2M
The video shows that the students are likely to provide different answers because they
might have not discussed the details of the accident that they have lied about. Due to
poor planning, the Dean is likely to find out that the accident was indeed fictitious. This
175
is a lesson that dishonesty is unacceptable and immoral as it can be harmful and is
associated with various psychological disorders.
Planning does not only provide benefits to the organisation; it also has disadvantages.
In the next section, you will learn about the disadvantages of planning.
7.4
DISADVANTAGES OF PLANNING
If planning is not done properly, it will have a detrimental effect on how the organising,
leading and control tasks are performed. The following are some of the pitfalls of
planning:
•
Planning may create inflexibility. It is not simple to deviate from the goals
and plans.
•
Managers spend a lot of time on this process.
•
Decision making is delayed as plans and goals are usually determined by
top management.
•
Creativity and innovation are restrained.
As much as planning is crucial for any organisation to know where it is going and to
achieve its goals, managers should ensure that decision-making is not delayed,
creativity and innovation are sustained, and planning inflexibility is minimised. After
going through the next section, you will be able to discuss the planning process.
7.5
THE PLANNING PROCESS
It is important to understand that planning does not take place in isolation nor as a
once-off activity. It is an ongoing process. Figure 7.2 depicts the main steps of the
planning process.
176
5. Reactive
planning
1. Establish
goals
4.
Implement
the plan
2. Develop
alternative
plans
3. Evaluate
alternative
plans
Figure 7.2: The planning process
Figure 7.2 shows that the planning process starts when managers formulate goals for
an organisation (“establish goals”). When goals have been set, different courses of
action that can be implemented to achieve the established goals are suggested
(“develop alternative plans”), followed by an evaluation of the courses of action to
establish the most favourable one (“evaluate alternative plans”). The plan that is most
likely to attain the established goals is then put into action (“implement the plan”) and
lastly, evaluation is done to determine whether the implemented plan resulted in the
attainment of the established goals that were set during the first step of the process.
The outcome of the evaluation will enable an organisation to refine its goals and plans
(reactive planning). The feedback loop starts the whole process again.
Remember the following about planning:
•
It is not a static process but a dynamic one. This means that it is a process that
never stands still; nor can it remain the same. Plans should be reviewed at
regular intervals and then adjusted (if necessary) to adapt to changing needs
and circumstances (the feedback loop).
•
It is the foundation on which the other management tasks rest. You need to
understand how planning is interlinked with the other management tasks.
177
Activity 7.2
This activity will take approximately 10 minutes to complete.
Let us take the planning process to a more personal level to clarify
the differences between goal-setting, developing plans and
implementing the plans.
University and college lecturers live very sedentary lives, with long hours spent
sitting in front of a computer and at a desk while developing study material and
assessments, marking assessments and conducting research and administrative
work. The medical scheme of one university in Pretoria has conducted research and
identified that its members must become more active to lead more productive lives.
The medical scheme develops a mission statement that states that its members
should be healthy and feeling well. The goal that the medical scheme set to realise
this mission statement was that unhealthy lecturers must change their situation. To
this end, the medical scheme took the following action:
•
It evaluated research that was published and information that was obtained
from its own database.
•
It sent out a questionnaire to all lecturers about their current weight and
physical exercise regime.
•
It compared the information obtained from the questionnaire with their own
records regarding the medical history of these lecturers.
•
It identified the high-risk cases and invited these lecturers to join the HighPerformance Training Centre in Pretoria to undergo further tests so that a
personal trainer could be assigned to them.
The medical scheme decided to measure the success of this programme after one
year, with a requirement that at least 30% of the obese lecturers would have a
normal body-fat ratio and that 40% of these lecturers would have a normal blood
pressure reading.
178
You are asked to classify these actions into the steps of the planning process (i.e.
establishing a goal, developing alternative plans, evaluating alternative plans,
implementing the plan and reactive planning) completed by the medical scheme.
Feedback:
Establishing a goal: The medical scheme developed a mission
statement that its members should be healthy. The goal was that obese
lecturers must lose weight, which will also be good for their blood pressure.
Developing alternative plans: Not mentioned.
Evaluating alternative plans: Not mentioned.
Implementing the plan: The following actions were implemented:
•
It evaluated research that was published and information obtained from its own
database.
•
It sent out a questionnaire to all lecturers about their current weight and physical
exercise regime.
•
It compared the information obtained from the questionnaire with their own
records regarding the medical history of these lecturers.
•
It identified the high-risk cases and invited these lecturers to join the HighPerformance Training Centre in Pretoria to undergo further tests so that a
personal trainer could be assigned to them.
Reactive planning: The medical scheme decided to measure the success of the
programme after one year.
As depicted in figure 7.2, the first step of the planning process is establishing goals.
After studying the next section, you will be able to discuss various organisational goals.
7.6
ORGANISATIONAL GOALS
Every business needs to set goals to determine the direction in which it is heading.
Organisational goals are all about where an organisation wants to be at a specific
future date. Different goals are set by the different managerial levels and range from
strategic goals formulated by top-level management, and tactical goals by middle-level
management, to operational goals formulated by lower-level management. Managers
179
must formulate goals that are specific, measurable, attainable, relevant and timebound. This is called the SMART framework, as you will learn in the next section.
Managers can follow the SMART framework when formulating goals:
•
Specific (S) – Goals and the outcomes should be clearly defined.
•
Measurable (M) – Goals should be defined in such a way that they can be
measured objectively and be quantified.
•
Attainable (A) – Goals should be both challenging and realistic, taking into
consideration the resources that an organisation has.
•
Relevant (R) – Goals should be aligned with the vision, mission and values of
an organisation.
•
Time-bound (T) – Specific time limits should be assigned to the goals that an
organisation sets.
Now that you are able to define organisational goals and understand the SMART
framework for formulating goals, the next step will enable you to differentiate between
strategic, tactical and operational goals.
7.6.1 Strategic goals
Strategic goals involve creating long-term general goals for an organisation as a whole
and establishing what resources will be needed to achieve those goals. These goals
are set by top management and are future-oriented with a timeframe of three to ten
years. Strategic goals include the vision, mission statement and long-term goals, as
discussed below.
7.6.1.1 Vision
The vision refers to what an organisation aspires to be in the future. It provides a
picture of the future that an organisation aims to reach. A vision enables change and
guides an organisation during the strategic planning process.
7.6.1.2 Mission statement
An organisation’s mission refers to the purpose as set out by its management; that is,
the reason for its existence. For example, the mission statement of Pick n Pay is "We
serve – with our hearts we create a great place to be – with our minds we create an
excellent place to shop." The first part, "we serve", refers to the customer orientation
180
of an organisation. The second part of the statement refers to the dream of an
organisation that it will create a wonderful place for its employees to work and the last
part refers to the fact that they want to create a wonderful place for their customers to
shop. See the next extract for the vision, mission and values for Mmakau Mining.
About us: Mmakau Mining
Vision
As a producer of minerals and a developer of human resources, Mmakau's vision is
to generate wealth through the sustainable development of resources and
communities wherever we operate. Practically, this will be achieved through the
following:
•
Facilitating the equity participation of local communities and rural renewal
projects through our mining activities
•
Empowering communities with employment and skills training
•
Ensuring broad-based indigenous participation in the wealth creation process
Mission
To contribute expertise and a business philosophy of sustainable wealth creation
through targeted procurement, entrepreneur development, skills enhancement and
socio-economic development.
Values
Mmakau adds value to and operationally implements its vision through the following:
•
Board representation and participating in management and steering
committees
•
Diverse mining technical expertise and seasoned operational knowledge
•
Participating in exploration programmes and negotiating compensation for
interested and affected parties during exploration
•
Heading all mining applications initiatives; assisting in mining permit
applications and in acquiring mining licences for conversions
181
•
Facilitating producers' forums and developmental committees in all mining
regions
•
Developing and participating in community trusts that have equity
participation
•
Coordinating and obtaining Tribal Resolutions
•
Overseeing the implementation of employment equity programmes
•
Mmakau establishes and/or chairs transformation committees that focus on
procurement with BEE targets, small and medium enterprise (SME)
development and compliance with Mining Charter.
Source: http://www.mmakaumining.co.za/about_philosophy.htm [Accessed
13/04/2021]
Activity 7.3
This activity will take approximately 15 minutes to complete.
Go to Bantu Shoes' website at https://www.bathu.co.za/pages/about.
From the information provided under "About", compile the vision, mission and values
for the company. As of 2 February 2022, the information about the organisation’s
vision, mission and values was not available on the corporate website.
Feedback:
The vision, mission and values of Bantu Shoes are as follows, as
deduced from the information provided on their website:
Vision: Building a sneaker brand that Africans can proudly affiliate with
Mission: To create world-class sneakers, creating sustainable jobs and reigniting
hope
Values: Collaboration with other brands, staying true to oneself, perseverance,
following one's dreams and doing something one is passionate about.
182
7.6.1.3 Long-term strategic goals
Long-term strategic goals originate from the vision and mission of an organisation,
cover the entire organisation and focus on the long term, which is usually between
three and ten years. The goals include key areas such as market positioning,
profitability,
productivity,
financial
sustainability,
human
resources,
social
responsibility, leadership and technology.
Once strategic goals have been formulated, they need to be broken down in such a
way that they will be adopted by different functional departments. This brings us to the
next section, where you will learn about functional and operational goals.
7.6.2 Functional or tactical gaols
The long-term goals are separated into more manageable, shorter-term elements
known as tactical goals. These goals are determined by middle-level management or
heads of department and cover a period ranging from one to three years.
7.6.3 Operational goals
The functional goals are then separated into different operational goals to be achieved
by individuals or groups. Operational goals are current, narrow and resource-focused
and formulated to help direct and control the implementation of tactical goals (Gitman
et al., 2018).
Activity 7.4
This activity will take approximately 5 minutes to complete.
In discussions by the top three retailers' CEOs in South African trade
journals, the following general planning activities were mentioned:
•
All three CEOs stated that they wanted to grow their organisations internationally
so that they could earn at least 30% of their total revenue outside South Africa.
183
•
They wanted to increase the number of consumers buying online by 20%. They
furthermore wanted to cap costs to grow at a rate lower than inflation.
•
They wanted to raise their brand awareness inside South Africa in the next six
months by at least 10%.
Differentiate between strategic goals, functional goals and operational goals and
state which of the above goals can be classified under the respective types of goals.
Feedback:
Strategic goals involve creating long-term general goals for an
organisation as a whole and establishing what resources will be needed
to achieve those goals. These goals are set by top management and are futureoriented with a timeframe of three to ten years. The first goal provided above falls
under this category as it is a long-term goal and affects the entire organisation.
Functional or tactical goals are derived from long-term goals and are more
manageable, shorter-term elements. These goals are determined by middle-level
management and cover a period ranging from one to three years. The second goal
provided in this activity falls under this category because it does not affect all
departments but only the marketing team. This goal can be measured in a period of
between one and three years.
Operational goals are goals to be achieved by individuals or groups. Operational
goals are current, narrow and resource-focused and are formulated to help direct
and control the implementation of tactical goals. The last goal is operational as it can
be achieved by individuals or groups of employees and the target period is very short
(six months).
Now that you have a better understanding of organisational goals, you will learn about
actions to be taken to achieve the goals – thus, formulating organisational strategies
and plans.
184
7.7
ORGANISATIONAL STRATEGIES AND PLANS
While goals are seen as the roadmap that shows an organisation where to go and how
to get there, a plan is a blueprint for achieving the goals. Plans explain how goals will
be achieved by specifying resources that will be used, the periods in which the plans
must be implemented and all the other initiatives that will be essential to reach specific
goals. Several different plans of action are formulated and considered, and the best
option is chosen.
7.7.1 Strategic plans
For an organisation to achieve the strategic goals discussed in the previous section,
management needs to develop strategies and plans. Just like the strategic goals,
strategic plans cover the entire organisation. Strategies can be categorised into
generic and corporate strategies.
7.7.1.1 Generic strategies
Generic strategies refer to the main plan of how an organisation envisages competing
in the market and include cost leadership, differentiation and focus strategies
(Erasmus, Rudansky-Kloppers & Strydom, 2019).
(i)
Cost leadership focuses on having the lowest cost of production by a significant
margin. This strategy will normally target a wide range of customers.
(ii)
Differentiation focuses on the distinctiveness of some dimensions that are
valued by customers, to enable an organisation to charge higher prices. This
strategy may focus on either a narrow customer segment or a broad section of
customers.
(iii)
A focus strategy focuses on a narrow segment or domain of activity and tailoring
the products or services of an organisation to the needs of that specific
segment, to the exclusion of others. There are two types of focus strategies,
namely focused low-cost strategy (providing products or services in a specific
market segment at a lower production cost than rivals) and focused
differentiation (providing valued products or services in a particular market
segment).
185
7.7.1.2 Corporate strategies
Corporate strategies focus on identifying the types and number of businesses and
industries that an organisation wants to conduct its activities in and how an
organisation can maintain cohesion to create a competitive advantage between the
different business units. The types of corporate strategies include internal and external
growth, turnaround, combination and decline strategies (Erasmus et al., 2019). Figure
7.3 depicts the four corporate strategies.
Figure 7.3: Corporate strategies
(i)
Internal growth strategies
Internal growth strategies aim to leverage the current range of products and services
of an organisation and the markets where it operates and initiate growth strategies that
combine new and existing products and markets (Van Rensburg, 2019). Based on
whether products and markets are new or not, four internal growth strategies are
possible, namely market development, product development, concentration growth
and innovation.
•
Market development aims to grow turnover by selling an organisation's existing
products and/or services into new markets.
186
•
Product development intends to grow turnover by selling new products or
services to an organisation's existing market.
•
Concentration growth aims to increase market share by selling more of an
organisation's existing products and/or services to its existing markets.
•
Innovation intends to introduce advancements in technology and/or services
through research and development.
(ii)
External growth strategies
External growth strategies occur when organisations choose to expand by adding new
businesses to their current operations. Strategic options to achieve external growth
can be generally categorised under integration and diversification.
•
Integration occurs when an organisation buys another organisation that is
comparable to the current business. Integration can be either horizontal (taking
over organisations similar to a business, therefore, eliminating competition) or
vertical (taking over organisations that supply a business with inputs or those
that act as the intermediaries of a business).
•
Diversification occurs when adding new products or markets. There are two
different types of diversification, namely related diversification (acquiring a
business that has a close resemblance with how the main business performs
key value chain activities) or unrelated diversification (it focuses on entering and
operating businesses in other industries with opportunities to realise
consistently good financial results).
(iii)
Corporate combination strategies
Corporate combination strategies aim to join forces to generate adequate resources
and expertise. These strategies include mergers, acquisitions and joint ventures.
•
A merger occurs when two separate organisations combine resources to form
a new organisation.
•
An acquisition occurs when one organisation acquires another to become the
only owner of both.
•
A joint venture occurs when a new corporate entity is formed and is jointly
owned by two or more organisations that agree to contribute resources and
share in the expenses, revenues and control of the newly formed entity.
187
(iv)
Turnaround or decline strategies
Turnaround or decline strategies result from operational challenges and fierce
competition that caused an organisation to perform badly over an extended period.
The strategies focus on reducing direct operational costs and improving productivity
gains. The two turnaround or decline strategies include turnaround and liquidation.
•
Turnaround occurs when an organisation experiences difficult times and its
profits decline over an extended period, forcing it to reduce costs by cutting
unprofitable products, disposing of unprofitable resources (asset reduction,
retrenchment or divestiture) and implementing strategies to improve the
effectiveness of management.
•
Liquidation occurs if all the options discussed above are not viable and an
organisation has no other choice but to be liquidated. A liquidation strategy
involves selling the whole organisation or some parts of it. It can be voluntary
or can be directed by the court in case an organisation can no longer pay its
debts (bankruptcy).
Activity 7.5
This activity will take approximately 15 minutes to complete.
Complete the following crossword puzzle about organisational strategies
and plans.
188
Feedback:
See the crossword puzzle below with answers.
189
For this module, we expect you to have a basic understanding of these strategies. You
will learn more about these strategies in the third-year module, Strategic Planning III
A (MNG3701).
190
Once strategic plans have been formulated, managers in all departments need to
formulate their tactical plans. This brings us to the next section where you will learn
about tactical or functional plans.
7.7.2 Tactical or functional plans
The tactical plans specify the activities and the allocation of resources such as finance,
people and equipment required to implement the overall strategic plan over a specified
time. Each department in an organisation should set their functional plans as
highlighted in table 7.1.
Table 7.1: Tactical plans
Functional areas
Main areas to be included
Marketing
The product line, marketing communication, prices,
market position and distribution channels
Finance
Policy on capital structure, asset management, dividends
and debtors
Human resources
Remuneration, training and development, labour
relations, diversity management, labour retention and
recruitment
Operations
Productivity, location, raw material, machines and
equipment
Legal services
Legislation issues
Research and
Improve existing products and develop new products
development
Public relations
Communicate with external and internal stakeholders
Information and
Maintain internal and external communication networks
Communication
and equipment
Technology (ICT)
Source: Adapted from Erasmus, Rudansky-Kloppers & Strydom (2019)
191
7.7.3 Operational plans
Operational plans are set by lower-level management and cover a maximum period of
one year. There are two types of operational plans, namely single-use and standing
plans.
7.7.3.1 Single-use plans
Single-use plans are developed to accomplish a set of goals that are not likely to apply
again in the future. These plans include the programme, project and budget.
•
A programme is a set of plans formulated to achieve a once-off goal, such as
acquiring long-term assets.
•
A project, similar to a programme, aims to achieve a once-off goal but of smaller
scope and complexity than a programme – for example, branding of an
organisation's vehicles and buildings.
•
A budget is a comprehensive written plan indicated in monetary terms,
summarising the activities to be carried out and the strategies for achieving the
goals of an organisation. A budget provides guidance when it comes to
managing the allocation and distribution of resources and finances (Sithole,
2018).
7.7.3.2 Standing plans
Standing plans are used over time and assist employees to perform tasks that occur
frequently in an organisation. Examples of standing plans include policies, rules and
standard procedures.
•
Policies set the boundaries for decision-making. Policies are of broad scope
and emanate from the overall goals of an organisation.
•
Rules specify what employees may or may not do in a particular situation.
•
Standard procedures stipulate the exact series of steps that should be taken to
perform a certain task.
Table 7.2 summarises different types of planning in terms of time, level of
management, extent of coverage, purpose, breadth and predictability.
192
Table 7.2: Types of planning
Strategic
Tactical
Operational
Timeframe
Three to ten years
One to three years
Less than one year
Level of
Top management
Middle
Supervisory or
management
lower management
Functional areas
Sections, teams
management
Extent of coverage
Entire organisation
and individuals
Purpose and goal
Breadth of content
Establish mission
Establish mid-
Implement and
and long-term
range goals for
activate specific
goals
implementation
objectives
Broad and general
More specific
Specific and
concrete
Accuracy and
High degree of
Moderate degree
Reasonable
predictability
uncertainty
of certainty
degree of certainty
It is important to understand that goals are not set in isolation. In the next section, you
will learn about factors that influence goals and plans.
7.8
FACTORS THAT INFLUENCE GOALS AND PLANS
Below are some of the factors that influence the process of formulating goals and
plans:
7.8.1 Purpose
The purpose of an organisation includes its obligation to its stakeholders and the
community where it operates. For example, an organisation needs to provide
customers with safe products at equitable prices and generate enough revenue for its
stakeholders. The purpose directs the generic and corporate strategies of an
organisation.
7.8.2 Values
Management's values influence the goals. Values represent what an organisation
stands for and the principles that should guide the actions of an organisation as it
builds and operates a business. Core values have an impact on the whole planning
processes and operations of any organisation. Pick n Pay, for example, articulated
193
their values as follows: "We are passionate about our customers and will fight for their
rights; we care for and respect each other; we foster personal growth and opportunity;
we nurture leadership and vision and reward innovation; we live by honesty and
integrity; we support and participate in our communities; we take individual
responsibility and we are all accountable." (https://www.pnp.co.za/about-us/missionand-vision).
7.8.3 Environment
The strategic planning process must evaluate an organisation's fit with its environment.
The business environment has been discussed in lesson 3, therefore, we will not go
into detail about the dynamic environment in which organisations operate.
Management must consider the environment in which an organisation operates when
determining the goals of an organisation. It is very difficult for management to keep
track of all the changes in the dynamic business environment.
Organisations should consider the following ten principles of the United Nations Global
Compact (UNGC) when formulating goals and plans:
• Human rights
Principle 1: Support and respect the protection of internationally proclaimed human
rights.
Principle 2: Ensure that they are not complicit in human rights abuses.
• Labour
Principle 3: Uphold freedom to associate and recognise the right to collective
bargaining.
Principle 4: Elimination of all forms of forced and compulsory labour.
Principle 5: Effective abolition of child labour.
Principle 6: Elimination of discrimination of employment and occupation.
• Environment
Principle 7: Support a precautionary approach to environmental challenges.
Principle 8: Undertake initiatives to promote greater environmental responsibility.
Principle 9: Encourage the development and diffusion of environmentally friendly
technologies.
194
• Anti-corruption
Principle 10: Work against all forms of corruption, including extortion and bribery.
7.8.4 Management experience
The experience of management plays a key role in the determination of organisational
goals. The following excerpt summarises the value of experience in a business
environment: "Recently, I was asked if I was going to fire an employee who made a
mistake that cost the company $600,000. No, I replied, I just spent $600,000 training
him. Why would I want somebody to hire his experience?" (TJ Watson).
This brings us to the end of this lesson about the management function of planning.
7.9
SUMMARY
By now you should have a clear understanding of the process of planning and how it
interlinks with the various management activities (namely organising, leading and
control). We saw that planning is the first step in the management process that is done
once top management determines the mission and goals of an organisation.
You are advised to access the link below to watch the video presenting a summarised
overview of the management function of planning:
https://www.youtube.com/watch?v=gpO91cxnndw
Remember that planning is an ongoing process and that goals and plans need to be
adjusted and reviewed continuously within a changing environment. Should there be
a deviation from the plan, reactive planning needs to take place.
The next step is organising (lesson 8), which involves setting up a structure through
which activities can be performed to attain the set objectives. Necessary resources
that must be assigned to certain employees are also needed in this process. These
matters will be discussed in the next lesson.
195
SELF-ASSESSMENT QUESTIONS
This activity will take approximately 15 minutes to complete.
Let us test your understanding of the business terminology that you have
been exposed to in this lesson. Match the sentence in column A with the
most likely explanation in column B.
Column A
Column B
1. The process of goal-setting, developing plans and
a. Liquidation
implementation
2. The broad plan of how an organisation is going to
b. Operational plan
compete in its industry
3. The managers who have middle managers as
c. Planning
subordinates
4. The process whereby management and employees
d. Generic strategy
jointly set goals
5. A specific achievement to be attained at a future date
e. Lower management
6. The process of formulating shorter-term plans for
f. Growth strategy
implementation in an organisation's strategic plan
7.
The managers who do not have managers for
subordinates
g. Management by
objectives
h. Goal
i. Top management
j. Middle management
Feedback:
See the answers to the self-assessment questions below.
Question 1
The process of goal-setting, developing plans and implementation is called planning.
(1:c)
196
Question 2
The broad plan of how an organisation is going to compete in its industry is named
generic strategy. (2: d)
Question 3
The managers who have middle managers as subordinates are called top
management. (3:i)
Question 4
The process whereby management and employees jointly set goals is called
management by objectives. (4:g)
Question 5
A specific achievement to be attained at a future date is called a goal. (5:h)
Question 6
The process of formulating shorter-term plans for implementation in an organisation's
strategic plan is called an operational plan. (6:b)
Question 7
The managers who do not have managers for subordinates are lower management.
(8:e)
7.10
REFERENCES
Erasmus, B., Rudansky-Kloppers, S. & Strydom, J. 2019. Introduction to business
management (11th edition). Cape Town: Oxford.
Gitman, L.J., McDaniel, C., Shah, A., Reece, M., Koffel, L., Talsma, B. & Hyatt, J.C.
2018. Introduction to business [Online]. Houston, Texas: OpenStax. Available from:
<https://openstax.org/details/books/Introduction-Business>
[Accessed
1 January 2021].
Openstax. 2019. Principles of management [Online]. Houston, Texas: Openstax.
ISBN: 978-0-9986257-7-5. Available from: <https://openstax.org/details/books/
principles-management> [Accessed 1 March 2021].
197
Van Rensburg, M.J. 2019. Developing and choosing appropriate strategies. In Botha,
T. and Venter, P (Eds). Practising strategy: A Southern African Context
(2nd edition). Cape Town: Juta.
Sithole, P.G. 2018. A budget analysis of different soil fertility treatments for
conventional and organic vegetable farming on a smallholding in South Africa
(Master’s Dissertation). Stellenbosch University, Stellenbosch.
7.11
OPEN EDUCATIONAL RESOURCES (OERs)
Saylor.com Academy. 2020. Exploring business [Online]. The Saylor.com Academy.
Available
from:
<https://saylordotorg.github.io/text_exploring-business-v2.0/>
[Accessed 12 March 2021. Focus on “Section 6.2: Planning”.
198
Contents
8.1
INTRODUCTION ....................................................................................................201
8.2
DEFINING ORGANISING.......................................................................................202
8.3
THE IMPORTANCE OF ORGANISING ..................................................................203
8.4
THE FUNDAMENTALS OF ORGANISING .............................................................203
8.4.1
Job design ..............................................................................................................204
8.4.2
Departmentalisation................................................................................................206
8.4.3
Organisational relationships ...................................................................................214
8.4.4
Coordination ...........................................................................................................220
8.5
FACTORS THAT INFLUENCE HOW ORGANISATIONS ARE DESIGNED ...........222
8.6
THE INFORMAL ORGANISATION.........................................................................223
8.7
LINKING UBUNTU PHILOSOPHY TO ORGANISING ............................................223
8.8
SUMMARY .............................................................................................................225
8.9
REFERENCES .......................................................................................................228
8.10
OPEN EDUCATIONAL RESOURCES (OERS) ......................................................229
199
LESSON 8: ORGANISING
This lesson will require approximately NINE notional hours. Figure 8.1 represents an
overview of lesson 8.
8.1 Introduction
8.2 Defining organising
8.3 The importance of organising
8.4 The fundamentals of organising
8.5 Factors that influence how organisations are designed
8.6 The informal organisation
8.7 Linking the Ubuntu philosophy to organising
8.8 Summary
8.9 References
8.10 Open Educational Resources (OERs)
Figure 8.1: Visual overview of the lesson
200
8.1
INTRODUCTION
This lesson will focus on the management function of organising. In the previous
lesson, you learned about planning as the first important element of the management
process. The structured grouping and combining of employees and other resources
and coordinating them to achieve the organisational goals constitute the second
significant element of management, namely organising. After an organisation has
concluded the planning process, management needs to organise the business to
implement the plan.
LEARNING OUTCOMES
When you have worked through this lesson, you should be able to do the
following:
•
Explain the concept of organising.
•
Describe the importance of organising.
•
Discuss the fundamentals of organising.
•
Explain the informal organisation and its role to support the formal structure.
•
Identify and explain the factors that influence organisational design.
•
Apply Ubuntu philosophy to the organising function of management.
KEY TERMS
authority
job enrichment
centralised
job rotation
chain of command
job specialisation
coordination
organisational structure
decentralised
organising
departmentalisation
responsibility
informal organisation
span of control
job enlargement
Ubuntu
Click on the Additional Resources tab for the comprehensive Multilingual glossary
for MNB1501.
201
8.2
DEFINING ORGANISING
Organising is a process of grouping different activities to be conducted and allocating
duties and responsibilities to people in groups or departments (Kumar, 2016). The
main purpose of organising is to allocate and coordinate the resources of an
organisation to implement set plans and to accomplish predetermined goals (Gitman,
McDaniel, Shah, Reece, Koffel, Talsma, & Hyatt, 2018). According to Kumar (2016),
the characteristics of organising include the following:
•
Goal-directedness – Achieving the organisation's goals and objectives
•
Differentiation – Identifying and classifying the activities in an organisation into
different processes and tasks to achieve organisational goals
•
Grouping – Grouping activities into small and manageable sections such as
teams or departments
•
Assigning or delegating – Assigning groups to various supervisors and
managers with the required authority to manage their performance
•
Dynamic and constantly evolving – Organising is dynamic and constantly
evolves because it changes depending on substantial changes in the internal
and external environments.
How the resources and activities of a business are organised will differ from one
organisation to another, depending on factors such as the size, strategies and culture
of a business. For example, compare the organisational structure of an entrepreneurial
business, such as a small catering company, with that of a multinational company,
such as Sasol. The catering company might consist of an entrepreneur, a chef and
some casual staff (waiters/waitresses). The entrepreneur (owner) will probably
assume the role of general manager who is responsible for marketing, costing and
pricing, planning, scheduling and supervising daily activities. The chef will be
responsible for purchasing fresh produce and preparing party platters and other meals,
while the casual staff will be responsible for preparing venues, serving guests and
cleaning up after functions. Although done very simply, we have applied the
management task of organising to the catering company by dividing the total workload
of the company and allocating it to different individuals. Each person knows what is
expected of him or her and what tasks to complete. In a very large organisation such
as Sasol or Transnet, the organising task is much more complex, with the total
202
workload of the organisation distributed over various departments, functional and
product areas and even geographical regions.
In the next section, you will discover why organising is important in an organisation.
8.3
THE IMPORTANCE OF ORGANISING
Successful managers ensure that all the activities identified during the planning
process are allocated to relevant employees, departments or teams and that everyone
has the resources needed to perform the activities allocated to them. According to
Erasmus, Rudansky-Kloppers and Strydom (2019), organising in an organisation is
important for the following reasons:
•
Organising involves a comprehensive analysis of work to be completed and
resources to be utilised to accomplish business plans.
•
Organising separates the entire workload into tasks that can easily be
performed by an individual or a team.
•
Organising encourages the productive allocation and use of resources.
•
Similar tasks and activities of employees are clustered together logically in
specialised departments, such as finance, marketing, human resources and
operations, where experts in their particular fields carry out their given duties.
•
The development of an organisational structure results in a mechanism that
coordinates the activities of the whole business into a complete, uniform,
harmonious unit.
With an understanding of why organising is important, the attention will now shift to
the fundamentals of organising.
8.4
THE FUNDAMENTALS OF ORGANISING
Building an organisational structure revolves around the following building blocks or
fundamentals of organising: job design (established work-related responsibilities of
each employee, departmentalisation (grouping employees into teams or departments
based on what they have in common), organisational relationships (establishing
reporting relationships and how the authority will be distributed among positions) and
coordination (designing systems for effective coordination between departments).
Each of these fundamentals is discussed below.
203
8.4.1
Job design
Job design refers to the systematic and planned allocation of job tasks to the team,
group and individuals in an organisational setting (Olusegun & Olusoji, 2020). During
this process, the work-related responsibilities of each employee are established. Job
design is essential to get the job done reliably, efficiently, economically and safely
(Francis & Singh, 2016).
When work is designed, it is usually divided into separate jobs and tasks to be
assigned to employees. This is called the division of labour. When tasks are divided
into jobs, employees only focus on their specialised activities.
8.4.1.1 Job specialisation
Job specialisation entails organising activities into sections of related tasks that can
be managed by individuals or teams. The overall task in the organisation is divided
into smaller tasks that are specialised (Erasmus et al., 2019). Table 8.1 shows the
advantages and disadvantages of job specialisation.
Table 8.1 Advantages and disadvantages of job specialisation
Advantages
Disadvantages
It leads to efficiency.
It may lead to boredom.
It simplifies jobs and results in clearer It is time consuming.
roles for employees.
It saves transfer time.
It results in higher cost to the company.
It is easier to design or purchase It leads to underutilisation of skills.
specialised tools to support the work.
Motivation
is
derived
from
job
satisfaction.
The importance of job specialisation cannot be overemphasised. However,
specialisation should be implemented in such a manner that its possible unwanted
consequences are avoided. For example, an organisation can introduce job design
components such as job rotation, job enlargement, job enrichment and work teams,
as discussed next.
204
8.4.1.2 Job rotation
Job rotation is a systematic process whereby employees are moved from one job to
another. This means that employees are assigned to work on different tasks during
specific periods, which are categorised on a similar scale as the skills, knowledge and
capability of individual employees (Van Wyk, Swarts & Mukonza, 2018). The job itself
does not change as employees in similar positions are swapped.
8.4.1.3 Job enlargement
Job enlargement is all about increasing the number of activities that an employee
performs, resulting in all employees doing different activities.
8.4.1.4 Job enrichment
Job enrichment involves a variety of job content, higher levels of knowledge and
expertise, greater responsibility and autonomy for planning, directing and controlling
work (Putri & Setianan, 2019). It encompasses increasing both the number of activities
the employee does and the control the employee has concerning the activities
(Erasmus et al., 2019).
8.4.1.5 Work team
When the work team option is implemented, employees are permitted to design the
work system they will adopt as a team to conduct their interconnected set of activities.
Activity 8.1
This activity will take approximately 10 minutes to complete.
Game is a subsidiary of the JSE-listed Massmart Holdings. The retail
company operates out of 150 stores in 12 African countries and sells
different products classified under the following categories: Appliances,
Electronics & Entertainment, Mobile Devices & Computers, Baby &
Toys, Sports & Leisure, DIY & Auto, Home & Garden, Groceries & Household,
Health
&
Beauty,
and
Money
Centre
(https://www.game.co.za/game-
za/en/aboutgame).
How would you allocate different tasks to salespersons at any Game store regarding
job rotation, job enlargement, job enrichment and work team?
205
Feedback:
Job rotation – moving employees from one category to another. In other
words, employees are assigned to work in a different category during
specific periods, which are categorised on a similar scale as the skills, knowledge
and capability of individual employees. The job itself does not change as employees
in similar positions are swapped.
Job enlargement – all salespersons are responsible to advise customers on all
categories.
Job enrichment – involves a variety of job content, higher levels of knowledge and
expertise, greater responsibility and autonomy for planning, directing and controlling
work. For example, employees are allowed to communicate with suppliers regarding
the availability of certain products.
Work teams – salespersons would be permitted to design the work system they will
adopt as a team to conduct their interconnected set of activities.
Once the organisation has divided the work that needs to be done into specific jobs,
there is a need for managers to group the jobs in one unit to ensure that related tasks
and activities are coordinated.
8.4.2
Departmentalisation
The grouping of employees, tasks and resources into organisational units to facilitate
the planning, leading and control processes is called departmentalisation (Gitman et
al., 2018). The current dynamic business environment forces organisations to be
structured effectively to offset different competitive threats and to satisfy varying
customer needs (Gitman et al., 2018). The types of departmentalisation in an
organisation include functional departments, divisions, projects and matrix.
8.4.2.1 Functional departmentalisation
This form of departmentalisation is usually implemented by small to medium-sized
organisations. The employees in each function are grouped according to their
comparable skills and the similarity of the tasks that they perform. Functional
departmentalisation is based on the primary functions performed within an
206
organisational unit such as marketing, production or operations, supply chain, finance
and human resource management. You will learn more about the different functions
and their activities in an organisation if you register for the module MNB1601. Figure
8.2 depicts the functional departmentalisation of a medium-sized organisation.
Chief Executive
Officer (CEO)
Finance
Department
Marketing
Department
Human
Resources
Department
Operations
Department
Purchasing and
Supply Chain
Department
Figure 8.2: Functional departmentalisation
With functional departmentalisation, all connected activities are placed in the same
unit and the employees in the unit are managed by one manager who reports to the
CEO. Table 8.2 shows the advantages and disadvantages of functional
departmentalisation.
Table 8.2: Advantages and disadvantages of functional departmentalisation
Advantages
Functional
Disadvantages
departmentalisation The
functional
departmentalisation
is
enables the CEO to have direct difficult to implement in a large organisation
access to the lower-level subordinates – it is appropriate for small and mediumand
full
knowledge
of
what
is sized organisations.
happening in the organisation.
The managers of each functional The flow of information tends to be slow,
department have direct access to the resulting
CEO.
in
coordination
and
control
challenges.
Each unit specialises in what it does Challenges faced by sub-units at lower
best, resulting in the operational levels
do
not
receive
sufficient
efficiency of employees and the consideration from managers at a higher
organisation as a whole.
level, while some tasks are inclined to be
exaggerated.
207
The CEO can resolve inter-functional When a different number of activities are
challenges
and
coordinate
the performed in various units, it becomes
interrelated functions.
difficult to manage them.
The structure is simple to understand It encourages inter-departmental conflicts.
and implement in most small to
medium-sized organisations.
8.4.2.2 Divisional departmentalisation
Organisations that have more assets or a higher number of employees and customers
regularly find it difficult to operate as one large entity using the functional organisational
structure. In such cases, the size makes it challenging to manage operations and
attend to all customers’ needs. Hence, these organisations are structured as divisional
organisations made up of different smaller, self-managed divisions, which are
responsible and accountable for their performance. Each division is self-managed as
it has its functional expertise such as finance, marketing, production, supply chain and
human resources as required to achieve its objectives. The challenge for senior
managers of an organisation is to establish the most suitable manner to structure its
operations to implement its strategic objectives. Consequently, divisions can be
designed based on products, location, customers and processes.
(i)
Product division
Product division means that an organisation is structured according to its product
lines. The product division is more appropriate for very large organisations, especially
those that sell different products to different customers. With this structure, the
organisation is separated into small business units that focus on different products.
Figure 8.3 depicts an example of a product division of a wholesaler that deals with
different products such as perishable goods, clothing, home and office appliances,
outdoor appliances and tools, car-related products and cellphones.
208
CEO
Division:
Perishable
goods
Division:
Outdoor
appliances &
tools
Division:
Home &
office
appliances
Division:
Clothing
Division: Carrelated
products
Division:
Cellphones
Figure 8.3: Product division
In product division, managers head the functional sections while the final authority
rests with the product manager who controls and coordinates the activities of the
department.
(ii)
Customer division
The customer division is preferred by some organisations because it empowers them
to cater effectively for their different classes of customers. This type of division adopts
a similar structure to the product division; an experienced manager who is
knowledgeable about the customers that they serve heads each division.
(iii)
Location or geographical division
The location division is suitable for big organisations that sell their products in
different geographic areas to respond to customers' needs at a local level. With this
structure, an organisation is separated into small business units that focus on different
markets in various areas. Figure 8.4 depicts an example of the location division of an
organisation that operates in different provinces in South Africa.
CEO
Gauteng
Limpopo &
Mpumalanga
Western
Cape
Northern
Cape &
North West
KwaZuluNatal
Free State
& Eastern
Cape
Figure 8.4: Location division
Like all divisions, location division is also characterised by the decentralisation of
authority. Each region has its support functions. Managers head the functional
209
sections while the final authority rests with the regional managers who control and
coordinate the activities of the region.
(iv)
Process division
If the products of an organisation move through several steps during production, a
process division structure might be required. For example, a dairy company that
owns farms, processes its and sells the milk to customers can decide to implement the
process division as shown in figure 8.5.
CEO
Rearing &
Harvesting
Storage
Transportation
Lab testing
&
Processing
Packaging
Selling
Figure 8.5: Process division
Each process division has its support functions. Managers head the functional sections
while the final authority rests with the managers who control and coordinate the
activities of the process divisions. The advantages and disadvantages of the division
structure are highlighted in Table 8.3.
Table 8.3: Advantages and disadvantages of division departmentalisation
Advantages
The
division
Disadvantages
structure
enables It involves higher financial costs because of
managers to make decisions promptly the repetition of supporting functions for
and deal with challenges in their each division.
division.
The
specialised
knowledge is utilised fully.
employees’ It requires enough suitable managers to
manage the divisions and their functional
sections.
The measurement of each group is Some divisions are likely to focus on their
easy.
own needs and goals while disregarding
those of the organisation.
210
Activity 8.2
This activity will take approximately 10 minutes to complete.
Use the Coca-Cola Company (https://www.coca-colacompany.com/
home) to explain how the organisation has organised its divisions
according to product and location.
Feedback:
The Coca-Cola Company has been arranged in the following manner
regarding their products and location:
Products: The company offers a variety of drinks including still and sparkling water,
dairy, fruit juices, organic and plant-based drinks, teas and coffees. Various divisions
have been created that offer different products. For example, Coca-Cola offers soft
drinks, Minute Maid offers a variety of juices, Aquarius provides bottled water and
Appletiser provides sparkling soft drinks.
Location: The company has divisions in more than 200 countries.
While the functional and division departmentalisations characterise how many
organisations are structured, the latest organisational structures, which are more
flexible, have been implemented by many organisations. The project and matrix
structures are two of the organisational structures adopted to minimise the drawbacks
presented by the functional and division structures.
8.4.2.3 Project structure
A project structure is utilised when an organisation embarks on a specialised project
for a long period. A special unit to cater for the project is designed from the existing
organisation to ensure that the normal operation of the organisation is not interrupted.
A project leader on the middle management level is assigned to manage the project
and this person reports directly to the CEO. The project draws its managers and
employees from the organisation's functional departments and they return to their
positions once the project has been completed. Table 8.4 indicates the advantages
and disadvantages of the project structure.
211
Table 8.4: Advantages and disadvantages of project structure
Advantages
Disadvantages
The project manager has the required Project
managers
usually
experience
authority and is solely responsible for resentment from and conflict with functional
the results, making it better to manage managers regarding the authority over
and control the project activities.
employees who are involved in a project.
It is mainly focused on the completion The transfer of employees to the project
of the project, on time and according regularly disturbs the stability of the
functional departments.
to the standard set.
The
project
structure
does
not The development of employees' specialised
interfere with the normal structure of skills is interrupted because they are
the organisation.
moving across different projects.
Sometimes none of the configurations may meet all the needs of a particular business.
To overcome this, the matrix organisational structure has been created to incorporate
the advantages of all the structures discussed earlier.
8.4.2.4 Matrix structure
With the matrix structure, specialised employees from different functional
departments are assigned to work full-time on different projects (sometimes on more
than one project), under the overall guidance and direction of a project manager. This
structure aims to draw skills from different departments and, therefore, combines the
advantages of independent project organisation and functional specialisation. Each
employee has two direct supervisors, namely the line manager from the specific
functional area where the employee is based, and the project manager (Gitman et al.,
2018). The matrix structure is relevant for organisations that rely too much on
contractual project activities and has many projects to manage. Figure 8.6 depicts a
matrix structure.
212
Figure 8.6: Matrix structure
Employees assigned to a project return to their respective functional departments
when the project is completed, while they are waiting to be allocated to another project
or to a new project. The advantages and disadvantages of the matrix structure are
highlighted in Table 8.5.
Table 8.5: Advantages and disadvantages of the matrix structure
Advantages
Disadvantages
It enables the sourcing of specialised The employees sourced from specialised
and technical employees from various functional departments are not sure who is
functional departments, who can be their manager as they are exposed to
assigned to different projects at the twofold authority: that of the functional
same time.
manager and the project manager. The
principle of unity of command is, therefore,
violated.
213
The matrix structure offers a flexible The concurrent engagement of the same
structure suitable for the requirements employee in different projects results in
of unstable environments.
compromised project management.
The coordinating authority of project Project members from different functional
managers enables the speedy sharing areas
of information and decision making.
may
struggle
to
communicate
effectively and to work together as a team.
Instead of building big departments
with underutilised employees, project
managers source only the specialised
staff they require to complete the
project.
This structure offers employees an
opportunity to develop and reinforce
their interpersonal and technical skills.
Once departments have been established, an organisation needs to establish
reporting relationships and how the authority will be distributed among positions. This
brings us to the next section, on organisational relationships.
8.4.3 Organisational relationships
The chain of command, authority and span of control as elements of organisational
relationships in an organisation are discussed in this section.
8.4.3.1 Chain of command
The chain of command refers to the vertical connecting lines in the organisational
structure. A well-structured organisation has a clear chain of command indicating the
line of authority that ranges from one level of the organisation to the following, from
the highest position to the lowest, and clearly shows who reports to whom (Gitman et
al., 2018). The chain of command has two components, namely unity of command and
the scalar principle. Unity of command occurs when an employee only reports to one
supervisor. Once employees report to different supervisors (e.g. under the project and
matrix structures), the unity of command is broken. When the unity of command is
broken, employees sometimes receive conflicting instructions and are unsure which
214
direction to take. The scalar principle refers to the clear and unbroken vertical line
that extends across the organisation, ranging from the bottom to the top.
8.4.3.2 Authority
Authority refers to the legitimate power that permits an employee to demand action
and anticipate compliance as granted by the organisation and acknowledged by
employees (Gitman et al., 2018). In the discussion of authority, the concepts of line
authority and staff authority, centralised authority and decentralised authority, and
delegation of authority require some clarification.
(i)
Line and staff authority
Line authority consists of direct and clear lines of authority where communication
starts from top management, descending to lower levels. This gives managers direct
control of all activities in the organisation. The line authority can be improved by adding
staff positions to the structure when an organisation develops and become
multidimensional. Staff authority affords support services and specialised advisory to
line managers (Gitman et al., 2018). Employees with staff authority take care of the
support and administrative activities required by operational employees to accomplish
the goals of the organisation.
(ii)
Degree of centralisation
The degree of centralisation has to do with the level at which decisions are made.
Factors to be considered when determining how much decision-making authority to
delegate include the speed of change in the environment, the size of the organisation,
managers' willingness to give up authority, the organisation's geographic dispersion
and employees' willingness to accept more authority (Gitman et al., 2018). The two
forms of the degree of centralisation include centralised and decentralised authority.
Centralised authority applies when most decision-making is concentrated at the top.
Centralisation has the advantage of consistency in decision-making. When centralised
authority is used in an organisation, critical decisions are made by top management –
resulting in those decisions being more constant than if they were made by different
supervisors at lower levels in the organisation. The disadvantage of centralised
authority, however, is that top management makes essentially all the important
decisions, causing lower-level managers to feel underutilised. Lower-level managers
215
also do not develop decision-making skills that would assist them to become
promotable. In addition, top management might not have access to certain information
that only supervisors and subordinates have, or might disrupt the decision-making
process.
Decentralised authority occurs when decision making is spread throughout the
organisation, allowing managers at lower levels to make certain decisions. The
decentralised authority provides top management with more time to work on higherlevel tasks such as strategic planning, which cannot be delegated to lower-level
managers. The main disadvantage of decentralised authority is that there is no
synchronisation between what the different divisions are doing, with the result that
divisions might end up competing against each other.
(iii) Delegation of authority
Delegation of authority is the process of entrusting work to subordinates.
Regrettably, many managers are averse to delegating authority. Consequently, they
deny subordinates the opportunity to learn and develop new skills – and in the process
they overload themselves with tasks that could be performed by others. Delegation of
authority goes hand in hand with responsibility, authority and accountability. The duty
to perform a task (responsibility) will not be enough to get the job done. Subordinates
should be granted the power to make the necessary decisions (authority) to complete
a task. Unfortunately, in many South African organisations, people are given
responsibility (the obligation to carry out a task) without the corresponding authority
(the right to give instructions and deploy resources) to carry out that responsibility –
and this can lead to a great deal of frustration on the part of the subordinate who has
been tasked with carrying out certain activities. Subordinates should be held
accountable for their performance (accountability). Normally, authority and
responsibility descend through the organisation as managers allocate activities to, and
share decision-making with, their subordinates. However, accountability ascends in
the organisation because managers at each sequentially higher level are held
accountable for their subordinates' actions (Gitman et al., 2018).
Now that you have learned about organisational relationships, the next section will
enable you to differentiate between the two types of span of control and the factors
that influence the decision to implement either of the two.
216
8.4.3.3 Span of control
A span of control (also called span of management) refers to the number of
subordinates who report directly to a manager and the number of layers between the
top managerial position and the lowest managerial level. The number of subordinates
directly reporting to one supervisor should be kept to a minimum to ensure that
supervision and control are effective –as the time and ability of managers are limited.
There are two types of span of control, namely wide and narrow span of control.
(i)
Wide (flat) span of control
Usually, new organisations have only a few layers of management. When a wide
span of control is used, a manager can effectively supervise and control many
employees at the same time. As a result, an organisation will have fewer hierarchical
levels and the structure will be flat. A wide span results in fewer levels of supervision,
thereby making communication simple and effective in the organisation. However, it
allows only general supervision, as there is limited time to individually supervise every
employee. Figure 8.7 depicts a wide span of control.
CEO
Manager
Employee
Employee
Employee
Manager
Employee
Employee
Employee
Employee
Employee
Employee
Employee
Figure 8.7: Wide span of control
(ii)
Narrow (tall) span of control
As organisations grow, they are more likely to add additional layers between top
management and the employees at the bottom. A narrow span of control involves
multiple levels of supervision, thereby allowing managers to exercise close
supervision and control. The disadvantage of a narrow span is that information takes
longer to reach employees at a lower level. The process of communication becomes
complicated and expensive. Figure 8.8 depicts an organisational structure based on
a narrow span of control.
217
CEO
Manager
Deputy
Supervisor
(Team A)
Employee
Employee
Deputy
Supervisor
(Team B)
Employee
Supervisor
(Team C)
Employee
Employee
Supervisor
(Team D)
Employee
Employee
Employee
Figure 8.8: Narrow span of control
Normally, the taller the span of control, the more efficient the organisation.
Nevertheless, both narrow and wide spans of control have advantages and
disadvantages, as indicated in table 8.6.
Table 8.6: Advantages and disadvantages of narrow and wide spans of control
Advantages
Narrow
Disadvantages
It permits a high degree of control.
span of
control
It is more expensive due to extra
levels of management.
The manager is more familiar with
Vertical layers result in slower
each individual due to fewer
decision making.
subordinates.
Immediate feedback is received
Top management is isolated.
due to close supervision.
Employee autonomy is
discouraged.
Wide
Increased efficiency and reduced
Managers have less control over
span of
costs due to fewer levels of
their subordinates.
control
management
Quicker decision making due to
Managers may lack familiarity with
increased subordinate autonomy
their subordinates due to the large
number of employees they
218
manage.
Offers greater organisational
Managers have an inability to
flexibility
provide the necessary leadership
or support.
Employee empowerment leads to
This might lead to a lack of
higher levels of job satisfaction.
coordination or synchronisation.
Source: Adapted from Gitman et al. (2018)
A span of management can be as wide as 50 or more, or as narrow as two or three
employees (Gitman et al., 2018). For example, an organisation such as Unisa has
quite a tall organisational structure, with over nine levels of management. It is
recommended that a span of control be four at higher levels and eight to twelve at
lower levels. However, determining the number of employees working under a
supervisor is not that simple – because the nature of jobs and the capacity of
individuals differ according to organisations. Below are some of the factors that
influence the span of control.
(iii)
Factors influencing the span of control
•
Ability of employees
•
Ability of the manager
•
Extent of decentralisation
•
Nature of the work
•
Efficiency of the organisation
•
Availability of time for supervision
•
Support staff
Activity 8.3
This activity will take approximately 5 minutes to complete.
The following image depicts the management structure of the
Education, Training and Development Practices Sector Education and
Training Authority (ETDP SETA). By looking at the organogram, which
span of control do you think the ETDP SETA has implemented, and why
do you think so?
219
Source: ETDPSETA 2019-20 annual report (http://www.etdpseta.org.za/education/
sites/default/files/annual-reports/ETDP-SETA-2019-20-Annual-Report.pdf)
Feedback:
The ETDP SETA has adopted a narrow or tall span of control. Various
managers report to the second level, which reports to the CEO. In addition,
employees are likely working under these managers even though they were not
included in the diagram.
Once organisational relationships have been established, there is a need to
coordinate the activities in different departments. The next section deals with the last
fundamental of organising, namely coordination.
8.4.4 Coordination
The total tasks of the business are divided into small units when an organisation is
structured – to accomplish organisational goals. Therefore, the challenge for
managers is to ensure that the work is coordinated and there is cooperation between
departments. The main purpose of coordination is to facilitate the interdependence of
220
the departments and teams within the organisation. Coordination and cooperation are
very important because the combined performance of all the departments will
determine the overall performance of the organisation. Organisational charts,
committees, budgets, broad policies and procedures are some of the mechanisms that
are used to promote coordination in organisations (Erasmus et al., 2019).
Activity 8.4
This activity will take approximately 5 minutes to complete.
Read the excerpt below and answer the question that follows:
“There was a longstanding disconnect between the project leadership
and the business office regarding responsibility for monitoring project
expenditures and labour hours. For the company’s 10-year history,
there was no expectation that project leads should receive and monitor budget and
projected labour hours, or that comparing actual versus projected expenditures
would be useful for project management purposes. There wasn’t a clear
understanding among the project side about why the contract and budget
considerations were important, and these parameters were not factored into how
projects
were
staffed
and
managed.”
Extracted
from
https://www.aiscollaborations.com/process-this-blog/2017/10/23/case-studyimproving-coordination-between-project-teams-and-the-business-office (Accessed
01 February 2022)
Which one of the fundamentals of organising do you think is lacking from this
extract? Justify your answer.
Feedback:
There is a lack of coordination in the organisation. Coordination is all
about facilitating the interdependence of the departments and teams
within the organisation to improve the combined performance of all the departments,
which will lead to the overall performance of the organisation. Based on the
information provided in the extract, it is obvious that the different projects work in
isolation.
221
The way organisations are structured is influenced by many factors. After going
through the following section, you will be able to explain the factors that influence how
organisations are structured.
8.5
FACTORS THAT INFLUENCE HOW ORGANISATIONS ARE DESIGNED
How organisations are structured is a function of different factors. The main factors
that influence how organisations are designed include the following:
•
The stability of a business environment. Both the level of stability and the
rate of environmental change will influence how organisations are structured
and what form of departmentalisation the organisation adopts. One good
example of environmental instability in South Africa has been in the higher
education environment over the past five years, where the entire public higher
education system has been reconfigured through a series of mergers and
rationalisation initiatives. The merger between the old Unisa and former
Technikon South Africa has had a significant impact on how the new Unisa is
structured in terms of its functional, product and customer departmentalisation.
This need to restructure the University was brought about by external
environmental change and instability.
•
The strategy of a business. As the saying goes, "structure follows strategy".
This is indeed true since an organisation's strategy has a direct impact on how
the business is structured. A renewed focus on technology might result in a
significantly greater allocation of resources to a business's IT department.
Similarly, a business such as General Electric (GE), which focuses on product
development and innovation, will allocate significant resources to its research
and development department.
•
The size of a business. The size of an organisation has a definite impact on
how it is structured. Small businesses are not organised in the same way as
large, complex organisations such as the Shoprite group. Historically, large
businesses were often characterised by many levels of management, a high
degree of specialisation and extensive departmentalisation; however, in recent
years, there has been a shift towards flatter and leaner organisational
structures.
222
•
The competence of employees and management. How organisations are
structured is not only a function of the competence of staff but also of the
attitudes and beliefs of top management.
•
The organisational culture. The beliefs and values shared by the people in a
business influence how the organisation is structured. In this regard, it will not
make sense for a business to be structured in a very tall bureaucratic manner
when the culture is characterised by innovativeness, teamwork and few rules
and regulations.
What you have learned in this lesson up to now relates to the formal arrangements
that an organisation makes to achieve its goals. However, relationships within
organisations are not limited to formal arrangements. In the next section, you will
discover how the informal part of organising works to support the formal arrangements.
8.6
THE INFORMAL ORGANISATION
The informal organisation is defined by the interpersonal relations between people in
an organisation that are not determined by the formal organisational structure
(Erasmus et al., 2019). It takes a fixed form and members interact regularly using
informal communication such as corridor conversations, personal calls, WhatsApp
groups, and so forth. The informal organisation could support formal organisations as
follows:
•
By enhancing intra- and inter-departmental teamwork
•
By improving decision making as communication occurs frequently
It is important to note that at times, an informal organisation may include activities that
are not in line with those activities expected in the formal structure.
The next section explains how the Ubuntu philosophy can influence an organisational
structure in an African context.
8.7
LINKING UBUNTU PHILOSOPHY TO ORGANISING
Management theories originate from the West and are grounded in the Western world
environment, and consequently, they are not well matched to African conditions and
circumstances (Akpor-Robaro, 2018). In the South African context, there is a
developing philosophical belief system known as Ubuntu (a Bantu word broadly
meaning sharing and community), resulting from African culture, values, beliefs and
223
behaviours (Inyang, 2008). The notion of Ubuntu comes from the African sayings,
"Motho ke motho ka batho ba bangwe" and "Umuntu ngumuntu ngabantu", plainly
interpreted as "A person is a person through other persons", or "I am because we are;
we are because I am" (Ganiyu, 2018). Ubuntu is defined as "… humaneness – a
pervasive spirit of caring and community, harmony and hospitality, respect and
responsiveness – that individuals and groups display for one another. Ubuntu is the
foundation for the basic values that manifest themselves in the ways African people
think and behave towards each other and everyone else they encounter" (Inyang,
2008). The Ubuntu philosophy permits managers to adopt the familiar African values
to construct and support the effectiveness of an organisation in the following ways:
•
Pooling resources for survival – maintaining productivity and effectiveness
depends on shared values and individual contributions: encourage a focus on
communal (vs differences) with reliance to eliminate a threat to survival through
conflict.
•
Engineering unified situations – the spirit of solidarity, the mutual regard among
members and individual adhesion to the group create situations defined by
group behaviours – sit together, focus on each other, and coordinate behaviour.
•
Enhancing social oneness and participation – set up informal opportunities –
central village location for gatherings, activities, mediation, decisions, events
and rituals (Inyang, 2008).
Traditional African society's styles are generally categorised into two, namely
decentralised (consensus-based systems in which law making, social control and
allocation of resources are managed by bodies such as village groups and age grades)
and centralised (systems based on chieftaincy) (Oghojafor, Alaneme & Kuye, 2013).
The decentralised (fragmented) traditional states provisioned for practices of control
based on the dynamics of clanship; a normative scheme that involved structures of
well-established rules of conduct typically applied by fragmented segments' heads and
in more crucial instances, by spontaneous community action (Oghojafor et al., 2013).
"Incorporating Ubuntu principles in management hold the promise of superior
approaches to managing organisations. Organisations infused with humanness, a
pervasive spirit of caring and community, harmony and hospitality, respect and
responsiveness will enjoy more sustainable competitive advantage" (Inyang, 2008).
224
Therefore, Ubuntu as a management system emphasises teamwork, attention to
relationships, mutual respect and empathy between a leader and followers, and
participative decision-making. These are fundamental principles of management,
which hold promise for improving organisation activities and functioning in Africa. All
these aspects should be considered when an organisation is structured – concerning
the division of work, departmentalisation and establishing organisational relationships.
This may be a valid suggestion or argument; however, it will only work if such an
indigenous theory considers the environment, even with the indigenous background
(Akpor-Robaro, 2018). An indigenous theory that does not consider the environment
will experience the same misfortune as an imported theory, as circumstances differ,
even within the same environment (Akpor-Robaro, 2018).
8.8
SUMMARY
A good structure does not safeguard the success of an organisation. However, a poor
organisational structure has an impact on the performance of employees – no matter
how good they are. In this lesson, you have learned about the importance and
fundamentals of organising, factors that influence how organisations are structured,
and informal organisation. Finally, you were conscientised about how Ubuntu can be
linked to the organising function.
Once planning and organising have been conducted, managers must take the lead to
ensure that plans are translated into action. In the next lesson, you will learn about the
third function of management, namely leading.
SELF-ASSESSMENT QUESTIONS
This activity will take approximately 15 minutes to complete.
1.
Which option can be a disadvantage that an organisation might
experience with the location division structure?
(a)
The unity of command can be affected, which will result in a serious risk of soured
relations between the project and functional executives.
(b)
Despite sophisticated specialisation, coordination remains a problem.
(c)
Certain regions may be successful, but the rest of the business will not reap the
benefits of a good organisation.
225
(d)
This organisational structure is not suited to ad hoc and complex projects
requiring specialised skills.
2.
One of the major disadvantages of using a matrix structure is divided authority,
as often two managers will have authority over the same subordinates. What is
violated when it happens that one employee reports to two supervisors?
(a)
Unity of command
(b)
Chain of command
(c)
Span of control
(d)
Scalar principle
3.
Home4Hire Houlding is a Northern Cape-based organisation that deals with
property development and estate management. The organisation is divided in a
manner that can cater to the needs of students, the middle class, affluent families,
retired and old people, and business organisations. How is the company in the
scenario departmentalised?
(a)
According to function
(b)
According to product
(c)
According to location
(d)
According to customer
4.
What process do managers use to transfer authority and responsibility to
positions below them in an organisational hierarchy?
(a)
Decentralisation
(b)
Coordination
(c)
Delegation
(d)
Specialisation
5.
Which statement best describes an organisation with a flat organisational
structure?
(a)
Many subordinates are reporting to one manager.
(b)
There is a clear, unbroken line of authority.
(c)
Managers are underutilised in the organisation.
(d)
Subordinates have a clear reporting relationship with their supervisor.
226
Self-assessment feedback
1.
The correct answer is option (c). When the location structure is implemented,
certain regions may be successful, but the rest of the business will not reap the
benefits of a good organisation. Option (a) is incorrect because the unity of
command is affected, resulting in a serious risk of soured relations between the
project and functional executives only when the project and matrix structures are
implemented. Option (b) is incorrect because the statement relates to the
functional departmentalisation structure as different functions such as marketing,
human resources and finances work in silos, making it difficult to coordinate
them. Option (d) is incorrect because the structure that is best suited to ad hoc
and complex projects requiring specialised skills is the matrix structure.
2.
The correct answer is option (a). The unity of command suggests that each
person within an organisation must have a clear reporting relationship with only
one supervisor. The chain of command refers to a clear and distinct line of
authority among the positions in an organisation and has two components,
namely the unity of command and the scalar principle. The scalar principle
suggests that there must be a clear and unbroken line of authority that extends
from the lowest to the highest position in the organisation. Hence, options (b) and
(c) are incorrect. A span of control relates to the number of employees reporting
to one manager. Therefore, option (d) is incorrect as the scenario did not provide
information about the number of employees reporting to one manager.
3.
The correct answer is option (d). Customer departmentalisation is adopted
particularly where a business concentrates on some special segment of the
market or group of consumers. Option (d) is correct as Home4Hire Houlding
arranged its departments by focusing attention on different customers. Option (a)
is incorrect because the functional structure groups together activities belonging
to each management function. The location structure (option c) groups activities
according to geographical location and gives autonomy to area management.
Therefore, this option is incorrect. Option (b) is incorrect as product
227
departmentalisation designs departments so that all activities concerned with the
manufacturing of a product or a group of products are grouped in product
sections, where all the specialists associated with the products are grouped.
4.
The correct answer is option (c). Delegation is the process that managers use to
transfer authority and responsibility to positions below them in the organisational
hierarchy. Option (a) is incorrect because decentralisation refers to the process
of systematically delegating power and authority throughout the organisation to
middle- and lower-level managers. Coordination (option b) is incorrect as it refers
to the process of linking the activities of the various departments in the
organisation into a single integrated unit. Option (d) is also incorrect because
specialisation is the degree to which the fields carry out their given duties.
5.
The correct answer is option (a). The flat or broad structure is characterised by
many subordinates reporting to a manager. Option (b) is incorrect because the
statement describes the scalar principle. Option (c) is incorrect because under
the flat structure many subordinates are reporting to one manager. Option (d)
relates to the chain of command; therefore, it is incorrect.
8.9
REFERENCES
Akpor-Robaro, M.O.M. 2018. Why do Management Theories Fail? Reasons and
Solutions: A Perspective of African Context, International Journal of Economics &
Management Sciences, 7(520): 1–4.
Erasmus, B., Rudansky-Kloppers, S. & Strydom, J. 2019. Introduction to business
management (11th edition). Cape Town: Oxford.
Francis, S. & Singh, S. 2016. An investigation into job satisfaction and turnover
intentions amongst engineers in Gauteng, Innovative Journal of Business and
Management, 5(5): 121–133.
Ganiyu, R.A. 2018. Redesigning the management curricula for Africa, Indigenous
Management Practices in Africa, 20: 249–269.
228
Gitman, L.J., McDaniel, C., Shah, A., Reece, M., Koffel, L., Talsma, B. & Hyatt, J.C.
2018. Introduction to business [Online]. Houston, Texas: OpenStax. Available from:
<https://openstax.org/details/books/introduction-business>
[Accessed
31 January 2022].
Inyang, B. J. 2008. The challenges of evolving and developing management
indigenous theories and practices in Africa, International Journal of Business and
Management, 3(12): 122–132.
Kumar, R. 2016. Principles of management. Kerala: Jyothis Publishers.
Oghojafor, B.E.A., Alaneme, G. C. & Kuye, O.L. 2013. Indigenous management
thoughts, concepts and practices: The case of the Igbos of Nigeria, Australian
Journal of Business and Management Research, 3(1): 8–15.
Olusegun, E.A. & Olusoji, J.G. 2020. Work environment and job satisfaction among
nurses in government tertiary hospitals in Nigeria, Rajagiri Management Journal,
14(1): 71–92.
Putri, W.H. & Setianan, A.R. 2019. Job enrichment, organizational commitment, and
intention to quit: The mediating role of employee engagement, Problems and
Perspectives in Management, 17(2), 518–526.
Van Wyk, A.E., Swarts, I. & Mukonza, C. 2018. The influence of the implementation of
job rotation on employees' perceived job satisfaction, International Journal of
Business and Management, 13(11): 89–101.
8.10
OPEN EDUCATIONAL RESOURCES (OERS)
Students are advised to refer to the organising chapter in the following OERs to learn
more about the management function of organising.
Business Faculty from Ontario Colleges and Ecampusontario Program Managers.
2018. Fundamentals of business: Canadian edition [Online]. Available from:
<https://ecampusontario.pressbooks.pub/businessfuncdn/>
1 June 2020].
229
[Accessed
Openstax. 2019. Principles of management [Online]. Houston, Texas: Openstax.
ISBN: 978-0-9986257-7-5. Available from: <https://openstax.org/details/books/
principles-management>. [Accessed 1 June 2020].
Saylor.com Academy. 2020. Exploring business [Online]. The Saylor.com Academy.
Available
from:
<https://saylordotorg.github.io/text_exploring-business-v2.0/>
[Accessed 1 June 2020].
230
Contents
9.1
INTRODUCTION ........................................................................... 233
9.2
THE NATURE OF LEADERSHIP ........................................................ 234
9.2.1 Leader ........................................................................................ 234
9.2.2 Leadership ................................................................................... 234
9.3
DIFFERENCES BETWEEN LEADER AND MANAGER ............................ 235
9.4
THE COMPONENTS OF THE LEADING FUNCTION .............................. 237
9.5
LEADERSHIP THEORIES ............................................................... 243
9.5.1 Trait theory of leadership ................................................................... 243
9.5.2 Behavioural theory of leadership .......................................................... 244
9.5.3 Contingency or situational theories of leadership ........................................................ 246
9.6
MOTIVATION ................................................................................ 247
9.7
GROUPS AND TEAMS IN ORGANISATIONS .......................................... 250
9.7.1 Groups ........................................................................................ 250
9.7.2 Teams ........................................................................................ 253
9.8
COMMUNICATION .......................................................................... 254
9.8.1 Defining communication .................................................................... 254
9.8.2 Elements of communication................................................................ 255
9.9
SUMMARY ................................................................................... 258
9.10 SELF-ASSESSMENT QUESTIONS ....................................................... 259
9.11 REFERENCES ............................................................................... 260
9.12 OPEN EDUCATIONAL RESOURCES (OERS) .......................................... 261
231
LESSON 9: LEADING
This lesson will require approximately TEN notional hours. Figure 9.1 represents an
overview of lesson 9.
9.1 Introduction
9.2 The nature of leadership
9.3 Differences between leadership and management
9.4 Components of the leading function
9.5 Leadership theories
9.6 Motivation
9.7 Goups and teams in organisations
9.8 Communication
9.9 Summary
9.10 Self-assessment questions
9.11 References
9.12 Open Educational Resources
Figure 9.1: Visual overview of the lesson (Source: Author's design)
232
9.1
INTRODUCTION
In lesson 8, you learned about the second important element of management, namely
organising. The third complex element of management is called leadership. Leadership
is that element of management that sets activities and people in motion to ensure that
goals are accomplished.
LEARNING OUTCOMES
When you have worked through lesson 9, you should be able to do the
following:
• Describe the nature of leadership.
•
Differentiate between leader and manager.
•
Explain the five components of the leadership function, namely authority, power,
responsibility, delegation and accountability.
•
Discuss basic leadership models by referring to the factors influencing effective
leadership.
•
Describe the fundamental model of motivation.
•
Discuss groups in the organisation by referring to (1) the reasons why groups are
formed, (2) the kinds of groups and (3) the characteristics of groups.
•
Differentiate between groups and teams in the organisation.
•
Describe a simple communication model
KEY TERMS
Leader
Trait theory of leadership
Leadership
Power
Authority
Motivation
Manager
Groups
Leadership models
Behavioural theory of leadership
Maslow’s hierarchy of needs
Contingency or situational theory of
leadership
Teams
Communication
233
Responsibility
Accountability
Delegation
Click on the Additional Resources tab for the comprehensive Multilingual glossary
for MNB1501.
9.2
THE NATURE OF LEADERSHIP
In this section, you will learn about the nature of leadership. The concepts “leader” and
“leadership” and the characteristics of leadership are discussed.
9.2.1 Leader
In order to understand what leadership is all about, you need to understand what the
word “leader” means in the business context. The word “leader” can be used in two
ways. Sometimes the word is used to refer to someone who takes the lead. We speak
of someone being a leader in a specific industry. A person such as Sol Kerzner (of Sun
International and founder of Sun City), for example, would be considered a leader in
the hotel industry. Similarly, Raymond Ackerman (of Pick n Pay) is a leader in the retail
industry. However, a more accurate way to describe these people would be to say that
they are entrepreneurs.
The second use of the word “leader” refers to the management of subordinates. This
is the meaning of the word that applies to the management task of leadership. It is very
important that you note this distinction. It is not uncommon for someone to be a very
successful entrepreneur (i.e. a leader in business or a pioneer in a specific industry)
and yet be a poor leader of people in the sense that he or she finds it difficult to delegate
responsibility and to motivate staff, inspire them to greater achievement, develop their
skills, and so on.
9.2.2 Leadership
It is important that you familiarise yourself with the definition of leadership. Make sure
that you understand this definition: Leadership is defined as the influencing and
directing of the behaviour of subordinates in such a way that they willingly strive to
accomplish the goals or objectives of the business.
There are a few important terms in this definition, but two particularly important ones
are the words “influence” and “willingly”. The word “influence” is used in a very wide
234
context here. For example, giving instructions to a subordinate would fall under the
definition of influencing, but so too would threatening a subordinate with dismissal if his
or her performance does not improve (although not the best example of good
leadership). Leadership is clearly a process of social influence directed at stimulating
action towards achieving the goals of the business.
The second important term in the definition of leadership is the word “willingly”. This
attribute of leadership is evident in the following two very famous statements by former
American President Dwight D Eisenhower: “You don’t lead people by hitting them over
the head. That is an assault, not leadership.” and “Leadership is the art of getting
someone else to do what you want to be done because he wants to do it”. Richard
Branson (the founder of the Virgin Group) remarks that there are many ways to get
your point across and make your business successful without being aggressive:
“Always remember that you love what you do and your role is to persuade others to
love your business too, therefore to want to work with you.” All of these statements
refer to influencing the behaviour of employees to pursue the goals of the business
willingly and not under coercion or through the use of power and formal authority. In
the next section, you will learn to differentiate between leadership and management.
9.3
DIFFERENCES BETWEEN LEADER AND MANAGER
A good manager is not necessarily a good leader and vice versa. Much has been
written in management literature about the differences between managers and leaders.
A manager can broadly be defined as a good administrator. This is particularly true in
a bureaucratic organisation where a manager may be extremely good at carrying out
procedures, having everything in place, always meeting deadlines, and so on, and yet
not be very good at inspiring and motivating his or her subordinates. It is also possible
to be an outstanding leader but a poor manager because you do not plan very
effectively, or do not exercise sound control – yet you may get tremendous support and
commitment from subordinates for your ideas and vision. The distinction between
leaders and managers is not clear-cut and has been shown to be quite controversial in
management literature. The following table is therefore merely a summary of some of
the differences between a leader and a manager.
235
Table 9.1: The differences between leader and manager
Leader
Manager
Lead and direct
Plan, organise and control
Create and articulate vision and
Implement vision, change and
change
policy
Innovate
Administer
Develop
Maintain
Inspire
Control
Do the right things
Do things right
Source: Author’s compilation
Do the following activity about the differences between a leader and a manager.
Activity 9.1
This activity will take approximately 15 minutes to complete.
Access the link below to watch a YouTube video about the differences
between a leader and a manager:
https://www.youtube.com/watch?v=mhkLc0HEtR0
After watching the video, answer the following questions:
1. Write down the aspects that you have learned that separate the two concepts,
leader and manager.
2. Do you think that you can be both a leader and a manager?
Feedback:
There is an overlap between leaders and managers in terms of
functions, skills and characteristics. The answers to the two questions
are provided below.
1. As seen in the video, the two can be differentiated as follows:
•
Leadership is a process of social influence that maximises the effort of others
236
to achieve a goal or a specific target. Management is the art of work done
through people.
•
Leaders set goals while managers follow them.
•
Leaders transfer the mission, goal and vision to the whole organisation while
managers keep employees aligned with the core goals and values of the
organisation.
•
Leaders think of ideas while managers mostly focus on the execution phase.
•
Leaders focus on improvement while management is concerned with control.
What are other differences that you have identified? You can discuss these with
your fellow students on myUnisa.
2. The answer to this question is “Yes!''. To improve the performance of any
organisation, it is desirable that all managers also display the attributes of good
leaders. This is why more and more organisations are embarking on leadership
development initiatives to develop strong managers into strong leaders. Turning
managers into leaders so that they become better managers is the underlying
principle behind the study of leadership.
In the next section, you will learn about the components of the management function of
leading.
9.4
THE COMPONENTS OF THE LEADING FUNCTION
Now that we have clearly defined leadership in the business context, we can shift our
focus to the components of the leading function. The following have been identified as
the main components of leadership (Erasmus, Rudansky-Kloppers & Strydom, 2019;
Smit, Botha & Vrba, 2020; Botha & Vrba, 2021):
•
Authority – the right of a manager to give commands to and demand actions
from employees. Authority was discussed in depth in lesson 8.
•
Power – a manager’s ability to influence the behaviour of employees.
•
Responsibility – the obligation to achieve organisational goals by performing
the activities described in their job description. A manager is responsible for the
results achieved in their organisations, departments or sections.
237
•
Delegation – the process whereby the manager assigns responsibility and
authority for achieving organisational goals. Managers delegate responsibility
and authority down the chain of command to their employees.
•
Accountability – the evaluation of how well individuals meet their
responsibilities. Managers are accountable for everything that happens in their
sections, departments, or organisations, even for the successful completion of
the tasks they delegated to employees.
Since components such as authority, responsibility, delegation and accountability
have been discussed in lesson 8, we will now only focus on one component of the
leading function, namely power. Power is one of the key elements associated with
leadership and comes in five main forms. These different forms of power often
determine whether a leader is effective or ineffective in influencing subordinates and
securing their commitment to organisational goals and the leader’s vision. It is very
important that you understand the different kinds of power that a leader can use and
how these affect subordinates’ performance.
Line authority is always linked to a particular position in the organisation. For example,
the marketing manager has the authority to decide on a sales strategy, as well as to
give instructions to the sales, advertising and marketing research teams. He or she
also has the authority to allocate the marketing budget accordingly. Because this
authority is position-specific, the marketing manager cannot give instructions to staff in
the finance or production departments or decide on a purchasing strategy for the
business.
Power, on the other hand, is linked to both the person and (sometimes) the position. It
refers to the influence that leaders exert over their subordinates. Different forms of
power may result in differing levels of commitment and compliance by subordinates.
French and Raven (1959) provide us with a useful typology that identifies the sources
and types of power that may be at the disposal of leaders (Openstax, 2019).
The five types of power are:
•
Reward power – the power a person has because people believe that they can
bestow rewards or outcomes, such as money or recognition that others desire.
238
•
Coercive power – the power a person has because people believe that the
person can punish them by inflicting pain or by withholding or taking away
something that they value.
•
Legitimate power – the power a person has because others believe that the
person possesses the “right” to influence them and that they ought to obey. This
right can originate in tradition; in the charisma or appeal of the person; and in
laws, institutional roles within society, moralistic appeal, and rationality (that is,
logical arguments, factual evidence, reason, and internally consistent positions).
•
Referent power – the power a person has because others want to associate
with or be accepted by him or her. Referent power refers to a manager’s personal
power or charisma.
•
Expert power – the power a person has because others believe that the person
has and is willing to share the expert knowledge that they need. (The concept
of resource power extends the idea of expert power to include the power that a
person has because others believe that the person possesses and is willing to
share resources, such as information, time, or materials that are needed.)
Looking at the definitions of the five types of power we quickly see that power can be
either positional or personal. The first three types of power are clearly related to a
manager’s position in the organisation and can be likened to formal authority. The last
two types of power are both forms of personal power and are not derived from a
manager’s position within the organisation. Table 9.2 summarises the uses and
outcomes of power.
Table 9.2: Uses and outcomes of power
Source of
leader
Type of outcome
Commitment
Compliance
Resistance
influence
Referent
Likely
Possible
Possible
power
If request is
If request is
If request is for
believed to be
perceived to be
something that will
important to leader
unimportant to
bring harm to
leader
leader
239
Expert power
Likely
Possible
Possible
If request is
If request is
If leader is
persuasive and
persuasive and
arrogant and
subordinates share
subordinates are
insulting, or
leader’s task goal
apathetic about
subordinates
leader’s task goal
oppose task goal
Legitimate
Possible
Likely
Possible
power
If request is polite
If request is seen as
If arrogant
and highly
legitimate
demands are
appropriate
made or request
does not appear
proper
Reward power
Coercive
power
Possible
Likely
Possible
If used in a subtle,
If used in a
If used in a
very personal way
mechanical,
manipulative,
impersonal way
arrogant way
Possible
Likely
If used in a helpful,
If used in a hostile
non-punitive way
or manipulative
Very unlikely
way
Source: (Cartwright, 1959 in Erasmus et al., 2019)
Make sure that you understand these different forms of power and how using different
forms of power can result in differing levels of commitment from followers. This is a very
important section of the lesson that you have to master.
Activity 9.2
This activity will take approximately 15 minutes to complete.
Answer the following questions:
9.2.1 In fulfilling the leadership task of management, should a manager
make use of formal line authority associated with the specific position or
rather the personal power he or she possesses?
9.2.2 Having thought about the above question, now consider the well-known business
and political leaders listed below. Can you identify the type of power they possess, be
240
it personal or positional, as well as the source of their personal power? Use the
template below to complete the activity. You might not be familiar with all of the leaders
in the list. If this is the case, it would be a good idea to read up about their
achievements, either on the internet or in the library resources available to you.
Tip: Remember that leaders very seldom possess only one form of power and more
often than not they influence their subordinates through the use of a combination of
power sources.
Leader
Type of power
Source
Your own boss or line manager
President Cyril Ramaphosa
Nelson Mandela (former South African president)
Bill Gates (founder and CEO of Microsoft)
Oprah Winfrey (owner of Harpo Productions)
Jack Welch (former CEO of General Electric)
Feedback:
To answer the first question, you can consult table 9.2. This table gives a
good idea of the outcomes of a manager using different sources of
power; it illustrates that commitment from subordinates is more likely when a leader
draws on personal forms of power such as referent and expert power. Positional power
is most effective in ensuring compliance with requests or instructions.
The second part of the learning activity dealt with the types of power used by prominent
leaders. It is quite possible that your answers to this activity will differ from the feedback
below because the views of subordinates regarding the power held by a leader can
differ.
Leader
Type of power
Source
Your own boss or line
Legitimate
+ Your line manager or boss will
manager
whatever you may always have a degree of legitimate
have included
power to give you instructions and
allocate resources. This type of
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power is derived from formal
authority delegated to the line
manager. Your line manager or
boss may also be in a position to
give or withhold rewards.
President Cyril Ramaphosa
Legitimate power
The
president
possesses
a
of
a
great
country
deal
of
positional power as the head of the
nation.
Nelson Mandela (former
Referent power
South African president)
Mandela no longer possesses the
legitimate power that he once
enjoyed as President; however,
many people still follow him as a
leader and role model and identify
with
his
values
and
morals.
Mandela is a good example of a
leader with extensive referent
power.
Bill Gates (founder and
Legitimate power + As CEO, Bill Gates has a lot of
CEO of Microsoft)
expert power
legitimate power, however, in his
early days with Microsoft his
leadership was based largely on
his
technical
excellence
and
knowledge.
Oprah Winfrey (owner of
Legitimate power + Although Oprah Winfrey has been
Harpo Productions)
referent power
described
as
a
meticulous
businesswoman, her true power
base is drawn from referent
power. Her caring approach and
involvement in people's lives has
resulted in her becoming one of
the most influential women in the
United States.
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Jack Welch (former CEO of Legitimate power +
Although considered one of the top
General Electric)
power of reward +
businessmen of the 20th century,
coercive power
his
approach
to
management
received some criticism. A recent
management publication quoted
Jack
Welch
saying
“Business
success is a matter of reward and
punish”. This approach was very
evident at GE in the days of Jack
Welch where the top 20% of
employees were richly rewarded
while the worst-performing 10%
were fired.
Having looked at some of the foundations of leadership and management, we next
delve into the theories of leadership.
9.5
LEADERSHIP THEORIES
Apart from the types of power leaders possess, you might have asked yourself the
question: “But what makes them great?” Researchers have been asking similar
questions for many years now and in so doing have tested a number of models. In this
lesson, you will learn about the three important theories of leadership, namely trait
(characteristics), behavioural and contingency (situational) theory of leadership.
9.5.1 Trait theory of leadership
What does the person you described look like (e.g. male or female; tall or short)? What
kind of personality does he or she have? Did you describe this person as imaginative,
intelligent, honest visionary, and courageous? If you had difficulty making a
comprehensive list of traits, or if you perhaps found yourself with an endless list, then
you are once again in a similar position to those academics who first sought as early as
1930, to define leaders according to a set of characteristics or traits.
This first leadership model, known as the trait theory of leadership, suggests that
certain leadership characteristics are common to all successful leaders and that if
we can identify those characteristics, we can place people with such characteristics in
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positions of leadership. The problem with this theory is that over half a century's worth
of research has failed to provide a universal set of characteristics for successful leaders.
Successful leaders in history have displayed very different traits. Compare for example
the leadership traits of the leaders identified in activity 9.2. While all of them could be
described as good leaders, their personal characteristics might differ greatly.
Access the OER link below to learn about the trait perspectives on
leadership.
https://openstax.org/books/principles-management/pages/13-4-thetrait-approach-to-leadership
The core traits that have been identified as preconditions that endow people with
leadership potential include drive, leadership motivation, honesty and integrity, selfconfidence, cognitive ability, knowledge of the business and other traits. Make sure
that you have an understanding of what each of these entails.
9.5.2 Behavioural theory of leadership
Following researchers’ attempts to identify a single set of characteristics, the next
model of leadership that began to emerge is known as the behavioural theory of
leadership. This leadership model was based on the assumption that good leaders are
determined by how they behave and that successful leaders behave differently from
unsuccessful leaders. This behaviour is commonly referred to as “leadership style”. In
other words, a leader who treats subordinates in a certain manner will be regarded as
a successful leader.
A good contemporary example of different leadership styles would be to compare
Donald Trump (billionaire real estate developer and former president of the United
States of America) and Sir Richard Branson (CEO of Virgin). Donald Trump has been
widely described as autocratic and ruthless in his leadership style and he exhibits
many of the behaviours associated with a task-oriented leader. Sir Richard Branson
is quite different in his leadership approach and is described as the most flamboyant
business leader in modem times, with a clear focus on people leadership. Branson’s
leadership style is more characteristic of a relationship-oriented leader. Researchers
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from four different universities support the behavioural approach to leadership as
discussed below.
9.5.2.1 The University of Iowa
The study conducted by the University of Iowa identified three basic leadership styles,
namely autocratic, democratic and laissez-faire.
Access the OER link below to learn about the University of Iowa's study
of leadership styles. Only focus on the section titled “Leadership styles”
and make sure that you understand the characteristics of each, as
contained in table 6.4.
https://openstax.org/books/introduction-business/pages/6-4-leadingguiding-and-motivating-others
9.5.2.2 The Ohio State University
The study by the Ohio State University identified two leadership styles, namely
initiating structure and consideration.
9.5.2.3 The University of Michigan
The study conducted by the University of Michigan distinguished between productionoriented leaders and employee-orientated leaders.
9.5.2.4 Blake and Mouton
The Blake and Mouton study developed the managerial/leadership grid.
Access the OER link below to learn about the behavioural approach by
Ohio State University, the University of Michigan, and Blake and
Mouton.
https://openstax.org/books/principles-management/pages/13-5behavioral-approaches-to-leadership
It is important that you familiarise yourself with the four main studies on the
behavioural theory of leadership.
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9.5.3 Contingency or situational theories of leadership
The third leadership model to emerge opposes the view that there is "one right way to
lead'' and rather attempts to determine the best leadership style for a given situation
depending on various factors, namely the type of objectives that have to be reached,
the type of subordinates at the leader's disposal, and so on – hence the name
“situational leadership”. The three main situational leadership theories are discussed
below.
Access the OER link below to learn more about Fiedler's contingency
theory of leadership.
https://openstax.org/books/principles-management/pages/13-6situational-contingency-approaches-to-leadership
9.5.3.1 Fiedler's contingency theory of leadership
According to Fiedler, organisations attempting to achieve group effectiveness through
leadership must assess the leader according to an underlying trait, assess the
situation faced by the leader, and construct a proper match between the two.
9.5.3.2 House’s path-goal model
The model postulates that leaders have a responsibility to assist employees to reach
their goals. As such, they should provide employees with the essential directions and
support to make sure that employees’ goals are aligned with the goals and objectives
of the organisation. The four leadership behaviours that leaders can implement in
different situations identified in this model included directive, supportive, participative
and achievement-oriented (Erasmus et al., 2019).
9.5.3.3 Hersey and Blanchard's situational leadership model
The work maturity of employees determines the best leadership style for a particular
situation. The employees’ need for achievement, their willingness to accept
responsibility, and their task-related ability and experience determine their work
maturity. The manager uses one of four leadership styles (telling, selling, participating
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or delegating) to match the employees’ maturity level in a given situation (Erasmus et
al., 2019). In the next section, we will explore motivation and how managers and
leaders can motivate their employees.
9.6
MOTIVATION
Motivation can be described as an inner desire to fulfil an unfulfilled need (Erasmus et
al., 2019). Every person, whether employed in an organisation, a full-time student, a
housewife or an entrepreneur, has personal goals that he or she strives for – and will,
to some extent, be driven intrinsically (internally) to achieve these goals. At the same
time, it is important that employees are also motivated to achieve the goals of the
organisation. Other than the decisions that employees make on their own about their
work – and whether they like their work – the manager in his or her role as a leader is
the most influential factor in ensuring employee motivation and morale, and ultimately
the pursuit of organisational goals. Read through the case study about Siemens to see
how they motivated their employees within a creative environment.
Siemens: Motivation within a creative environment
Siemens is the engineering group behind many of the products and services people
take for granted in their daily lives. The list of products designed and manufactured by
Siemens is almost endless, from traffic lights to gas turbines to domestic appliances
such as kettles and fridges.
Engineers use scientific principles to develop products or systems that solve real-life
problems. Much of engineering is about innovation – rather than invention. This means
that engineers transform creative ideas into improved products, services, technologies
or processes. A career within the field of engineering is exciting and varied, as the work
is constantly changing. Becoming an engineer at Siemens is about using energy, ideas
and passion. It requires a range of skills and abilities that are needed across the whole
business.
Siemens offers opportunities for young people at all levels to enter the world of
engineering. The company also recruits undergraduates and graduates for
professional engineering jobs. It goes beyond the standard approaches to attracting
suitable candidates because its employees enable the company to be competitive. This
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approach has led to Siemens having an open culture with opportunities for employees
at all levels. However, even at entry-level, Siemens employees enjoy wide-ranging
opportunities for further education and training. By following an engineering career,
Siemens people have the opportunity to move into other disciplines. For instance, they
may go into areas such as research, manufacturing, sales and marketing, finance, or
project management.
Motivation stimulates people and encourages them to willingly put more effort into
doing something. Well-motivated employees will feel fulfilled and happy in the
workplace. Additionally, they are likely to be more productive and to produce work of a
higher quality. Motivated individuals are influenced by a number of different factors.
Initially, everybody has basic needs, such as food or accommodation, which pay can
provide. However, there are many other factors that motivate individuals. A creative
environment, such as that provided by engineering, can be very stimulating.
The structure of Siemens motivates individuals by empowering them to improve
processes. Siemens provides the sort of environment where workers can learn new
things and are given the opportunity to progress within the business. Some staff at
Siemens thrive on the problem-solving aspect of their roles and respond to challenges.
Other employees find the varied nature of the work motivating – having the opportunity
to try different roles. Siemens employees also value the fact that they are allowed to
be imaginative and can influence their own work. This culture demonstrates that
Siemens values its employees and helps to recruit the next generation of engineers.
If you want to be a successful manager, you need to understand how individuals are
motivated and what motivates them. You will then be in a position to influence the
behaviour of subordinates. Many theories have been developed that deal with the
motivation of employees. In this lesson, we introduce you to the basic model of
motivation as well as to Maslow’s hierarchy of needs. It is very important that you
understand this hierarchy and its application. According to Maslow, different people
experience different levels of need fulfilment. For instance, some people may be
striving to satisfy their social needs, while others are mostly driven by their esteem
needs. Some may even be at a level where their main concern in life is to satisfy their
physiological needs.
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Activity 9.3
This activity will take approximately 15 minutes to complete.
Open the link below and watch a YouTube video regarding motivation at
work according to Maslow.
https://www.youtube.com/watch?v=J_Ri9uy878E
After watching the YouTube video, give examples of how each need can be fulfilled in
the workplace environment.
Feedback:
The following examples explain how each need can be fulfilled at work:
•
Security needs can be fulfilled by a long-term contract, good information on the
future of the organisation, and a safe work environment.
•
The need for belonging in a work environment can be fulfilled by a good work
atmosphere characterised by teamwork and satisfying interpersonal interactions.
People are social beings and want to belong to a community.
•
Esteem needs are linked to positive feedback on the quality of your work, being
rewarded and praised, getting a promotion or a raise, and knowing you are useful
to the organisation. All these examples are ways to fulfil esteem needs.
•
Self-actualisation/self-realisation can be fulfilled by personal and spiritual
development, religion and culture. The company values autonomy and
encourages employees to become subject matter experts.
Maslow’s theory suggests that although all motives are present in every adult
(babies/toddlers acquire them over time), not all motives influence an individual. We
may spend a great deal of effort satisfying our esteem needs, but when there is a
sudden earthquake, the only motive that will influence our behaviour is the need to
survive. In the same way, we may eat a meal regularly, but we would not be motivated
to change jobs and join a company that gives its employees free meals. In other words,
although we take steps to satisfy certain needs, we are driven by those needs that are
basically unfulfilled. The basic model of motivation is depicted in figure 9.2. Make sure
that you understand this model and how it can be applied in the organisational context.
The motivation process begins with internal needs, motives or drives, and moves in a
certain sequence.
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Internal needs,
motives or
drives
results in
feedback
Drive force
(Behaviour
or action)
Satisfaction
(Fulfilment)
Desired
goals
to achieve
which provides
Figure 9.2: The basic model of motivation (Mullins, 2005)
Now that you understand motivation, in the next section we will look at the difference
between groups and teams in the organisation.
9.7
GROUPS AND TEAMS IN ORGANISATIONS
Employees of the modern organisation do not work merely as individuals hidden away
somewhere in a small cubicle and working in isolation from their co-workers. As the
world of work becomes more and more complex, so the need grows for organisations
to approach work and problems in a multidisciplinary and cross-functional manner. This
has given rise to the use of groups and teams in organisational structures, with the
associated need for team leadership; therefore, groups and teams are discussed as
part of this particular lesson.
A clear distinction is made between groups and teams and it is important that you are
able to identify and understand the difference between the two. You also need to
familiarise yourself with the different types of groups and teams.
9.7.1 Groups
“A group refers to two or more people, interacting and interdependent, who come
together to attain particular goals” (Smit, Botha & Vrba, 2020; Botha & Vrba, 2021).
People join groups for various reasons, such as:
•
satisfying social needs to achieve goals that are impossible for them to achieve
as individuals
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•
achieving some level of recognition, prestige or status
•
enhancing their self-worth by belonging to a specific group
•
feeling more powerful by joining a group because group action can achieve more
than individual action
•
feeling less insecure and less threatened, suffering less self-doubt and feeling
stronger than standing alone – groups offer security to people
Most people belong to various groups – at work, in the community or their families.
However, in organisations, there are informal and formal groups. Figure 9.3 depicts
these two categories together with the specific type of group within them.
Informal
Types of
groups
Formal
Interest
groups
Friendship
groups
Command
groups
Task groups
Figure 9.3: Categories and types of groups (Smit, Botha & Vrba, 2020; Botha &
Vrba, 2021)
Do you still remember the informal organisation discussed in lesson 7? An informal
group is an interest group or a friendship group that is not part of the organisational
hierarchy and one that develops out of the day-to-day activities and interactions
between people working in the same organisation (Smit, Botha & Vrba, 2020; Botha
& Vrba, 2021).
•
Interest groups focus on the needs of the group itself, stemming from the
shared interests of its members (Smit, Botha & Vrba, 2020; Botha & Vrba,
2021).
•
A friendship group can range from a social club that organises social events
for the members of a department, to a few people playing cards together during
their lunch break (Smit, Botha & Vrba, 2020; Botha & Vrba, 2021).
The formal group or work group is a unit of two or more people who interact primarily
to share information and to make decisions that will help each group member perform
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within his or her own area of responsibility. The organisation’s structure defines formal
groups, where work assignments are allocated to specific work groups. (Smit, Botha
& Vrba, 2020; Botha & Vrba, 2021).
•
A command group comprises a manager and the employees who report
directly to him or her. The organisational structure determines the authority
relationships in an organisation and indicates the various command groups
(Smit, Botha & Vrba, 2020; Botha & Vrba, 2021).
•
A task group comprises people working together to complete a specific task,
and it can cross hierarchical boundaries. With the completion of the project, the
group disbands (Smit, Botha & Vrba, 2020; Botha & Vrba, 2021).
Every group in an organisation is different in terms of its structure or the set of
characteristics that shape the behaviour of both the group and the individual group
members. The structure of a group defines the positions individual group members
occupy in the group and the position and functioning of the group in the context of the
entire organisation. The following seven variables define group structure, and it often
predicts the effectiveness of a group.
•
Leadership is a critical factor in the success of a group. In both formal and
informal groups a leader gives direction and creates an environment where
workers can be motivated to achieve the goals of the group and the
organisation.
•
Each member in a group fulfils a role and each role carries a role expectation,
which is how others believe a person should act in a given situation.
•
Group norms are standards shared by members of a group and develop from
interaction between these members. Norms can be positive or negative and
should be managed by managers.
•
Status in groups can be formal or informal, meaning that groups sometimes
give higher status (informal) to group members who are relatively low on the
hierarchical level of the organisation. Such status is derived from factors such
as age or experience or the social influence of a group member.
•
Cohesiveness refers to group solidarity – the way a group stands together as
a unit. Group cohesiveness develops because the group is attractive to its
members and this attraction relates to need satisfaction.
•
Group size affects the group’s overall performance. Smaller groups are usually
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more productive than groups with more members, although bigger groups
perform better at problem-solving.
•
Diverse groups with a variety of skills and knowledge tend to be more effective
than homogeneous groups.
9.7.2 Teams
“A team (or a work team) comprises a small number of people with complementary
competencies working together, committed to a common purpose, and individually
and collectively accountable for performing tasks that contribute to attaining specific
goals” (Saylor.com Academy, 2020; Smit, Botha & Vrba, 2020; Botha & Vrba, 2021).
There are several types of teams:
1. In the traditional manager-led team, the leader defines the team’s goals
and activities and is responsible for achieving its assigned goals.
2. The leader of a self-managing team may determine overall goals, but
employees control the activities needed to meet them.
3. A cross-functional team is designed to take advantage of the special
expertise of members drawn from different functional areas of the
organisation.
4. On
virtual
teams,
geographically
dispersed
members
interact
electronically in the process of pursuing a common goal.
Open the OER link below to learn about teams.
https://saylordotorg.github.io/text_exploring-business-v2.0/s12teamwork-and-communications.html
Teams can improve organisation and individual performance in a number of areas.
Not all teams, however, are formed to achieve the same goals, or charged with the
same responsibilities. Nor are they organised in the same way.
Is there a difference between groups and teams? Not all groups are teams. Open the
link below to watch the video about the difference between teams and groups.
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Time: 3:10 minutes
https://www.youtube.com/watch?v=uG-FLOi4OOU
Having learned about teams and groups, in the next section you will learn about
communication.
9.8
COMMUNICATION
By now you should have realised that leaders are human beings involved with other
human beings. For leaders to influence their subordinates they must be able to
communicate effectively. This section touches briefly on the importance of
communication and the elements involved.
9.8.1 Defining communication
The English word, “communication” has been derived from the Latin word,
“communicare”, which means to impart or to participate or to transmit. The word
“communicare” is derived from the root, “communis”, which means to make common
or to share (RA Podar College, n.d). Communication is defined as the process of
understanding and sharing meaning (Pearson & Nelson, 2000). The first keyword in
this definition is process. A process is a dynamic activity that is hard to describe
because it changes (Pearson & Nelson, 2000). Imagine you are alone in your kitchen,
thinking. Someone you know (say, your mother) enters the kitchen and you talk briefly.
What has changed? Now, imagine that your mother is joined by someone else,
someone you have not met before – and this stranger listens intently as you speak,
almost as if you were giving a speech. What has changed? Your perspective might
change, and you might watch your words more closely. The feedback or response
from your mother and the stranger (who are, in essence, your audience) may cause
you to re-evaluate what you are saying. When we interact, all these factors — and
many more – influence the process of communication.
The second keyword is understanding. “To understand is to perceive, to interpret,
and to relate our perception and interpretation to what we already know.” If a friend
tells you a story about falling off a bike, what image comes to mind? Now your friend
points out the window and you see a motorcycle lying on the ground. Understanding
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the words and the concepts or objects they refer to is an important part of the
communication process (University of Minnesota Libraries Publishing, 2019).
Next comes the word sharing. Sharing means doing something together with one or
more people. In communication, sharing occurs when you convey thoughts, feelings,
ideas, or insights to others. You can also share with yourself (a process called
intrapersonal communication) when you bring ideas to consciousness, ponder how
you feel about something, or figure out the solution to a problem and have a classic
“Aha!” moment when something becomes clear (University of Minnesota Libraries
Publishing, 2019).
Finally, meaning is what we share through communication. The word “bike”
represents both a bicycle and a short name for a motorcycle. By looking at the context
in which the word is used and by asking questions, we can discover the shared
meaning of the word and understand the message (University of Minnesota Libraries
Publishing, 2019).
9.8.2 Elements of communication
To better understand the communication process, Figure 9.3 illustrates a basic
transactional communication model with the eight key elements of interpersonal
communication. These elements are explained below (University of Minnesota
Libraries Publishing, 2019):
•
Source – The source imagines, creates, and sends the message. The speaker
begins by first determining the message – what to say and how to say it. The
second step involves encoding the message by choosing just the right order or
the perfect words to convey the intended meaning. The third step is to present
or send the information to the receiver or audience. Finally, by watching the
audience’s reaction, the source perceives how well they received the message
and responds with clarification or supporting information.
•
Message – The message is the stimulus or meaning produced by the source
for the receiver or audience. The message may convey ideas, opinions, plans,
orders or explanations. To be effective, a massage should be simple and clear
(Erasmus, Rudansky-Kloppers & Strydom, 2019).
•
Channel – The channel is the way in which a message or messages travel/s
between source and receiver. Spoken channels include face-to-face
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conversations, speeches, telephone conversations and voicemail messages,
radio, public address systems, and Voice over Internet Protocol (VoIP). Written
channels comprise letters, memorandums, purchase orders, invoices,
newspaper and magazine articles, blogs, e-mails, text messages, tweets, and
so forth.
•
Receiver – The receiver receives the message from the source, analysing and
interpreting the message in ways both intended and unintended by the source.
As a receiver you listen, see, touch, smell, and/or taste to receive a message.
•
Feedback – When you respond to the source, intentionally or unintentionally,
you are giving feedback. Feedback is composed of messages the receiver
sends back to the source. Verbal or nonverbal, all these feedback signals allow
the source to see how well and how accurately (or how poorly and inaccurately)
the message was received. Feedback also provides an opportunity for the
receiver or audience to ask for clarification, to agree or disagree, or to indicate
that the source could make the message more interesting. As the amount of
feedback increases, the accuracy of the communication also increases.
•
Environment – The environment is the atmosphere – physical and
psychological – where you send and receive messages. For instance, the
environment can include the tables, chairs, lighting, and sound equipment that
are in the room. The room itself is an example of the environment. The
environment can also include factors like a formal dress that may indicate
whether a discussion is open and caring or more professional and formal.
•
Context – The context of the communication interaction involves the setting,
scene, and expectations of the individuals involved. The degree to which the
environment is formal or informal depends on the contextual expectations for
communication held by the participants. Context plays a very important role in
communication, particularly across cultures.
•
Interference – Interference, also called noise, can come from any source.
Interference is anything that blocks or changes the source’s intended meaning
of the message. Noise interferes with normal encoding and decoding of the
message carried by the channel between source and receiver. Not all noise is
bad, but noise interferes with the communication process.
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Figure 9.3: A transactional communication model (University of Minnesota
Libraries Publishing, 2019)
Open the link below to watch a YouTube video for a short explanation of the
communication model.
Time: 4:52 minutes
https://www.youtube.com/watch?v=TRNFQlX2uiI
Activity 9.4
This activity will take approximately 10 minutes to complete.
Access the link below to watch a YouTube video on poor communication in
the workplace:
https://www.youtube.com/watch?v=AAhIFD9czks
Identify the poor forms of communication displayed in the video.
Feedback:
We can identify the following forms of poor communication from the
video:
•
Giving unspecific deadlines – always give detailed deadlines when communicating
a need. A good leader will schedule a pre-deadline check-up to ask the employee
about the progress made.
257
•
Negative emphasis – negative comments from a leader to an employee can lead to
discouragement and a decrease in work output.
•
No feedback is given regarding what is expected.
•
Messaging through e-mail is not a reliable form of communication – a good leader
will communicate with employees individually and face-to-face.
If you have not understood the explanations in this module so far, then the
communication between lecturer and learner has not been successful! This could be
as a result of faulty sending, or faulty receiving, or both. It could even be a case of the
channel of communication being ineffective because you would have benefited more
from attending a discussion class than from reading the study guide on your own.
Students sometimes phone their lecturers for information that has been clearly set out
in a tutorial letter – but they simply did not bother to read it. That would mean poor
communication on account of poor receiving. It could also be that the explanation is so
vague that the student still does not understand it, even after reading it. This would
simply be poor communication because of poor sending in terms of the message being
poorly constructed. Similarly, in the business environment we often see the effects of
poor communication. Many times, we hear excuses such as “Oh, so that is what you
meant!” or “If you had said so in the first place, things would have been far clearer!”
9.9
SUMMARY
Leading is the third task of management and is the one that sets up the business and
keeps it going. As you may have realised from our discussion, leading is a difficult
concept to define, because it is concerned with influencing the behaviour of
subordinates and directing their activities so that the aims of the business are attained
as profitably as possible. Its components – leadership, motivation, group and team
behaviour and communication – are interrelated instruments used to exert that
influence. Managers should have sufficient knowledge of these factors to be good
leaders as well as good managers. We deal with the fourth and final important element
of management, namely control, in lesson 10.
Make sure you have mastered the key concepts that were listed at the start of the
lesson by making brief notes so that the meaning of each term is clear.
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Before proceeding to the next lesson, take some time to reflect on what you have
learned in lesson 9. Make sure you have achieved all the outcomes listed at the
beginning of this lesson.
9.10 SELF-ASSESSMENT QUESTIONS
This activity will take approximately 10 minutes to complete.
QUESTION 1
Which one of the following statements on
authority is wrong?
a) Final authority flows from delegation.
b) Management delegates authority to subordinates to enable them to execute
tasks.
c) The right to expect action from others is also conferred by members of a group.
d) Power is not granted to a manager.
QUESTION 2
Which one of the following types of power is granted to all managers?
a)
legitimate
b)
personal
c)
referent
d)
expert
QUESTION 3
A trade union is formed to satisfy the _______ needs of the employees.
a)
basic
b)
security
c)
social
d)
esteem
e)
self-actualisation
259
THE ANSWERS TO THE SELF-ASSESSMENT QUESTIONS
Question
9.11
Answer
1
d
2
a
3
b
REFERENCES
Blake, R. R. & Mouton, J. S. 1981. Management by grid principles or situationalism:
Which? Group and Organisation Studies, 6:439–455.
Botha, T. & Vrba, M. 2021. Contemporary management Principles (2nd edition). Cape
Town: Juta
Erasmus, B., Rudansky-Kloppers, S. & Strydom, J. 2019. Introduction to business
management (11th edition). Cape Town: Oxford.
French, J. R. P. & Raven, B. 1959. The bases of social power. In Cartwright, D (ed.),
Studies in social power. Ann Arbor, MI: Institute for Social Research, University of
Michigan, 150–167.
Kirkpatrick & Locke. 1991. The best managers: What it takes. 2000 (Jan. 10). Business
Week, 158.
Mullins, L. J. 2005. Management and Organisational Behaviour (7th edition). UK:
Prentice Hall.
RA Podar College, n.d. Unit 1: Theory of Communication. [Online]. Available from:
<chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/http://www.rapodar.ac.in/
pdf/elearn/Bus%20Com%20Unit%201%20notes.pdf> [Accessed 5 August 2022].
Smit, P. J., Botha, T. & Vrba, M. J. 2020. Management Principles – A contemporary
edition for Africa (7th edition). Cape Town: Juta.
University of Minnesota Libraries Publishing. 2019. Business Communication for
success.
[Online].
Available
from:
<https://drive.google.com/file/d/
11WQJqr4jCez_RqWkMEavruCMsOj7TtSM/view> [Accessed 10 August 2022].
260
9.12 OPEN EDUCATIONAL RESOURCES (OERS)
You are advised to refer to the Leadership chapter on the following OERs to learn
more about the management function of leading.
Business Faculty from Ontario Colleges and Ecampusontario Program Managers.
2018. Fundamentals of business: Canadian edition [Online]. Available from:
<https://ecampusontario.pressbooks.pub/businessfuncdn/>
(Accessed
5 August 2022).
Openstax. 2018. Introduction to Business [Online]. Houston, Texas: Openstax. ISBN10: 1-947172-55-7. Available from: <https://openstax.org/books/introductionbusiness/pages/6-4-leading-guiding-and-motivating-others>
(Accessed
11 August 2022).
Openstax. 2019. Principles of management [Online]. Houston, Texas: Openstax.
ISBN: 978-0-9986257-7-5. Available from: <https://openstax.org/books/principlesmanagement/pages/13-introduction> (Accessed 5 August 2022).
Saylor.com Academy. 2020. Exploring business [Online]. The Saylor.com Academy.
Available
from:
<https://saylordotorg.github.io/text_exploring-business-v2.0/>
(Accessed 5 August 2022).
261
Contents
10.1
INTRODUCTION ..........................................................................................264
10.2
DEFINING CONTROLLING..........................................................................265
10.3
THE PURPOSE OF CONTROLLING ...........................................................266
10.4
THE NEED FOR CONTROLLING ................................................................268
10.4.1 Environmental stability ..................................................................................269
10.4.2 Environmental complexity .............................................................................269
10.5
THE CONTROLLING PROCESS .................................................................270
10.6
TYPES OF CONTROLLING .........................................................................277
10.6.1 Reactive controlling ......................................................................................277
10.6.2 Proactive controlling .....................................................................................277
10.7
AREAS TO BE CONTROLLED AND TECHNIQUES USED ........................278
10.7.1 Financial resources ......................................................................................278
10.7.2 Human resources .........................................................................................280
10.7.3 Physical resources .......................................................................................280
10.7.4 Information resources ...................................................................................282
10.8
CHARACTERISTICS OF AN EFFECTIVE CONTROLLING SYSTEM .........282
10.9
BASIC CONTROLS FOR SMALL BUSINESSES .........................................283
10.10 SUMMARY ...................................................................................................284
10.11 REFERENCES .............................................................................................287
10.12 OPEN EDUCATIONAL RESOURCES (OERs) ............................................288
10.13 IMAGES USED.............................................................................................288
262
LESSON 10: CONTROLLING
This lesson will require approximately NINE notional hours. Figure 10.1 represents an
overview of lesson 10.
10.1 Introduction
10.2. Defining controlling
10.3 The purpose of controlling
10.4 The need for controlling
10.5 The controlling process
10.6 Types of controlling
10.7 Areas to be controlled and techniques to be used
10.8 Characteristics of effective controlling
10.9 Basic controls for small businesses
10.10 Summary
10.11 References
10.12 Open Educational Resources (OERs)
10.13 Images used
Figure 10.1: Visual overview of the lesson
(Source: Author's design)
263
10.1
INTRODUCTION
The management functions that you have learned about so far are planning (lesson
7), organising (lesson 8) and leading (lesson 9). By now you know that planning is
about establishing plans for the organisation. This includes defining the mission and
objectives or performance targets to be met to achieve the organisation's mission.
After planning has been concluded, an organisation needs to be organised by
allocating the employees and resources required to implement the objectives. In
addition, employees should be provided with focus and direction, and be motivated to
accomplish the objectives of the organisation. The question that comes to mind is "Are
these functions enough in an organisation to succeed?". Unfortunately, the answer is
no. Once the organisation carries out its plan, there is a need to monitor operations to
determine whether everything is going according to the plan. In most instances, there
is a need to take corrective action. This is where the controlling function comes in. In
this lesson, you will learn how to define the term controlling, what the purpose of
controlling is and why there is a need for controlling. Furthermore, you will be
introduced to the controlling process, types of controls, areas to be controlled and
characteristics of effective controlling. Lastly, you will explore basic controls for small
businesses.
LEARNING OUTCOMES
When you have worked through this lesson, you should be able to:
•
•
define the management function of controlling
•
explain the purpose of controlling
discuss how the need for control is determined depending on the complexity
and stability of the environment
•
discuss the four steps of the controlling process
•
differentiate between the various types of control
•
explain the key areas of control in an organisation and the techniques used
•
discuss the characteristics of an effective controlling system
•
explain the basic controls for small businesses
264
KEY TERMS
actual performance
areas of controlling
budgets
control process
complexity
corrective action
deviations
economic order quantity (EOQ)
financial ratios
financial resources controlling
human resources controlling
information resources controlling
inventory
inventory controlling
just-in-time system (JIT)
material requirements planning (MRP)
physical resources control
quantity controlling
set standards
small businesses
stability
total quality management (TQM)
Now that you know what will be expected of you at the end of this lesson and the key
terms that you should be familiar with, the next section will enable you to define the
management function of controlling.
10.2
DEFINING CONTROLLING
Controlling is used to ensure that the organisation's goals and objectives are reached
and that resources are being used as productively and effectively as possible. It
functions to give feedback on the other three tasks, namely planning, organising and
leading, and to start a new cycle of the management task. Controlling is concerned
with narrowing the gap between what was planned and the actual achievements of
management and it ensures that all activities are carried out as they should be. In
addition, controlling is the process whereby management obtains information to
determine whether the objectives that were set for the organisation during the planning
stage have been reached and, if not, to take corrective action. The management
process thus takes place between planning and controlling. So, it should be clear that
the task of controlling has its roots in planning.
Like the managerial functions of planning, organising and leading, controlling is a
difficult task that is executed at different levels of the organisation (Openstax, 2019).
265
For example, top management monitors the overall strategic plans of the organisation,
which can be implemented only if middle management controls the organisation's
divisional and departmental plans. The divisional and departmental plans, in turn,
depend on lower management to control and monitor employees' performance
(Openstax, 2019). The following section will help you to understand the purpose of
controlling in an organisation.
10.3
THE PURPOSE OF CONTROLLING
An organisation needs a controlling process because even the best-laid plans can go
wrong owing to unforeseen circumstances or unexpected changes within the
environment. Organisations did not foresee the recession that occurred in 2009 or the
impact that a pandemic like Covid-19 would have on their sustainability. Therefore,
many organisations experienced great losses despite proper planning before these
occurrences. Some organisations managed to adjust, though, because they have had
effective control systems to detect changes in the environment. Read the following
case study on small, medium and micro enterprises (SMMEs) surviving and thriving
post Covid-19 due to effective financial and quality control. The full article focuses on
how South African SMMEs can survive and thrive post Covid-19, but we only extracted
the sections related to the management function of controlling.
How South African SMMEs can survive and thrive post Covid-19
The ongoing Covid-19 pandemic is causing untold human suffering across Africa
and is likely to leave an indelible impact on the continent's small and medium-sized
enterprises (SMEs). For South African SMEs, already having to contend with a
contracting economy, additional shocks from Covid-19 are causing further pressure
on their operations. Lockdown measures have caused revenues in many SMEs to
fall precipitously and the majority report that they are being forced to cut back on
business spending to survive. For some, this may not be enough; analysts are
predicting that around 60 per cent of SMEs may close before the crisis is over.
Many low-matured and new SMME businesses lack the financial, operational, and
strategic structures that are common in larger businesses. This hinders them from
making the best use of the available capital to scale their operations. This may be
because they have limited cash flow and are highly dependent on clients paying
266
their invoices on time or because they have little knowledge of and insight into how
to effectively set up and run the business, and the associated key metrics to be
tracked. For example, an agricultural client that had an ambitious growth plan to
expand their facilities in core and non-core areas struggled to obtain the required
funding because the business was not in a financial position to meet stringent
funding requirements.
Lack of prioritisation and financial planning that would have allowed them to focus
on core areas to finance and build out meant that, rather than growing sustainably,
the scale of their ambitions and poor internal management combined – and as a
result, they did not grow at all.
Liquidity and cash flow management are likely to come under even further pressure
during the crisis. A recent survey highlights that SMMEs are taking drastic actions
to hedge against future risk, with 70 per cent saying they have reduced business
spending already.
One of the four areas where SMMEs can take action to mitigate these challenges
during the crisis is to drive efficiency as well as sales. Most SMMEs focus on
increasing sales and managing cash as priorities. SMMEs that also focus on
operational efficiencies can drive further competitiveness to support sales and
potentially create increased capacity in the business. For example, a manufacturing
SMME used basic visualisation tools such as management boards to optimise
operations. By tracking tasks in progress and key performance indicator
dashboards, they managed to achieve a 25 per cent improvement in scrap
reduction, which had resultant earnings before interest, tax, depreciation, and
amortisation impact of roughly 100 per cent. This was primarily driven by improved
visibility into areas of leakage as well as a better ability to focus team efforts on
solving problems.
Extract from https://www.mckinsey.com/featured-insights/middle-east-and-africa/howsouth-african-smes-can-survive-and-thrive-post-covid-19# (Accessed 8 February
2022)
267
Organisations must do environmental scanning to keep abreast of change, to
determine which factors pose threats to existing goals and to determine which factors
represent opportunities to promote current goals. The following reasons show why it
is important to have controlling processes:
•
Without controlling, effective planning cannot take place.
•
It enables companies to adapt to environmental change and allows them to
cope with changes and uncertainties.
•
Controlling helps to limit the accumulation of errors due to poor decisionmaking.
•
As the size of a business increases, it becomes increasingly difficult to identify
areas of weak performance.
•
Controlling helps to minimise costs and increase output.
•
An effective controlling system allows management to identify problems before
they become critical for the organisation.
•
Controlling allows management to determine whether delegated tasks have
been carried out satisfactorily.
•
Increasing competition necessitates more effective cost and quality control. A
lack of control can result in resources being wasted or misused.
•
Controlling usually results in better quality.
In this section, we have demonstrated the importance of the management function of
controlling. However, organisations differ in the levels of controlling that they require.
This brings us to the next section, which will enable you to discuss the different levels
of need for controlling.
10.4
THE NEED FOR CONTROLLING
While there is a need for control in all organisations, the amount, importance and type
of controls differ from one organisation to another. The most important aspects that
affect the nature of controlling systems chosen by an organisation are the level of
environmental change and the complexity it experiences (Openstax, 2019). Figure
10.2 depicts different levels of need for controlling depending on the complexity and
stability of the environment in which an organisation operates.
268
Environmental complexity
Simple
Complex
Block 1. Low
Block 3. Moderate
Block 2. Moderate
Block 4. High
Static Dynamic
Environmental stability
Figure 10.2: Need for controlling (Attribution: Copyright Rice University, OpenStax,
under CC-BY 4.0 license. Available from https://openstax.org/details/books/principlesmanagement)
The aspects of the above diagram are discussed below.
10.4.1 Environmental stability
Organisations that conduct business in a relatively stable environment usually need to
change very little; therefore, managers can ultimately control their organisations by
implementing a set of routine procedures. However, with greater levels of
environmental change and the associated uncertainty, controlling requires continual
attention from managers. Routines and rigid controlling systems are simply not
adequate for such conditions (Openstax, 2019).
10.4.2 Environmental complexity
Environmental complexity affects the nature of control systems. Simple environments
contain a limited number of highly similar components that are relatively easy to control
using shared sets of rules and procedures. For example, the same rigid controlling
system can be used in all branches of a large organisation. Factors such as
organisational growth and product diversification might increase the complexity and as
269
a result, the need for the latest information and management's coordination between
organisational activities intensify. However, the complexity that calls for increased
controlling also requires open, responsive systems that can react rapidly and
successfully to complex environments. In such complicated situations, organisations
often specify the development of flexible systems as a means of goal attainment
(Openstax, 2019).
The level of control that organisations need under different environmental conditions
can be classified as follows:
•
Block 1 (Low need for controlling) – occurs when the environmental complexity
is simple and environmental stability is relatively static.
•
Block 2 (Moderate need for controlling) – occurs when the environment is
complex and environmental stability is static.
•
Block 3 (Moderate need for controlling) – occurs when the environmental
complexity is simple and environmental stability is relatively dynamic.
•
Block 4 (High need for controlling) – occurs when the environment in which the
organisation operates is both complex and dynamic.
The organisation first needs to establish the need for controlling, considering the
stability and complexity of the environment in which it operates. This will assist it to
establish the process to be followed, areas to focus on and techniques to be used. In
the following section, you will learn about the controlling process followed by most
organisations.
10.5
THE CONTROLLING PROCESS
The controlling process as depicted in figure 10.3 represents the heart of the
controlling task. It is important that you understand the sequence of these steps and
how the process is linked to the task of planning.
270
Step 3. Comparing
actual
performance with
standards
Step 1. Setting
performance
standards
Step 2. Measuring
actual
performance
Step 4. Taking
corrective actions
Figure 10.3: The four steps of the controlling process
We will now discuss the controlling process.
Step 1: Setting performance standards
Performance standards are the levels of performance an organisation wants to attain.
The performance standard of an organisation are based on its mission, objectives and
plans (Gitman, McDaniel, Shah, Reece, Koffel, Talsma & Hyatt, 2018). The most
effective performance standards state a measurable behavioural objective that can be
achieved in a specified timeframe. Remember that in the planning lesson, we have
indicated that the objectives should be SMART. Examples of performance standards
include the following (Erasmus, Rudansky-Kloppers & Strydom, 2019):
•
Productivity – The ratio of the inputs and outputs in the organisation. For
example, if the target is to produce goods and services at a ratio of 1:2, the
organisation expects to double the amount spent on producing their products
or services.
•
Profit – The amount of revenue the organisation envisages generating over a
certain period.
•
Market share – Indicates the share of the overall market that the organisation
aims to occupy. For example, in 2019 the market shares for Vodacom, MTN,
Cell C and Telkom were 42%, 29%, 16,9% and 9,5%, respectively
(https://www.statista.com/statistics/980115/mobile-market-share-southafrica/).
•
Staff development – This indicates the effectiveness of the training programme
for employees in the organisation.
271
Activity 10.1
This activity will take approximately 15 minutes to complete.
Case study: Vodacom's strategic objectives
The company identified the following performance standards:
• Grow data revenue to 40% of Group service revenue.
•
Clear market share leadership in all markets through segmented offerings
and best distribution.
•
Drive people transformation through diversity, skills and talent growth,
achieving an Engagement Score of 80.
•
Grow fixed-line FTTx connections in South Africa.
•
Grow five-point NPS and brand leadership through network leadership,
differentiated customer experience and best value.
•
Engage proactively with government and stakeholders to achieve each
country's broadband goals and contribute to a positive impact on societies,
achieving clear reputation leadership in all markets.
•
Grow contribution from enterprise to 30% of Group service revenue.
•
Grow contribution from non-South African entities to 30% of Group service
revenue.
•
Grow contribution from new services to 5% of Group service revenue.
•
Drive cost efficiencies to ensure cost growth is 0.5% lower than revenue
growth.
Case study extracted from https://www.vodacom-reports.co.za/integrated-reports/ir2016/ovr-strategy.php (Accessed 22 October 2020)
Use the table to classify the performance standards that Vodacom formulated.
Productivity
Profit
Market share
Staff
development
272
Reputation
Feedback:
The performance standards of Vodacom can be classified as follows:
Productivity
Profit
Market
Staff
share
development
Reputation
- Grow fixed- - Grow data
- Clear
- Drive people
- Grow five-point
line FTTx
revenue to 40%
market
transformation NPS and brand
connections
of Group service
share
through
in South
revenue.
leadership
diversity, skills through network
Africa.
- Grow
in all
and talent
leadership,
- Drive cost
contribution from markets
growth,
differentiated
efficiencies
enterprise to
through
achieving an
customer
to ensure
30% of Group
segmented
Engagement
experience and
cost growth
service revenue.
offerings
Score of 80.
best value.
is 0.5%
- Grow
and best
lower than
contribution from distribution.
proactively with
revenue
non-South
government and
growth.
African entities
stakeholders to
to 30% of Group
achieve each
service revenue.
country's
- Grow
broadband
contribution from
goals and
new services to
contribute to a
5% of Group
positive impact
service revenue.
on societies,
leadership
- Engage
achieving clear
reputation
leadership in all
markets.
Step 2: Measuring actual performance
An assessment of the actual performance must be conducted after establishing what
should be measured, by when, how and by whom (Openstax, 2019). This is a
273
continuous process that should be conducted to collect information and report on the
actual performance. The performance activities should be quantifiable; and reliable
measurements of actual achievements should be adopted (Erasmus et al., 2019). The
areas of control and the techniques used by most organisations are discussed in
section 10.7.
Step 3: Comparing actual performance with standards
During this step, the actual performance established in the previous step is compared
to the performance standards set in Step 1. This assessment includes comparing
actual organisational achievements with what was planned (what an organisation is
trying to achieve) and the means (how an organisation intended to implement the
actions). During this step, it is vital to understand why a standard has only been
achieved and not exceeded, or even why performance has been much better than
anticipated (Erasmus et al., 2019). The results of this comparison afford management
with the information to evaluate any deviations. When evaluating the deviations, the
following three aspects need to be considered (Erasmus et al., 2019):
•
Ensure that the differences between the actual performance and the standards
are valid.
•
Determine whether the size of the differences substantiates additional
investigation.
•
Identify all the reasons and activities that have contributed to the differences.
Causes of deviations include poor planning, unrealistic standards, defective
processes, shortage of resources, ineffective supervision and lack of communication.
Step 4: Taking corrective action
Using comparative information, managers form conclusions about the relationships
found between expectations and reality – and then decide whether to maintain the
status quo, change the standard, or take corrective action (Openstax, 2019). The
controlling-by-exception principle should be applied (Erasmus et al., 2019); meaning
that only critical differences in performance are reported to top management. The less
critical discrepancies should be dealt with by supervisors and employees themselves.
There are three options that management can choose from if actual performance
differs from the set standards (Erasmus et al., 2019):
274
•
Actual performance can be enhanced to reach the set standards.
•
Strategies can be reviewed to realise the set standards.
•
Performance standards can be adjusted (lowered or raised) to ensure that the
standards are more realistic considering the prevalent conditions.
This step completes the cycle of the controlling process and serves as the reference
point for the following cycle in the management process.
Activity 10.2
This activity will take approximately 15 minutes to complete.
Case study: Phaṱhutshedzo Cup 'n Cakes plans to expand
Phaṱhutshedzo Cup 'n Cakes (PCnC) is an SMME based in Polokwane,
Limpopo. The owner, Ndivhuwo Ndou, started the company during the
Covid-19 pandemic after losing her job. Hence, she named it Phaṱhutshedzo (a
Tshivenda name meaning "blessings"). During a recent planning session, Ndivhuwo
and her employees decided that the company should expand in the next financial
year. As such, new employees should be hired and they should relocate to a building
that is big enough to accommodate the expanded operations. However, to achieve
that, individual and team sales needed to increase by 25%. Together with her sales
team, Ndivhuwo came up with strategies that they will implement to achieve the set
target. Ndivhuwo promised the team additional incentives if they were to achieve
their goals.
By the end of the financial year, the overall sales increased by 20,75%. Ndivhuwo
then reviewed the sales team's performance and found the following:
•
Peter Ratau: Sales increased by 19%
•
Bohlokoa Masemola: Sales increased by 28%
•
Bonolo Mudau: Sales increased by 11%
•
Mafemani Baloyi: Sales increased by 25%
Ndivhuwo is your friend and she knows that you are registered for this module at
Unisa; therefore, she requested your assistance regarding the management function
of controlling. Briefly explain and provide examples of each step in the controlling
275
process. Also suggest what actions should be taken in step 4 regarding the
performance of the sales team.
Feedback:
The steps in the controlling process are as follows:
Step 1: Setting performance standards
This step involves setting the performance standards an organisation aims to
achieve – based on its mission, objectives and plans. Ndivhuwo and her employees
decided that the company should expand in the next financial year. However, to
achieve this, individual and team sales need to increase by 25%.
Step 2: Measuring actual performance
Step 2 involves assessing the actual performance after a certain period. In the case
study, it was found that the overall sales increased by 20,75%. Individuals were also
evaluated.
Step 3: Comparing actual performance with standards
The target was 25%; however, only 20,75% was achieved. This means that the team
did not achieve its target.
Step 4: Taking corrective action
In this step, managers use comparative information to form conclusions about the
relationships found between expectations and reality. They then decide whether to
maintain the status quo, change the standard, or take corrective action. Although
the overall performance did not reach the target in the case study, two out of the four
team members managed to achieve the target. The manager would need to have a
meeting with the other two team members who did not meet the target. The following
steps can be taken:
•
Additional on-the-job support can be provided;
•
training programmes can be identified for the team members to attend; or
•
team members be reprimanded for poor performance.
276
The following video summarises the controlling process and provides practical
examples of each step:
https://www.youtube.com/watch?v=Xaf4iNOKRyU
In the next section, you will learn about the types of controlling that organisations can
implement.
10.6
TYPES OF CONTROLLING
There are different controlling activities that organisations can implement at three
stages in the work process – prior to, during, or after the performance. However, in
practice, managers use a combined controlling system that integrates controlling at
each of these intervals to enable them to prepare for a task, lead its progress, and
monitor the outcomes (Openstax, 2019).
10.6.1 Reactive controlling
Reactive controlling is used after the product or service has been completed, to assess
the results. For example, after clothes have been sewn in a factory that produces
clothing, a sample of the clothes is assessed to establish whether it meets the
specifications and to determine if the work was completed on time and produced within
budget. This type of control plays a significant role in planning for future tasks, but the
main function is to provide feedback by explaining the degree to which actual tasks
have been conducted (Openstax, 2019).
10.6.2 Proactive controlling
Proactive controlling is used to prevent deviation from a desired plan of action before
the work begins and also to avoid deviation from the planned course of action while
the work is in progress. This type of controlling assists to reduce losses by providing
vital information about any deviations as soon as possible, before they take place. This
enables managers to take action to prevent or reduce undesirable consequences.
The types of controlling that have been discussed in this section can be used to control
certain areas, and various techniques are used for this purpose. The following section
will provide more information regarding the areas to be controlled and the techniques
to be used.
277
10.7
AREAS TO BE CONTROLLED AND TECHNIQUES USED
As a rule of thumb, organisations should identify the different areas that need to be
controlled, as those areas are generally responsible for the effectiveness of the entire
organisation. Figure 10.4 depicts the four areas on which controlling systems in most
organisations focus, as well as the techniques in use.
Financial
resources
•Budgets
•Financial ratios
Human resources
•Performance reviews
•Specific ratio analysis
Physical
resources
Information
resources
•Inventory control
(EOQ, MRP and JIT)
•Quality control (TQM)
Figure 10.4: Areas to be controlled and techniques used
(Source: Author's design. Images used licensed under CC-BY 4.0 license. See
section 10.13 for more details)
The areas to be controlled, namely financial, human, physical and information
resources are discussed below.
10.7.1 Financial resources
Financial resources are very important to the success of any organisation and are
central to the controlling process. Financial control mainly focuses on the following
aspects (Gitman et al., 2018):
•
Resources already owned by the organisation, such as cash and working
capital
•
Income. Organisations generate income through sales of final products and/or
by capital gains and royalties; rendering of services.
278
•
Expenditures such as payment of salaries, rent, tax, purchasing of raw
materials and other expenses
•
Liabilities. An organisation should ensure that it manages its liabilities such as
mortgage debt, bank overdraft, money owed to suppliers, salaries owed, taxes
owed, and so forth.
The financial resources are controlled to ensure that the organisation generates
sufficient revenues to cover its expenses, resulting in a profit. Managers should ensure
that incoming and outgoing funds are strictly monitored, as to irregularities such as
fraud and errors are likely to occur. It is also important to make sure that the
organisation's existing financial resources are not tied in activities such as slowmoving inventory and outstanding debtors, as the organisation might not convert them
to cash when they need it the most.
There are two important instruments in use for controlling the financial resources of an
organisation, namely budgets and financial ratios.
10.7.1.1 Budgets
A budget is a formal plan encompassing financial terms that specify how resources
are shared between different activities and departments in an organisation.
Management uses a budget to determine how financial resources are used. A budget
is critical in an organisation as it makes the following contributions to financial control
(Erasmus et al., 2019):
•
It provides standards that can be used in the controlling process.
•
It offers guidelines about how the resources are shared in the organisation.
•
It enables managers to coordinate resources, departments and projects.
•
Management can use it to evaluate resource allocation in the organisation.
Types of budgets include financial budgets (focusing on cash flow and capital
expenditure), operational budgets (focusing on revenue and operational aspects of the
organisation such as sales and contracts) and non-financial budgets (focusing on other
activities in the organisation, expressed in non-financial terms such as sales volume,
production and time projections).
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10.7.1.2 Financial analysis
Financial analysis (also known as ratio analysis) is the process of evaluating
businesses, projects, budgets and other transactions related to finance, to establish
their appropriateness and performance. It is used to scrutinise the solvency, stability,
profitability or liquidity of an organisation to assess whether investing money in it will
be worthwhile. Financial analysis will be discussed in the module Business
Management I B (MNB1602).
10.7.2 Human resources
The controlling of human resources involves assessing the performance of employees
and managers in the organisation and comparing the actual performance with the set
standards. The productivity of an organisation mostly depends on employees who are
responsible for combining the financial, physical and information resources to convert
inputs into outputs such as goods and services. The main instrument used for
controlling human resources in organisations is the performance appraisal or review.
An performance appraisal can be done through rating scales, checklists, selfevaluation, 360-degree feedback and management by objectives. In addition, an
organisation should assess specific human resources performance such as the
composition of the workforce, the level of training and development, absenteeism and
turnover.
10.7.3 Physical resources
The controlling of physical resources focuses on the assets of an organisation such as
raw material, products in the processing phase, final products, office furniture, tools,
manufacturing equipment and machinery, vehicles and buildings. Physical resources
such as furniture, tools, equipment, machinery, motor vehicles and buildings are
usually recorded in an asset register. Other resources such as inputs and final
products are generally monitored through inventory and quality controls.
10.7.3.1 Asset register
An asset register is a list of the assets that an organisation owns. The list includes
important information regarding all fixed assets – to track their value and physical
location. The asset register provides the number and value of assets such as office
furniture, equipment, motor vehicles, computers, communication systems, buildings,
and so forth.
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10.7.3.2 Inventory controlling
Inventory in an organisation entails resources such as raw materials, work-in-process
and final products. The main objective of inventory control is to contain the costs of
production without instigating interruptions or shortages. The following three
controlling systems for monitoring inventory are commonly used in an organisation
(Erasmus et al., 2019):
•
Economic order quantity (EOQ) is based on ordering the most economic
number of inputs to refill inventory levels. For example, a factory that sews
graduation gowns will adopt the EOQ by purchasing fabric when their current
stock of fabric reaches a certain level. The downside of this system is that
inventory must be reserved at all costs, without considering the demand from
the production department or customers.
•
Material requirements planning (MRP) is based on ordering the inventory when
needed, by estimating the demand for raw materials and the components
required to produce a final product. For example, the factory might decide to
purchase fabric based on the estimation of the quantity of fabric needed to
produce a certain number of gowns.
•
The just-in-time (JIT) system is similar to the MRP. This system adopts the
notion that inventory should be ordered when required. However, the JIT goes
a step further by using the actual orders for final products to source the raw
material and components, which are delivered just in time for processing. Using
the graduation sewing factory case, the factory will apply the JIT by only
ordering fabric when there are orders for gowns.
10.7.3.3 Quality
Quality and productivity have become very important issues all over the world. Quality
control refers to the management activities that ensure a level of quality that will satisfy
customers and have benefits for the business. There are different controlling systems
used for the management of quality but in this module, we will only focus on total
quality management (TQM). TQM is based on the premise that quality is the
responsibility of all stakeholders in an organisation – ranging from the board of
directors to the employees. It emphasises how managers can continuously improve
an organisation's work systems to ensure that its final products and services are of the
expected quality.
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10.7.4 Information resources
For the four functions of management (planning, organising, leading and controlling)
to work optimally, they rely on effective information. Management can implement plans
only if they receive accurate and timely information. The faster feedback is received
on how things are going in the management process, the more effectively the
controlling systems will function.
Now that we have covered the types of control, areas to be controlled and techniques
to be used, you must understand what constitutes an effective controlling system.
10.8
CHARACTERISTICS OF AN EFFECTIVE CONTROLLING SYSTEM
Successful controlling systems have the following common characteristics (Openstax,
2019):
•
A good controlling system follows the prescriptions and adequately satisfies
each organisational target.
•
An effective controlling system uses a combination of reactive and proactive
controlling systems to monitor and correct activities at all points in an
organisation's operations.
•
All effective controlling systems are based on information. Without good
information, managers cannot assess whether the targets in terms of the results
and processes were achieved; they cannot establish a relationship between
them or provide feedback to planners. To be effective, information must be
objective, accurate and timely, and it must be distributed to organisation
members who need it.
•
A controlling system focuses on issues of importance to the organisation.
Controlling procedures that focus on almost all tasks and results waste
resources and risk creating a controlling system that produces negative feelings
and reactions.
•
A good controlling system is practical. Some practical considerations to look for
in a controlling system include flexibility, feasibility, the possibility that all
stakeholders will agree to adopt it, and the simplicity with which the system can
be integrated with planning activities.
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In addition to implementing an effective controlling system, small businesses should
ensure that they pay special attention to some measures that are more prevalent for
their conditions. The following section highlights the basic controls that small
businesses should have in place.
10.9
BASIC CONTROLS FOR SMALL BUSINESSES
The World Bank estimated that SMMEs globally add up to 33 per cent of the national
gross domestic products (GDP) of different countries, offering up to 45 per cent of all
opportunities for employment (Bruwer, Coetzee Meiring, 2018). In the South African
context, researchers established that SMMEs enhance the economy by creating at
least 60 per cent of employment opportunities while contributing up to 57 per cent to
the national GDP (Bruwer et al., 2018). The same can be said about small-scale
enterprises in Nigeria as they were found to be the engine room for economic growth
(Adeniyi & Okoye, 2017). Regrettably, the sustainability rate of SMMEs is reported to
be one of the worst, with about 75 per cent disappearing after being in business for
just three years (Bruwer et al., 2018).
Ineffective internal controls contribute to why SMMEs still find it hard to be sustainable.
Effective controlling systems are regarded as critical to the survival of SMMEs due to
their impact on risk mitigation and prevention (Nqala, 2019). Internal controlling
systems in most organisations are designed by considering the size of the
organisation, the level of the accounting department, costs and benefits. Everyone in
an organisation has responsibilities regarding internal controls, such as the board of
directors, management, internal auditor, external auditor and other personnel. The
basic controls for small businesses include (Nqala, 2019):
•
Reconciling all cash receipts immediately.
•
Depositing all cash receipts every day.
•
Making all payments by serial numbered cheques, excluding all disbursements
from petty cash.
•
Reconciling bank account every month and retaining copies of reconciliation in
the file.
•
Using serial-numbered sale invoices, purchase orders and receiving reports.
•
Paying the vendors of only approved invoices that have been matched with the
purchase order and receiving reports.
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•
Balancing subsidiary ledger with control account frequently and preparing and
sending statements of a customer every month.
•
Preparing comparative financial statements supported by adequate detail to
divulge noteworthy variations in any category at revenue or expense.
Adopting these basic controls will alleviate risk and avert risk from occurring unnoticed.
The owner is also responsible for (1) approving all general ledger entries, (2)
reconciling the bank account monthly, (3) critically reviewing comparative monthly
statements of revenue and expense, (4) studying daily cash register totals, and (5)
signing all cheques and cancelling the supporting documents (Nqala, 2019).
The aspects highlighted in this section mostly focus on managing financial resources.
For entrepreneurs, cash is very important, especially during crises like the 2009
recession and the Covid-19 pandemic. The focus should be on the price, cost,
overheads, accounts receivable, volume, inventory and accounts payable to ensure
that an organisation has access to cash. Fundamentally, managers should establish
their organisation's current revenue and funding availability, analyse their scenarios,
and establish a way forward to improving cash reserves.
10.10 SUMMARY
One of the most important ingredients for the sustainability of any organisation is
adopting and upholding efficient and effective internal controlling procedures. During
this phase, the gap between the actual performance and set standards is evaluated
and reduced. We have discussed controlling as the fourth and final step of the
management process, so the discussion of the management process is complete. We
hope that you now have basic insight into all the general management functions.
Access the link below for a video that summarises the management function of
controlling:
https://www.youtube.com/watch?v=3BabPH-uXw8
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SELF-ASSESSMENT QUESTIONS
This activity will take approximately 10 minutes to complete.
QUESTION 1
Sibusiso Zulu, the CEO of Zulu Holdings, was worried about the poor
financial performance of the organisation, even though it was the market leader. He
hired a consultant to assist him to establish what could be the problem. The consultant
identified that the organisation has weak financial controlling systems and that the staff
members working with finances were not performing their jobs satisfactorily. In which
step of the controlling process did Sibusiso hire the consultant?
1 Step 1: Setting performance standards
2 Step 2: Measuring actual performance
3 Step 3: Comparing actual performance with standards
4 Step 4: Taking corrective action
QUESTION 2
Which option is an instrument that Sibusiso (in question 1) could use to control human
resources?
1 Performance reviews
2 Just-in-time (JIT) system
3 Total quality management (TQM)
4 Economic order quantity (EOQ)
QUESTION 3
Chloe manages the volunteer organisation, Barking Mad, which provides abandoned
animals with shelter and food and places them up for adoption. Which processes
would she follow when she is busy with the management function of controlling?
a
The shelter needs to maintain an adoption rate of 25% to provide all its animals
with shelter and food.
b
Chloe realises that their organisation is relatively unknown to the public and
organises a fun walk to raise awareness of Barking Mad.
c
Chloe compiles a detailed report of all the adoptions they have had over the last
six months.
285
d
The data Chloe has collected shows that their adoption rate is only 19%.
Choose the correct option:
1
abcd
2
bcda
3
dcba
4
acde
5
acdb
QUESTION 4
Match the area of controlling in column A with the correct type of controlling in
column B.
Column A
Column B
a. Inventory
i. TQM systems
b. Quality
ii. Set standards
c. Financial resources
iii. Just-in-time
d. Human resources
iv. ITT systems
v. Performance measurements
vi. CCTV
vii. Budgets
Choose the correct option:
1
a (i) b (ii) c (iii) d (iv)
2
a (i) b (v) c (iv) d (iii)
3
a (ii) b (iv) c (i) d (vi)
4
a (iii) b (i) c (vii) d (v)
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THE ANSWERS TO THE SELF-ASSESSMENT QUESTIONS
Question
Answer
Reference (section)
1
2
10.5
2
3
10.7
3
4 (a c d e)
10.5
4
4 (a (iii) b (i) c (ii) d (v))
10.7
10.11 REFERENCES
Adeniyi, S.I. & Okoye, E. I. 2017. Internal control for sustainable development of small
scale enterprises in Lagos State: A study of selected local governments.
Proceedings of the 2017 International Conference on African Entrepreneurship and
Innovation for Sustainable Development (AEISD), Awka, Anambra State, Nigeria.
Bruwer, J.P., Coetzee, P. & Meiring, J. 2018. Can internal control activities and
managerial conduct influence business sustainability? A South African SMME
perspective. Journal of Small Business and Enterprise Development, 25(5):
710–729. https://doi.org/10.1108/JSBED-11-2016-0188
Erasmus, B., Rudansky-Kloppers, S. & Strydom, J. 2019. Introduction to business
management (11th edition). Cape Town: Oxford.
Gitman, L.J., McDaniel, C., Shah, A., Reece, M., Koffel, L., Talsma, B. & Hyatt, J.C.
2018. Introduction to business [Online]. Houston, Texas: OpenStax. Available from:
<https://openstax.org/details/books/Introduction-Business>
[Accessed
1 June 2020].
Nqala, L. 2019. Internal controls systems, SMEs and economy of developing
countries: Case of South Africa [Online]. The Economic Society of South Africa
(ESSA).
Available
from:
<https://2019.essa.org.za/fullpaper/essa_3691.pdf>
[Accessed 19 October 2020].
Openstax. 2019. Principles of management [Online]. Houston, Texas: Openstax.
ISBN: 978-0-9986257-7-5. Available from: <https://openstax.org/details/books/
principles-management> [Accessed 1 June 2020].
287
10.12 OPEN EDUCATIONAL RESOURCES (OERs)
Refer to the controlling chapter or section on the following OERs to learn more about
the management function of controlling.
Business Faculty from Ontario Colleges and Ecampusontario Program Managers.
2018. Fundamentals of business: Canadian edition [Online]. Available from:
<https://ecampusontario.pressbooks.pub/businessfuncdn/> [Accessed 1 June 2020].
Saylor.com Academy. 2020. Exploring business [Online]. The Saylor.com Academy.
Available
from:
<https://saylordotorg.github.io/text_exploring-business-v2.0/>
[Accessed 1 June 2020].
10.13 IMAGES USED
These images are licensed under CC-BY 4.0 license:
Figure 10.4
1. Financial resources image: https://www.maxpixels.net/static/photo/1x/BudgetInvestment-Money-Finance-Business-Savings-2789112.jpg
[Accessed
19 October 2020]
2. Human
resources
image:
https://res.cloudinary.com/people-matters/image/
upload/fl_immutable_cache,w_624,h_351,w_624,h_351,c_scale,q_auto,f_auto/v
1496472516/1496472514.jpg [Accessed 19 October 2020]
3. Physical
resources
image:
http://1.bp.blogspot.com/_klSDkGhMiZ0/
TNcZAFOackI/AAAAAAAAAE8/lFCvLFoZyAQ/w1200-h630-p-k-no-nu/tool1.jpg
[Accessed 19 October 2020]
4. Information
resources
image:
https://cdn-images-1.medium.com/focal/1200/
632/0/0/1*lVGjdpqYxL2ZYI3L3wI6lA.jpeg [Accessed 19 October 2020]
288