Module 1: Introduction to Business Management
NQF LEVEL 5 – 15 CREDITS*
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Business Management Training College (Pty) Ltd.
2021 First Edition
First Print June 2021
*SAQA equates one credit with ten notional hours of study. Credits include all studies
related to this module, including prescribed and recommended research, assignments
and work-related projects if required. Credits will only be granted upon successful
completion of the full programme.
Author: Bernie van der Linde
Editors: Jako Poolman, Zoe Auths
TABLE OF CONTENTS
PRESCRIBED TEXTBOOK REFERENCES ........................................................... VII
CHAPTER 1: THE ROLE OF BUSINESS IN SOCIETY ............................................ 2
1.1
INTRODUCTION ........................................................................................... 2
1.2
THE FOUR KEY ELEMENTS OF BUSINESS ............................................... 3
1.3
THE FOUR FUNCTIONAL AREAS OF A BUSINESS ................................... 3
1.4
OPERATIONS INPUT-PROCESS-OUTPUT ................................................. 4
1.5
ADDING VALUE ............................................................................................ 5
1.6
THE PURPOSE OF SMMES IN SOUTH AFRICA ......................................... 6
1.7
SUMMARY .................................................................................................. 11
CHAPTER 2: NEEDS AND NEED SATISFACTION ............................................... 13
2.1
INTRODUCTION ......................................................................................... 14
2.2
FACTORS OF PRODUCTIONS .................................................................. 14
2.3
HUMAN NEEDS AND WANTS.................................................................... 16
2.3.1
Maslow’s Hierarchy of Needs ...................................................................... 17
2.4
SUMMARY .................................................................................................. 19
CHAPTER 3: THE MAIN ECONOMIC SYSTEMS ................................................... 21
3.1
INTRODUCTION ......................................................................................... 21
3.2
THE SOCIALIST ECONOMY ...................................................................... 23
3.3
THE COMMAND ECONOMY ...................................................................... 23
3.4
THE FREE MARKET ECONOMY ............................................................... 24
3.4.1
The free market system ............................................................................... 25
3.4.2
Origins of the free market system ................................................................ 27
3.4.3
Theory of the free market system ................................................................ 28
3.4.4
The practice of the free market system ....................................................... 30
3.4.5
The degree of market freedom .................................................................... 30
3.4.6
Ideology and ethics of the free market system ............................................ 31
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3.5
SUMMARY .................................................................................................. 33
CHAPTER 4: THE MACRO-, MICRO- AND MARKET ENVIRONMENT ................ 36
4.1
INTRODUCTION ......................................................................................... 37
4.2
THE MICRO-ENVIRONMENT (THE ORGANISATION) .............................. 40
4.2.1
Human Resources ....................................................................................... 41
4.2.2
Physical Resources ..................................................................................... 41
4.2.3
Financial Resources .................................................................................... 41
4.3
MACRO-ENVIRONMENT (EXTERNAL) ..................................................... 42
4.3.1
The PEST Analysis ...................................................................................... 46
4.3.2
The PESTLE Analysis ................................................................................. 48
4.4
THE MARKET OR TASK ENVIRONMENT ................................................. 51
4.5
SUMMARY .................................................................................................. 54
CHAPTER 5: CHANGE MANAGEMENT ................................................................ 56
5.1
INTRODUCTION ......................................................................................... 56
5.2
CHANGING ENVIRONMENTS ................................................................... 56
5.2.1
Uncertainty in the Environment.................................................................... 58
5.2.2
Stable Environments ................................................................................... 59
CHAPTER 6: CORPORATE SOCIAL RESPONSIBILITY....................................... 61
6.1
SUSTAINABILITY REPORTING ................................................................. 62
6.1.1
The Three Target Areas of Social Responsibility ......................................... 63
6.1.2
Focus Areas of Social Responsibility ........................................................... 64
6.1.3
Factors that Influence Corporate Social Responsibility ............................... 64
6.2
CORPORATE GOVERNANCE ................................................................... 65
6.3
SUMMARY .................................................................................................. 66
CHAPTER 7: THE NATURE OF MANAGEMENT ................................................... 68
7.1
INTRODUCTION ......................................................................................... 71
7.2
WHAT IS MANAGEMENT? ......................................................................... 72
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7.3
UNDERSTANDING PRODUCTIVITY .......................................................... 73
7.4
THE TASKS OF MANAGEMENT ................................................................ 75
7.4.1
Planning....................................................................................................... 76
7.4.2
Organising ................................................................................................... 77
7.4.3
Leading ........................................................................................................ 77
7.4.4
Controlling ................................................................................................... 77
7.5
MANAGERIAL ROLES ................................................................................ 78
7.6
MANAGERIAL SKILLS AND COMPETENCIES AT DIFFERENT LEVELS
OF MANAGEMENT ..................................................................................... 80
7.6.1
Managerial Competencies ........................................................................... 82
CHAPTER 8: MANAGEMENT THEORIES ............................................................. 87
8.1
CLASSICAL APPROACHES ....................................................................... 88
8.1.1
Scientific Approach ...................................................................................... 89
8.1.2
Process or Administration Approach ........................................................... 90
8.1.3
Bureaucratic Approach ................................................................................ 91
8.1.4
Behavioural Viewpoint of Management ....................................................... 92
8.1.5
Human Relations Movement ....................................................................... 93
8.1.6
Quantitative Management Theory ............................................................... 93
8.2
CONTEMPORARY APPROACHES ............................................................ 94
8.2.1
Systems Approach ...................................................................................... 94
8.2.2
Contingency Approach ................................................................................ 97
8.2.3
Total Quality Management (TQM) ............................................................... 98
CHAPTER 9: PROBLEM-SOLVING AND DECISION MAKING ........................... 101
9.1
ELEMENTS OF PROBLEM-SOLVING ...................................................... 101
9.1.1
Stating the Problem ................................................................................... 103
9.1.2
Negative State ........................................................................................... 103
9.2
THE FRAMEWORK FOR DECISION MAKING ......................................... 104
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9.3
CERTAINTY, RISK AND UNCERTAINTY ................................................. 105
9.3.1
Certainty .................................................................................................... 105
9.3.2
Risk ........................................................................................................... 105
9.3.3
Uncertainty ................................................................................................ 106
9.4
PROBLEM-SOLVING ABILITIES .............................................................. 106
9.4.1
Resources for Solving Problems Include ................................................... 107
9.5
CREATIVE THINKING TECHNIQUES ...................................................... 107
9.5.1
The Six Hat Thinking Techniques .............................................................. 107
9.5.2
Benefits of the Six Thinking Hats ............................................................... 112
9.5.3
Brainstorming ............................................................................................ 112
9.5.4
The Nominal Group Technique.................................................................. 114
9.5.5
Force Field Analysis .................................................................................. 115
9.5.6
The Fishbone or Ishikawa Diagram ........................................................... 117
9.5.7
Osborne’s Checklist ................................................................................... 119
9.6
ANALYTICAL THINKING TECHNIQUES .................................................. 120
9.6.1
Pareto Analysis.......................................................................................... 120
9.7
STEPS IN THE PROBLEM-SOLVING PROCESS .................................... 121
9.7.1
Types of Problems..................................................................................... 123
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LIST OF FIGURES
Figure 1.1: Operations input-process-output model ................................................... 5
Figure 1.2: The operations function ............................................................................ 6
Figure 1.3: The new National Enterprise Act thresholds .......................................... 10
Figure 2.1: The business needs ............................................................................... 16
Figure 2.2: Maslow’s hierarchy of needs .................................................................. 18
Figure 4.1: The macro- and microeconomics ........................................................... 38
Figure 4.2: The different layers of the business environment ................................... 39
Figure 4.3: The influences of the external environment in an organisation .............. 46
Figure 4.4: The PEST analysis ................................................................................. 47
Figure 4.5: Porter’s Five Forces Framework ............................................................ 54
Figure 7.1: Various organisational levels.................................................................. 71
Figure 7.2: Efficiency and Effectiveness................................................................... 73
Figure 7.3: Management functions performed by top management ......................... 74
Figure 7.4: Management functions performed by middle management ................... 75
Figure 7.5: Management functions performed by lower management ..................... 75
Figure 7.6: The process and tasks of management ................................................. 76
Figure 7.7: Structure of management's definitions ................................................... 81
Figure 7.8: Important aspects of each key managerial competency ........................ 85
Figure 8.1: Evolution of management thought .......................................................... 88
Figure 8.2: Environmental influences ....................................................................... 95
Figure 8.3: Model of a basic system ......................................................................... 96
Figure 9.1: Elements of a problem ......................................................................... 102
Figure 9.2 Example of defining a problem in terms of a negative state .................. 104
Figure 9.3: The framework for decision-making ..................................................... 105
Figure 9.4: The six thinking hats technique ............................................................ 108
Figure 9.5: Questions for the six thinking hats ....................................................... 112
Figure 9.6: Fishbone diagram ................................................................................ 118
Figure 9.7: The creative problem-solving process .................................................. 123
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LIST OF TABLES
Table 3.1: Comparison of the three major economic systems .................................. 22
Table 4.1: PESTLE analysis factors ......................................................................... 48
Table 4.2: PESTLE analysis for the vibe .................................................................. 50
Table 7.1: Mintzberg’s Ten Managerial roles with some examples .......................... 79
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PRESCRIBED TEXTBOOK REFERENCES
Erasmus, B.J., Strydom, J.W. & Rudansky-Kloppers, S. (2019). Introduction to
Business Management. 11th Ed. Cape Town: Oxford University Press.
ISBN 978 0 19 0412807
•
Study Chapter 1, The business world and business management.
•
Study Chapter 4, The Business environment.
•
Study Chapter 5, Corporate social reasonability.
•
Study Chapter 6, Introduction to general management.
Ferreira, E.J. & Groenewald, D. (2016). Administrative Management. 4th Ed. Cape
Town: Juta. ISBN 978 1 48512 127 5
•
Chapter 19, Problem-solving and decision-making.
RECOMMENDED TEXTBOOK/S
•
Botha, T., Vrba, M.J. & Smit, P.J. (2021). Management Principles: A
Contemporary Edition for Africa. 7th Ed. Cape Town: Juta. ISBN 9 781485
131007
•
Hellriegel, D., Slocum, J., Jackson S.E., & Louw, L. (2017) Management. 5th
Ed. Cape Town: Oxford University Press. ISBN 978 019 90777366
•
Ferreira, E.J. & Groenewald, D. Eds. (2016). Administrative Management. 4th
Ed. Cape Town: Juta. ISBN 978 1 48512 127 5
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PROGRAMME OVERVIEW
THE PROGRAMME AIMS TO ADDRESS THE FOLLOWING MANAGERIAL
COMPETENCIES:
•
Proficient communication skills: effective managers need to be skilful
communicators and have good listening skills to be able to manage a diverse
workforce. Managers need to adapt their communication skills based on
people’s personality and culture;
•
Understand multigenerational workforce trends: effective managers need
to understand the different generations and be able to adapt their management
styles accordingly;
•
Leadership skills: effective managers need the ability to direct, motivate and
lead by example. This includes being aware of their own strengths to interact
with subordinates in a way that capitalizes on their own strengths and minimises
their weaknesses;
•
Planning skills: effective managers need to be organised. Managers need to
know what needs to be done and when it needs to be done. Effective managers
must know the organisation’s goals and objectives to inspire subordinate to
achieve the vision;
•
Problem-solving skills: effective managers must be able to identify and solve
problems; take responsibility for challenges that arise and take ethical
approaches to decision-making and problem-solving;
•
Information sharing and collective intelligence: effective managers must
encourage social connectors and the sharing of ideas for joint decision-making
(Blum, 2014; Sineriz, 2018).
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PROGRAMME STRUCTURE
MODULE 1: INTRODUCTION TO BUSINESS MANAGEMENT
This module explains the role of business in society and how a business employs its
resources to satisfy the needs for products and services. The economic systems of
the world are explained in this module, including how small businesses function within
a market economy. The module further describes the role of management in the
business environment and the basic management functions and the skills and
competencies needed by management on different levels within a business.
MODULE 2: THE FUNCTIONS OF MARKETING IN BUSINESS MANAGEMENT
The purpose of this module is to introduce students to the fundamentals of marketing
management. This module covers the nature and the function of marketing
management within the organisation. Furthermore, the marketing process, as well as
the components of the marketing environment are discussed in this module. The
collection, analysis and interpretation are used to segment the market according to
consumer behaviour. The elements of the marketing mix (product, price, promotion,
and distribution decisions) are also covered in this module and how to develop a
simple marketing strategy. The module is concluded with a discussion regarding
customer service and the importance thereof.
MODULE 3: THE FUNCTIONS OF HUMAN RESOURCES IN BUSINESS
MANAGEMENT
The purpose of this module is to provide students with an overview of the tasks
associated with human resource management. The module starts with the scope and
task of the human resource management. The determining and formulating policy
task, advising task; rendering a service and controlling employee affairs management
tasks in relation to the HR function and the implication on other functional areas of
management are also discussed. This is followed by a discussion on human resource
provision, retention and governance affecting human resource management.
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MODULE 4: THE FUNCTIONS OF OPERATIONS IN BUSINESS MANAGEMENT
The purpose of this module is to provide students with an understanding of the
operations function in relation to other major business functions. Students are
introduced to concepts related to operations management, including supply chain,
supply chain management, logistics, supply and demand and various demand
forecasting techniques. To conclude the module, students will learn about inventory
management and how to calculate inventory costs.
MODULE 5: THE FUNCTIONS OF FINANCES IN BUSINESS MANAGEMENT
The purpose of this module is to introduce students to financial management from a
secondary or support perspective such as technology, human resource management
and legal services. On completion of this module, students will be able to explain the
scope of financial management, apply basic principles and practices of financial
management and explain budget planning and control issues. Financial statements
are analysed as a source of information for financial management and students must
be able to measure and interpret the financial performance of an organisation.
MODULE 6: BUSINESS COMMUNICATION IN A DIGITAL ERA
The purpose of this module is to introduce management students to the importance
of effective communication within a business environment. This module covers the
basics of communication, including various communication mediums within an
organisation, communication in the digital era, how to deal with multicultural
communication within the organisation, how to overcome barriers to effective
communication and how to conduct meetings.
MODULE 7: BUSINESS INFORMATION SYSTEMS
Information technology is an essential component of the modern organisation. The
evaluation, implementation and management of Information Systems (IS) have
become a part of business management. This module introduces students to the
importance of reliable and accurate information in a business, the information needs
of an organisation and the relationship between the information function and other
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Module 1: Introduction to Business Management
business functions. The student will also be able to differentiate between the various
components of information systems and understand relevant IS terminology. The
systems concept is discussed in terms of objectives and characteristics.
Contemporary issues such as information in an online world and information as a
management resource are also discussed.
MODULE 8: MANAGING BUSINESS PROJECTS
The purpose of this module is to introduce business management students to the basic
concepts and principles applicable to manage a project within a business environment.
A detailed overview is given of the project management life cycle and steps in
planning, managing and controlling a project, using the relevant methods and tools to
manage projects based on scenarios related to real-life business situations. At the end
of this module, students will be required to apply project management principles and
practices to complete a basic project for a given scenario as part of the summative
assessment.
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ASSESSMENTS
The Higher Certificate in Business Management consists of eight compulsory
modules. The outcomes of each module are assessed through a formative and a
summative assignment per module. After completing all formative and summative
assessments, students are required to complete a final integrated summative
assessment and participate in a panel interview.
A formative assignment must be completed for module 1 to 8 online.
•
The pass mark for formative assignments is 50%.
•
The final formative assignment mark has a weighting of 25% towards the
module mark.
•
Each formative assignment may be attempted more than once;
•
The final formative assignment mark will be the highest results obtained by the
due date for the specific assignment.
Summative assignments must be completed for module 1 to 8 online.
•
Students are required to achieve a minimum mark of 50% to pass the
summative assignment.
•
The final summative assignment mark has a weighting of 75% towards the
module mark.
•
Students are allowed two opportunities to complete and pass each summative
assignment.
•
Subject to approval by the Academic Council (AC), a student may be granted
permission for a third opportunity to attempt a summative assignment for a
module at a specific date and pay an additional submission fee.
•
Summative assignments submitted for second and third attempts will be
capped at 65%.
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Note: All students are required to attend a panel interview when all formative,
summative and integrated assessments for this programme have been completed to
determine if the student has achieved BMT College Graduateness, in terms of
scholarship, lifelong learning and ethical and responsible citizenship. The panel
interview also serves as a security measure to verify the student as the authentic
person who has attended and completed this online distance learning programme.
INTRODUCTION TO MANAGEMENT
Businesses are managed by professional managers. Managers are often seen as
people who drive fancy company cars and earn big salaries. It is therefore expected
to wonder if these managers are really worth the cost to the company. Would it not be
possible for the organisation to continue business without the help of managers?
To understand management, we need to first understand what a manager is. A
manager can be defined as a person who plans, organises, directs, and controls the
allocation of human, material, financial, and information resources in pursuit of
organisational goals (Hellriegel et al., 2008). If managers are the people responsible
for achieving the organisational goals, what does the term management mean?
De Beer and Rossouw (2012) define management as the art of getting things done
through people. This means that the organisational goals are achieved by managers
who delegate the tasks to others. There is however no generally accepted definition
of management. The term management can also be used to refer to the tasks and
activities involved in managing an organisation namely:
•
planning (mapping out exactly how to achieve organisational goals);
•
organising (after planning, managers organise their team and materials
according to their plan);
•
controlling (to continuously weigh the results against the organisational goals
and to take corrective actions if necessary); and
•
leading (motivate, communicate, encourage and guide employees towards
attaining organisational goals).
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CHAPTER ONE
The Role of
Business in
Society
IN THIS CHAPTER:
1.1
INTRODUCTION ........................................................................................... 2
1.2
THE FOUR KEY ELEMENTS OF BUSINESS ............................................... 3
1.3
THE FOUR FUNCTIONAL AREAS OF A BUSINESS ................................... 3
1.4
OPERATIONS INPUT-PROCESS-OUTPUT ................................................. 4
1.5
ADDING VALUE ............................................................................................ 5
1.6
THE PURPOSE OF SMMES IN SOUTH AFRICA ......................................... 6
1.7
SUMMARY .................................................................................................. 11
INTRODUCTION
CHAPTER 1: THE ROLE OF BUSINESS IN SOCIETY
LEARNING OUTCOMES
On completion of chapter 1 you should be able to:
•
Demonstrate knowledge and understanding of the key terms and concepts
related to business management.
•
Explain the role of the business organisation in making available products and
services to ensure that society thrives and exist.
•
Distinguish between the four main functional areas of a business, namely
operations management, financial management, marketing management and
human resource management.
1.1
INTRODUCTION
According to Steiner and Steiner (2012) 'business' is a broad term encompassing a
range of actions and institutions covering management, manufacturing, finance,
investment, and various other activities. The fundamental purpose of every business
is to make a profit by providing products and services that satisfy human needs.
Businesses satisfy needs by transforming products and services in exchange for profit.
Have you ever wondered why some business organisations are very successful, some
only moderately, or even marginally, while others fail altogether? The answer lies in
the concept of the “survival of the fittest.” Businesses survive only for the time they are
productive. Businesses must produce goods and supply services that generate
revenues that exceed the costs incurred in producing them, to provide a surplus, which
is referred to as a profit.
‘Productivity’ is the central issue in an organisation as all objectives and purposes aim
to increase or improve the organisation's productivity. Productivity is about utilising
whatever inputs are available ‘at the fullest’.
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THE ROLE OF BUSINESS IN SOCIETY
According to Stimpson and Farquharson (2010) production is an absolute measure
of the quality of output that an organisation produces in a given period. Productivity
is a relative measure concerned with how efficiently inputs are converted into
outputs.
1.2
THE FOUR KEY ELEMENTS OF BUSINESS
Du Toit et al. (2012) identify the following four key elements of businesses:
1.
Human activities: businesses need human activities. Business organisations
are managed and operated by people.
2.
Production: businesses need to produce something. Production refers to the
transformation of resources into products and services. For example, airlines
transport passengers to their desired destinations and in the process become
part of the transformation process.
3.
Exchange: businesses need an exchange. The products and services that
businesses produce are exchanged for money.
4.
Profit: a business aims to make a profit.
1.3
THE FOUR FUNCTIONAL AREAS OF A BUSINESS
Generally, the four main functional areas of a business involve marketing, finance,
operations and human resource management (Erasmus, Strydom & RudanskyKloppers, 2019).
These four functions will be discussed in more detail throughout the programme.
1. Operations Management
Operations management is the management of the resources in a business that is
necessary to produce goods and/or services. Operations management is concerned
with the transformational process of converting labour and materials (input) into goods
and services (output) as efficiently as possible to realise the objectives of the business
and to maximize organisational profit.
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OPERATIONS INPUT-PROCESS-OUTPUT
2. Human Resource Management
For a business to prosper, it needs the right people, at the right time and in the right
position to achieve the organisation’s goals. “Every manager in the organisation
should realise the importance of recruiting, selecting, training, developing, rewarding,
assisting and motivating employees” (Erasmus et al., 2019, p. 360).
3. Marketing Management
Marketing is a central part of any business’s activities. This function of the business is
involved in the marketing process, namely the transfer of products (or services) to the
market. The marketing process broadly involves:
•
Environmental scanning to collect crucial information on which marketing
management can base marketing decisions.
•
Developing the market offering, which consists of a tangible product or an
intangible service.
4. Financial Management
The financial management function is concerned with the management of the finances
and flow of money within the organisation. It is the art and science of obtaining
sufficient finance for a business at the lowest possible cost, investing in assets earning
a return greater than the cost of the capital, and managing the profitability, liquidity
and solvency of the business (Erasmus et al., 2019).
1.4
OPERATIONS INPUT-PROCESS-OUTPUT
For production to take place, inputs have to be transformed into something new
(outputs). The outputs consist of goods that differ physically from material inputs. Let’s
use the example of baking a cake. The ingredients (resources) are the mixers, sugar,
flour, eggs, labour, etc. which are transformed into a product (output) such as a cake.
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THE ROLE OF BUSINESS IN SOCIETY
FIGURE 1.1: OPERATIONS INPUT-PROCESS-OUTPUT MODEL
Source: Walley (2017, p. 8)
Figure 1.1 depicts the operations management role which is divided into three areas:
•
Managing input resources: It is the responsibility of the operations managers
to ensure that the right resources (employees, materials and equipment) are
available in the right quantity, at the right time.
•
Managing processes:
The operations manager is responsible for the
processes, which are a series of interlinked steps, or activities that consume
resources to meet the required output.
•
Managing outputs: The function of the operations manager is to meet the
customers’ needs by delivering the required products or services.
1.5
ADDING VALUE
The focus of the operations function is to add value during the transformation process,
as illustrated in Figure 1.2.
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THE PURPOSE OF SMMES IN SOUTH AFRICA
FIGURE 1.2: THE OPERATIONS FUNCTION
•Mixers
•Four
•Sugar
•Labour
Transformation
•Business
(Bakery)
•Bread
•Cakes
Resources
Products
Source: Adapted from Du Toit, Erasmus, & Strydom (2012, p. 4)
Thus, by referring to the cake-baking example, the value of the cake must be greater
than the value of the different parts (ingredients) to bake the cake, such as the flour,
sugar and eggs.
The greater the value, the more successful the business will be because the profit
margin will be higher. By continuously monitoring the degree of productivity an
organisation manages, one can maximise the organisation's return on investment
(ROI).
1.6
THE PURPOSE OF SMMES IN SOUTH AFRICA
The primary purpose of a small business is to create wealth and to add value to the
economy (Antonites et al., 2014; Bureau for Economic Research, 2016). Small,
medium and micro-sized enterprises (SMMEs) play a significant role as employment
generators by contributing to the redistribution of wealth and investment in the South
African economy. New SMMEs, arising from previously disadvantaged communities,
accelerate the growth opportunities by moving from a microenterprise to a larger
category enterprise (Berry et al., 2002). The small business owner’s greatest
motivation is to make a profit and to stimulate the environment with limited resources
and expansion goals (Feldman & Bolino, 2000).
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For the small business owners, self-employment signifies an escape from inefficient
bureaucracies, red tape and the burden of regulations that constrain organisations
from achieving growth (Bureau for Economic Research, 2016; Mayson & Barrett,
2017). Private ownership signifies an opportunity to create personal wealth and to
experience freedom (Feldman & Bolino, 2000).
The Department of Trade and Industry (DTI) reported in 2015 a total of 2.25 million
SMMEs in South Africa (Bureau for Economic Research, 2016). A 2015 report by the
Small Business Institute confirms that South Africa has a quarter of a million SMMEs.
A total of 98.5% of South Africa’s economy is made up of small and medium-sized
enterprises (SMEs) and creates 28% of jobs.
These SMMEs are defined in Section 1 of the National Small Business Act 102 of 1996
as amended by the National Small Business Amendment Act of 2003 and 2004 (NSB
Act) as:
"a separate and distinct business entity, including cooperative enterprises and
non-governmental 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".
The original NSB Act (26 of 2003) defined five categories of small businesses in South
Africa namely: (i) survivalists enterprises, (ii) micro-enterprises, (iii) very small
enterprises, (iv) small enterprises and (v) medium enterprises. The SMME definition
considers the number of employees per enterprise category combined with annual
turnover categories, including the gross assets excluding fixed property (Olawale &
Garwe, 2010). A brief overview of each category is provided as follows:
•
Survivalists generate income that is less than the minimum standard and
consists of hawkers, vendors, and subsistence farmers. In practice, survivalists
are categorised as part of the micro-enterprise sector.
•
Micro-enterprises have a turnover of less than the VAT registration limit and
consist of spaza shops, minibus taxis and other household industries that
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THE PURPOSE OF SMMES IN SOUTH AFRICA
employ not more than 5 people. The annual turnover is expected to be less
than R150 000 and gross assets, excluding fixed property, less than R100 000.
•
Very small enterprises operate in the formal market and employ fewer than
10 employees except for the mining, electricity, manufacturing and construction
sectors in which the minimum requirement is 20 employees. The annual
turnover is expected to be less than R200 000 to R500 000 depending on the
industry and gross assets, excluding fixed property, between R150 000 and
R500 000 depending on the industry.
•
Small enterprises have a limit of 50 employees and operate more complex
business practices. The annual turnover is expected to be less than R2 million
to R25 million depending on the industry and gross assets, excluding fixed
property, between R2 million and R4.5 million depending on the industry.
•
Medium enterprises employ a maximum of 100 employees except for the
mining, electricity, manufacturing and construction sectors which have a
maximum of 200 employees. The annual turnover is expected to be less than
R4 million to R50 million depending on the industry and gross assets, excluding
fixed property, between R2 million and R18 million depending on the industry
(Olawale & Garwe, 2010).
However, in March 2019 the Minister of Small Business Development, Lindiwe Zulu,
revised the national definition of small enterprises as:
“a separate and distinct business entity, together with its branches or
subsidiaries, if any, including cooperative enterprises, managed by one owner
or more predominantly carried on in any sector or subsector of the economy
mentioned in Column 1 of the Schedule and classified as a [very small] micro,
a small or medium enterprise by satisfying the criteria mentioned in columns 3
and 4 [and 5] of the Schedule”.
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The updated definition does away entirely with the fourth type of small business
previously recognised as ‘very small enterprise’. Many users found this size or class
category inconsistent and unhelpful with international practices. The new definition
also removes gross asset value as a metric because it is often inappropriate and
difficult to measure. Therefore, only two metrics legally determine the size of a
business namely (1) the number of employees and (2) the total annual turnover.
The number of employees has also been updated and is now uniform across all
companies, regardless of the sector they trade-in. Micro enterprises can have a
maximum of 10 employees, small businesses can have between 10 to 50 employees
and medium-sized enterprises can have a total of 250 employees.
Turnover ceilings now range from R220 million – (the maximum for a wholesale
company to qualify as a medium-sized enterprise) and R5 million (the maximum for a
catering business to qualify as a micro-enterprise).
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THE PURPOSE OF SMMES IN SOUTH AFRICA
FIGURE 1.3: THE NEW NATIONAL ENTERPRISE ACT THRESHOLDS
Source: Bureau for Economic Research (2016)
The NSB Act (26 of 2003) identifies small business development as an essential
element for economic growth in South Africa. Despite the significant impact that
SMMEs have on the economy, research conducted by the Small Enterprise
Development Agency shows that the majority of SMMEs rarely survive beyond the
emerging phases, lasting for an average of 3.5 years (Bureau for Economic Research,
2016) and with a failure rate of 75%, South African SMMEs rank amongst one of the
highest failures in the world (Olawale & Garwe, 2010).
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Even though small businesses encounter many challenges such as access to finance,
poor infrastructure, skills shortages and inefficient bureaucracy (Bureau for Economic
Research, 2016; Department of Trade and Industry, 2005), they contribute significantly
to the upliftment of communities by combining the resources of society to produce
products and services for the communities in which they operate (Du Toit, Erasmus,
Strydom, Badenhorst, & Cohen, 2012). Through the entrepreneurial spirit of the
owners and senior managers, these operations often become medium-sized to large
business operations and therefore the contributions of SMMEs should be highly
regarded in developing economies (Du Toit et al., 2012; Grobler, Wärnich, Carrell,
Elbert, & Hatfield, 2011)
1.7
SUMMARY
In this chapter, we have learned that a business is any organisation that uses
resources to meet the needs of customers by providing a product or service that they
demand. Business activities at all stages involve adding value to the resources such
as raw material and semi-finished goods and making them more desirable and thus
more valuable to the consumer. The business activity uses scarce resources to
produce goods and services that allow people a higher living standard. Businesses
identify the needs of consumers and purchase resources or factors of production to
produce goods and services that satisfy these needs, usually to make a profit.
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CHAPTER TWO
Needs and Need
Satisfaction
IN THIS CHAPTER:
2.1
INTRODUCTION ......................................................................................... 14
2.2
FACTORS OF PRODUCTIONS .................................................................. 14
2.3
HUMAN NEEDS AND WANTS.................................................................... 16
2.4
SUMMARY .................................................................................................. 19
NEEDS AND NEED SATISFACTION
CHAPTER 2: NEEDS AND NEED SATISFACTION
LEARNING OUTCOMES
On completion of chapter 2 you should be able to:
•
Describe the needs of society and how a business organisation satisfies those
needs in a market economy.
KEY TERMS AND CONCEPTS
•
A business: can be defined as the organised effort of a person or several
people to produce or sell, for a profit, some of the products and/or services that
satisfy customers’ needs. The word business has corresponding meanings:
enterprise, organisation, firm or company.
•
Capital: buildings, machinery, cash registers, etc. used in the production
process of final consumer products.
•
Economic principle: gaining the highest level of satisfaction of needs with
limited need-satisfying resources.
•
Financial resources: the money needed to pay employees, to buy raw
material or whatever else is needed, and to keep the business running well.
•
Human resources: the production factor of labour. These include the physical
and mental skills of people to create products and services.
•
Material resources: the physical objects needed to produce a product or
service, including buildings and machinery.
•
Natural resources: the production factor of the land includes agricultural land,
industrial sites, residential stands, etc. All such resources that nature provides
for humankind.
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INTRODUCTION
2.1
INTRODUCTION
Business management is a subject not only relevant to businesspeople but also every
person in society. Although many people are not actively involved in “business” as
such, they are involved in business processes merely by participating in the economic
life of the country.
The subject of business management encompasses all activities that are related to
the management of organisations. The mindset of management thinking is one of the
skills that this programme aims to address.
The objective of every business is to satisfy the needs of its customers. When a
business understands the needs of customers and designs its products and services
to satisfy those needs, the business will usually be successful. Economic activity is
aimed to fulfil society's needs and is motivated by the profit the entrepreneur receives.
Large, medium and small businesses exist because they have a purpose. Their vision
and mission are defined in terms of operational- and tactical plans, which set out how
they will achieve their goals and objectives. The ability of the business to fulfil its vision
and mission ultimately leads to customer satisfaction, profits for the business,
employee engagement and remuneration. Consequently, several people's standard of
living will be raised. However, the opposite is also true with regards to failed business
ventures, which leads to huge financial losses by the stakeholders, unsatisfied
customer needs, dismissal of employees due to operational requirements and
negatively affects the community in which the business operates (Van Rensburg,
2005).
2.2
FACTORS OF PRODUCTIONS
Businesses need factors of production to produce goods and services. These are
the resources needed by the business to produce goods and services.
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The factors of production include:
•
Natural resources: this refers to all resources provided by nature that are
scarce or limited. Examples are crude oil, water, minerals, coal, timber, etc.
•
Labour: this refers to human resources with skills and knowledge (technical
and academic), physical capabilities and skills to transfer goods into products,
provide a service and take leadership.
•
Capital: this is not just the finance needed to set up a business and pay for its
continuing operations, but also include man-made resources used during
production. Capital resources include computers, machines, factories, offices,
and vehicles.
•
Entrepreneurship: this is the process through which the entrepreneur
combines the capital, labour and natural resources to provide goods or
services. This process is often linked with risk-taking. (Ferreira, 2011)
Businesses have various needs, which must be satisfied to produce goods and
services for their customers.
Figure 2.1 below illustrates the wide range of business needs.
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HUMAN NEEDS AND WANTS
FIGURE 2.1: THE BUSINESS NEEDS
Land: Building
site and raw
material
Capital:
Finance,
factories,
offices and
machines
Customers:
Internal and
External
customers
Business
Needs
Suppliers:
Manufacturers,
vendors,
wholesalers
and
distributors
Labour:
Skilled,
unskilled,
temporary and
permanent
employees
Government:
Infrastructure
such as roads,
airports,
educational
institutions and
legislation
Enterprises:
Risk takers,
decisionmakers and
coordinators
Source: own compilation
2.3
HUMAN NEEDS AND WANTS
A human need is a basic requirement that individuals wish to satisfy. Physical needs
include foods, clothing and shelter. These types of needs are referred to as lowerorder needs. Individual needs include knowledge, recognition and self-actualisation
needs. These types of needs are referred to as higher-order needs.
Wants are broader in their perspective. These are the things we do not need for
survival, but they do satisfy certain of our individual needs. For example, a relaxing
holiday is a want rather than a need, although we often say we need a holiday.
Businesses need to understand and identify their target market. Every organisation
has two types of customers.
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Internal customers are customers who buy products and services (i.e. employees,
managers, owners, representatives). External customers buy products and enhance
the reputation of organisations because they contribute to the growth of the business
and have a profound effect on the overall success of our business (i.e. suppliers,
customers, society, governments, shareholders, etc.).
According to Harris (2000, p. 2), customers have four basic needs:
1.
Service: customers expect a certain level of service with every product that
they purchase. Expectations may vary according to the value of the item, type
of service, type of purchase etc.
2.
Price: people have limited financial resource and the price for products is
therefore becoming more important.
3.
Action: customers expect the organisation to react in response to their
problems.
4.
Appreciation: customers want to know that their business is valuable and that
the organisation they are dealing with cares about them as well as their needs.
2.3.1 MASLOW’S HIERARCHY OF NEEDS
Maslow’s (1943) hierarchy of needs comprises of five needs, also depicted as
hierarchical levels within a pyramid. The needs at the bottom of the hierarchy must
first be satisfied before an individual can attempt to satisfy the needs higher up in the
hierarchy. Figure 2.2 depicts the five different needs in the hierarchy:
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HUMAN NEEDS AND WANTS
FIGURE 2.2: MASLOW’S HIERARCHY OF NEEDS
Source: Maslow (1970)
According to Maslow, people are motivated to achieve certain needs and that some
needs take precedence over others. Our basic need is our physiological needs and
will be the first thing that motivates our behaviour. Once that level is fulfilled, the next
level, our safety needs, will motivate us etc.
•
Physiological needs are biological requirements for human survival such as
food, drink, shelter, clothing etc. If these needs are not satisfied, people will not
be able to function optimally. According to Maslow (1970), physiological needs
are the most important needs.
•
Safety needs: include protection from elements, order, law, freedom from fear,
security, etc.
•
The need for love and belonging includes friendship, intimacy, acceptance,
trust, receiving and giving affection, and love. The third level of human needs
is social and the feelings of belonging.
•
Esteem needs: can be divided into two categories namely (1) esteem for
oneself such as dignity, achievement, independence, and mastery; and (2) the
desire for reputation or respect from others, such as prestige and status.
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According to Maslow (1970), the need for reputation or respect is the most
important for children and adolescents and precedes real self-esteem or dignity.
•
Self-actualisation needs are the need to realise personal potential, personal
growth, self-fulfilment, peak experiences. This need is the desire to become
everything one is capable of becoming.
Maslow (1970) opined that individuals are motivated by a hierarchy of needs and that
the needs are organised in a hierarchy of dominance where more basic needs are met
before higher needs can be fulfilled. The order of needs is however not rigid and may
be flexible based on individual differences or external circumstances. Most behaviours
are multi-motivated, in other words, simultaneously determined by more than one
basic need.
2.4
SUMMARY
In this chapter, it is highlighted that a ‘want’ refers to a vague feeling that something is
absent or unavailable, although the “something” cannot always be clearly defined.
Needs, on the other hand, are experienced more intensely and the object of the needs
are definable.
The intensity of the need can vary from a “nice to have” to a definite “must-have”. The
satisfaction of these needs and wants forms the underlying stimulus for any business
activity. The unsatisfied needs experienced by consumers are business opportunities
for businesspeople to explore. Economic factors, such as the business cycle, inflation,
and recession, influences the demand for goods and services by compelling
customers to reassess their priorities (i.e., affordability) in terms of consumer products.
Each significant economic change requires an appropriate reaction by the business.
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CHAPTER THREE
The Main
Economic Systems
IN THIS CHAPTER:
3.1
INTRODUCTION ......................................................................................... 21
3.2
THE SOCIALIST ECONOMY ...................................................................... 23
3.3
THE COMMAND ECONOMY ...................................................................... 23
3.4
THE FREE MARKET ECONOMY ............................................................... 24
3.5
SUMMARY .................................................................................................. 33
THE MAIN ECONOMIC SYSTEMS
CHAPTER 3: THE MAIN ECONOMIC SYSTEMS
LEARNING OUTCOMES
On completion of chapter 3 you should be able to:
•
Distinguish between the world’s main economic systems.
KEY TERMS AND CONCEPTS
•
Command economy: the state owns and controls the community’s resources
or factors of production.
•
The free-market system is where individuals or organisations, who want to be
in business, can enter or leave the business sector whenever they want to.
•
Market economy: value is attached to the rights of the individual to possess
property such as land, buildings, equipment, or vehicles, including the right to
generate income from a property.
•
Mixed economies incorporate certain characteristics of the other systems.
•
Socialism: strategic and basic resources belong to every member of the
community.
3.1
INTRODUCTION
In general, there are three basic economic systems: free market, socialist and
command economy. No economy is a pure free market, socialist or commands
economy. All economies are usually a combination of the three economies with an
accentuated tendency towards one of the three basic economies.
The key criteria used to differentiate between economic systems focuses on aspects
of economic freedom in terms of ownership, competition, pricing, and government
interference.
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INTRODUCTION
Table 3.1 provides a comparison of the three major economic systems.
TABLE 3.1: COMPARISON OF THE THREE MAJOR ECONOMIC SYSTEMS
Criteria
Ownership
Competition
Free Market
Socialist
Command
Economy (aka
Economy (aka
Economy (aka
Capitalism)
Socialism)
Communism)
Individuals own
Individuals can own
Individuals cannot own
property and the
property but
property or the
organisation.
organisations in major
organisation.
industries are owned by
Everything is owned by
the government.
the government.
Organisations
Competition is limited to
No competition as the
compete with each
privately-owned
government
other to satisfy the
organisations.
organisations provides
needs of consumers.
Therefore, government
everything.
organisations have no
competition and can
charge whatever they
want.
The demand of
There is freedom of
The government
consumers
choice concerning which
decides what
Products
determines the
products and services
consumers need and
and
availability of
consumers want to use
what to produce.
services
products and
but some products and
services.
services are only offered
by the government.
Products and
Prices for government-
The government
services are priced
provided products and
determines all the prices
according to what
services are determined
for products and
consumers are willing
by the government.
services.
Government
The government owns
The government
Role of
involvement in the
and operates
controls all the factors of
government
economy is efficient
organisations such as
production and
in business
but not restrictive.
electricity and transport
resources.
Pricing
to pay.
in major industries.
Source: Adapted from Nieuwenhuizen and Oosthuizen (2010)
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3.2
THE SOCIALIST ECONOMY
A socialist economy is a combination of the free market and command economy. The
major industries such as electricity, water, education, health, transport, communication
etc. are owned by the government as socialists believe that strategic and basic
resources are communal property. A socialist economic system is characterised by
social ownership and operation of the means of production (raw materials, facilities,
machinery and tools used in the production of goods and services) that may take the
form of autonomous cooperatives or direct public ownership wherein production is
carried out directly for use.
3.3
THE COMMAND ECONOMY
In a command economy, also referred to as a communist economy, everything
belongs to the state that controls all the resources and factors of production. The
community as a whole make economic decisions. However, attempts to establish
communism have ended up creating state-driven authoritarian regimes and
economies, which benefit single party-political elite who are not accountable to the
community or people. This theory was developed in the 1800s by Karl Marx, a German
philosopher. He thought that the only way to have a society that could work in harmony
was to put workers in control. This theory was established in the Industrial Revolution
when many workers were treated unfairly in England, France and Germany. Marx did
not want a difference in economic classes and strive to eliminate the class struggle.
His main goal was to abolish capitalism. He, therefore, thought that if everything were
owned and shared by everyone, a paradise for workers could be achieved. Marx,
together with Friedrich Engel, wrote a pamphlet called ‘the communist Manifesto’,
which was published in 1848 to express their ideas on communism. It was however
later realised that communism does not work.
The characteristics of a communist economy are:
•
State or collective ownership of capital (such as property, money and other
physical assets) are owned by the State and there is very little private
ownership.
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THE FREE MARKET ECONOMY
•
Inputs and outputs are determined by the State. The state has an elaborate
planning system in place to determine the proportions and level of inputs to be
devoted to producing goods and services.
•
Labour is allocated according to the State’s plans. There is, therefore, no
choice of profession and when a child is in school, a streaming system will
allocate people into designated industries.
•
Private ownership is not possible, and an individual cannot own real estate,
shares, or any other form of physical or non-physical assets.
The state
allocates residences to people.
•
Prices are regulated by the State with little regard to the actual costs of
production. Instead of paying for goods and services, goods and services are
allocated by the State to the people.
The command economy was a prevalent economy in the former Soviet Union and
previous East European countries. This type of economy was eliminated due to the
impossibility to create wealth for the people of the country.
3.4
THE FREE MARKET ECONOMY
Countries with a free market economy are known as capitalists.
In a free-market economy:
•
individuals have the right to own and sell property;
•
organisations are encouraged to improve their competitive advantage;
•
consumers determine the prices of goods and services;
•
the government does not interfere (unnecessarily) in the economy.
The free market system is a complex system that consists of corporate and Small,
Medium, Micro and Macro enterprises (SMMEs) which use the resources of the
country to satisfy the people’s needs.
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Different communities use different economic systems to meet their needs using the
available resources and each democratic country arranges its economic system in
such a way that it solves its wealth problem as effectively as possible following the
wishes of its inhabitants.
The South African economic system is moving towards a free market-orientated
economy, but presently has a high degree of government participation in and control
of the economy.
3.4.1 THE FREE MARKET SYSTEM
A free market is one in which buyers and sellers make mutually voluntary exchanges
at a price agreed upon by both parties. In terms of its economic and political views, it
is the opposite of a command economy. A free market is a concept in both ethics and
economics that is treated as an abstract model by many economists and some
ethicists (a person devoted to ethical principles). In its idealised sense, it is a market
where all transfers of money, goods, and services are protected from coercion (i.e.
intimidation, bullying, pressure) and theft.
Since no country fully manifests the ideal of a free market, the term free-market
economy is used for a nation state's economy that approximates the ideal by having
a government that engages in little or no interventionist economic regulation. If such
a government intervenes in private affairs, it only does so to stop coercion that may
take place among market participants. As this protection must be funded, government
taxes individuals only as much as is necessary to perform this function. This is also
known as laissez-faire (abstention by governments from interfering in the workings of
the free market).
A market economy that has many regulations is not free. Whether any particular
economy is free enough of coercion to reasonably be called a free market economy is
often a matter of political dispute: libertarians (persons who advocate minimal state
intervention) typically say that Western economies are not free, and are mixed
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THE FREE MARKET ECONOMY
economies, due to what they believe constitutes very significant interference by
government in what would otherwise be a free market.
Whether the marketplace should be free, is also disputed.
Many assert that
government intervention is necessary to remedy market failure that is held by an
inevitable result of absolute adherence to free-market principles. Internationally, free
markets are advocated by proponents of economic liberalism, in Europe usually simply
called liberalism. Liberalism refers to the willingness to respect or accept behaviour or
opinions that are different to one’s own; social philosophy refers to the promotion of
individual rights, civil liberties, democracy, and free enterprise. In the United States,
support for free-market economic structures is a key tenet of U.S. conservatism and
libertarianism. Since the 1970s, the promotion of a global free-market economy,
deregulation and privatisation, is often described as neoliberalism.
The term free-market economy is generally used to describe Western economies, but
pro-market groups would only accept that description if the government practices
laissez-faire policies, rather than state intervention in the economy. Since the
emergence of a distinct economic system in the Soviet Union, the free market is
usually contrasted to a command economy and a centrally planned economy.
However, early proponents of a market economy in Europe in the 18th-century
contrasted it with the mediaeval and early-modern economies which preceded it.
For social philosophy, a free market is a system for allocating goods within a society:
supply and demand within the market determine who gets what, and what is produced.
The market does this without prior external decisions or values, and its supporters see
this as its great advantage. The allocation function is usually called "the market
mechanism", or simply "the market".
A free-market economy is generally understood to be different from pre-modern
economic systems. Some were monetised but that is not seen as sufficient to define
a free market.
Market transactions are understood to be economical, and personal gift-giving is not
generally considered a market transaction. Neither are coerced transfers such as
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tribute. Lack of economic transactions, for instance in a society of pure subsistence
(survival) farming, also rules out as a free market.
A free market implies the presence of competition, although monopolies that are not
maintained through coercion can be present. In addition, it often suggests the
presence of the profit motive, although neither a profit motive nor profit itself is
necessary for a free market. All modern free markets are understood to include
entrepreneurs, both individuals and businesses. A modern free-market economy
would typically include other features, such as a stock exchange and a financial
services sector, but they do not define it.
3.4.2 ORIGINS OF THE FREE MARKET SYSTEM
Some theories assume that a free market is a natural form of social organisations and
that a free market will arise in any society where it is not hindered. The consensus
among economic historians is that the free market economy is a specific historical
phenomenon and that it emerged in late mediaeval and early-modern Europe. Some
economic historians see elements of the free market system in the economic systems
of Classical Antiquity (the period of cultural history between the 8th century BC and the
6th century AD centred on the Mediterranean Sea – ancient Greece and ancient
Rome), and in some non-western societies.
By the 19th century, the market had organised political support, in the form of laissezfaire liberalism. However, it is not clear if the support preceded the emergence of the
market or followed it. Some historians see it as the result of the success of early liberal
ideology, combined with the specific interests of the entrepreneur.
In Marxist theory, the ideology simply expresses the underlying long-term transition
from feudalism (a dominant social system in medieval Europe) to capitalism. Note that
the views on this issue - emergence or implementation - do not necessarily correspond
to pro-market and anti-market positions. Libertarians would dispute that the market
was enforced through government policy, since that has a connotation of repression,
and Marxists agree with them, for different reasons.
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THE FREE MARKET ECONOMY
3.4.3 THEORY OF THE FREE MARKET SYSTEM
If a government is present in the marketplace, its use of force is ideally limited to
protecting the market participants from coercion, including protection of property
rights and enforcement of contracts. The essence of a free market can be understood
as a game in which the players compete according to a common set of rules that
prevent coercion (including theft); the enforcement of these rules may be carried out
by a neutral referee (the government). Players in this game may have different skills,
knowledge, and wealth, which may conflict with social norms of fairness, so a free
market may not agree with what some would consider a fair market or some may see
the equal application of the rules to all participants as the essence of fairness. This
conception of a market as a purely economic system based on freedom from coercion
among market participants as well as from government is in fundamental contrast to
a command economy.
The law of supply and demand predominates in the idealised free-market system,
influencing prices toward an equilibrium that balances the demands for the products
against the supplies.
At these equilibrium prices, the market distributes the products to the purchasers
according to each purchaser's use (or utility) for each product and within the relative
limits of each buyer's purchasing power. The necessary components for the
functioning of an idealised free market include the complete absence of artificial price
pressures from taxes, subsidies, tariffs, or government regulation (other than
protection from coercion and theft), and no government-granted monopolies (usually
classified as a coercive monopoly by free-market advocates) like the United States
Post Office, Amtrak, arguably patents, etc.
This equilibrating behaviour of free markets makes certain assumptions about their
agents, for instance, that they act independently. Some models in econophysics have
shown that when agents are allowed to interact locally in a free market (i.e. their
decisions depend not only on utility and purchasing power but also on their peers'
decisions), prices can become unstable and diverge from the equilibrium, often in an
abrupt manner.
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The behaviour of the free market is thus said to be nonlinear (a pair of agents
bargaining for purchase will agree on a different price than 100 identical pairs of agents
making the identical purchase). Speculation bubbles and the type of herd behaviour
often observed in stock markets are quoted as real-life examples of non-equilibrium
price trends.
Free-market advocates, especially Austrian school followers, often dismiss this
endogenous theory and blame external influences, such as weather, commodity
prices, technological developments, and government meddling on non-equilibrium
prices.
The distribution of purchasing power in an economy depends largely on the labour
and financial markets, but also other factors such as family relationships, inheritance,
gifts and so on. Many theories describing the operation of a free market focus primarily
on the markets for consumer products, and their description of the labour market or
financial markets tend to be more complicated and controversial.
The free market can be seen as facilitating a form of decision-making through what is
known as dollar voting, where a purchase of a product is tantamount to casting a vote
for a producer to continue producing that product.
The effect of economic freedom on societies’ and individuals' wealth remains a subject
of controversy. Kenneth Arrow and Gerard Debreu have shown that, under certain
idealised conditions, a system of free trade leads to Pareto efficiency, which is never
true in a command economy, because a government makes mistakes in distributing
resources since the information to its disposal is far less than perfect.
Many advocates of free markets, most notably Milton Friedman, have also argued that
there is a direct relationship between economic growth and economic freedom, though
this assertion is much harder to prove both theoretically and empirically. Joshua
Epstein and Robert Axtell have attempted to predict the properties of free markets in
an agent-based computer simulation called “Sugarscape”. They concluded that again
under idealised conditions, free markets lead to a Pareto distribution of wealth.
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THE FREE MARKET ECONOMY
This finding confirms the ideas of Vilfredo Pareto himself, who believed that the
"natural" tendency of society is towards a power-law distribution of wealth, power, or
influence.
3.4.4 THE PRACTICE OF THE FREE MARKET SYSTEM
While the free market is an idealised abstraction, it is useful in understanding real
markets, whether artificially created and regulated by governments or nongovernmental agencies, or phenomena such as the black market and the underground
economy, which can be remarkably robust in persisting despite attempts to suppress
these markets. Taxes and government regulation bias the equilibrium points of every
large government-sanctioned economy in existence today so that these economies
are only relatively free or unfree. Monopolistic practices, cartels, externalities (like
pollution), and asymmetrically distributed information are often cited as potential
problems that may exist in a free-market economy.
Knowledge bias can lead to what many may see as evils of such an economy, like
insider trading, price-fixing, price gouging, adverse selection, moral hazard, and the
principal-agent problem which they claim justify government intervention to remedy.
Some believe that the notion of a free market is inherently unachievable because its
operation depends on a class system, Commodity fetishism and argue that
governments create property rights and are fundamentally involved in markets through
the enforcement of such rights. Others argue that the concept of property comes from
natural law and is therefore incorrect to regard governments as creating markets.
3.4.5 THE DEGREE OF MARKET FREEDOM
The Heritage Foundation, a conservative think tank, tried to identify key factors which
allow measuring the degree of freedom of the economy of a particular country. In 1986
they introduced the Index of Economic Freedom (IEF), which is based on
approximately fifty variables. This, and other similar indices, do not define a free
market but measure the degree to which a modern economy is free, meaning in most
cases free of state interventions.
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The variables are divided into the following major groups:
•
Trade policy,
•
The fiscal burden of government,
•
Government intervention in the economy,
•
Monetary policy,
•
Capital flows and foreign investment,
•
Banking and finance,
•
Wages and prices,
•
Property rights,
•
Regulation, and
•
Informal market activity.
A numerical value between 1 and 5 is assigned to each group. IEF is the arithmetical
mean of these values, rounded to the hundredth. Initially, countries, which were
traditionally considered capitalists, received high ratings, but the method improved
over time. Today one can see a vivid correlation between the IEF values and a
country’s GDP.
3.4.6 IDEOLOGY AND ETHICS OF THE FREE MARKET SYSTEM
Support for the free market as an ordering principle of society is above all associated
with liberalism, especially during the 19th century. In Europe, the term 'liberalism'
retains its connotation as the ideology of the free market. In America, it came to be
associated with government intervention and acquired a pejorative meaning for
supporters of the free market. Later ideological developments, such as monarchism
and libertarianism also supported the free market and insisted on its pure form.
Although the Western world shares a generally similar form of economy, usage in the
United States refers to this as ‘capitalism’, while in Europe 'free market' is the preferred
neutral term. The use of the term ‘capitalism’ in Europe usually implies a Marxist, or at
least critical approach, unless it is being used to describe the 19th century.
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THE FREE MARKET ECONOMY
Marxism, communism, and socialism are usually seen as the main ideological
opponents of the free market. Modern liberalism (American usage), and in Europe
social democracy, seek only to mitigate what they see as the problems of an
unrestrained free market, and accept its existence as such. To most libertarians, there
is simply no free market yet, given the degree of state intervention in even the most
'capitalist' of countries.
From their perspective, those who say they favour a "free market" are speaking in a
relative, rather than an absolute, sense. In libertarian terms, they wish that coercion
be kept to the minimum that is necessary to maximize economic freedom (such
necessary coercion would be taxation, for example) and to maximize market efficiency
by lowering trade barriers, making the tax system neutral in its influence on important
decisions such as how to raise capital (e.g., eliminating the double tax on dividends
so that equity financing is not at a disadvantage vis-à-vis debt financing). However,
there are some (such as anarchic-capitalists), who would not even allow for taxation
and governments, instead preferring protectors of economic freedom in the form of
private contractors.
The ethical justification of free markets takes two forms. One appeals to the intrinsic
moral superiority of autonomy and freedom (in the market), see deontology, and the
other is a form of consequentialism (a belief that decentralised planning by a multitude
of individuals making free economic decisions produces better results regarding a
more organised, efficient, and productive economy, than a centrally-planned economy
where a central agency decides what is produced, and allocates goods by non-price
mechanisms).
An older version of this argument is the metaphor of the Invisible Hand, familiar from
the work of Adam Smith, although it is older. In Smith's time, there were no centrally
planned economies to serve as a comparison; he was simply arguing that the market
benefits the common good. Modern theories of self-organisation are of the view that
the internal organisation of a system can increase automatically without being guided
or managed by an outside source. When applied to the market, as an ethical
justification, they are appealing primarily to its intrinsic value as a self-organising entity.
Intense admiration for these abilities of the market became a characteristic of some
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pro-market argument in the 1990s, especially among those who saw the internet as a
form of a perfect market.
3.5
SUMMARY
In this chapter, we have learned that a free market system is an economic system
where the market forces are allowed freely to determine answers to basic questions
to guide business activity, e.g. what need-satisfiers need to produce, how to produce
these need-satisfiers, who should produce them, and for whom they should be
produced. There are no central controlling bodies to determine the characteristics of
the system since these developed spontaneously over time. The most outstanding
characteristic of the free market system is the recognition of the individual and his/her
economic rights.
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CHAPTER FOUR
The Macro-, Microand Market
Environment
IN THIS CHAPTER:
4.1
INTRODUCTION ......................................................................................... 37
4.2
THE MICRO-ENVIRONMENT (THE ORGANISATION) .............................. 40
4.3
MACRO-ENVIRONMENT (EXTERNAL) ..................................................... 42
4.4
THE MARKET OR TASK ENVIRONMENT ................................................. 51
4.5
SUMMARY .................................................................................................. 54
SUMMARY
CHAPTER 4: THE MACRO-, MICRO- AND MARKET
ENVIRONMENT
LEARNING OUTCOMES
On completion of chapter 4 you should be able to:
•
Explain the concepts of macro-, micro and market environments and the
variables that comprise each of these.
•
Identify business opportunities and threats from a given scenario and give
recommendations on how management can exploit the identified opportunities
and manage the identified threats.
KEY TERMS AND CONCEPTS
•
Competition (as a variable in the market environment): a situation in the
market environment in which different organisations with more or less the same
product or service compete for the business patronage of the same consumers.
•
Macro-environment: major and uncontrollable external factors that influence
an organisation’s decision-making and affect its performance and strategies.
Examples of the macro-environment include the economy, demographical-,
social-, legal- and political conditions, technological changes and natural
forces.
•
Market or task environment: the environment that immediately surrounds the
organisation.
•
Micro-environment: factors or elements in an organisation’s immediate area
of operations that affect its performance and decision-making. These factors
include competitors, customers, distribution channels, suppliers and the
general public.
•
Technology: the practical application of knowledge, especially in a particular
area.
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4.1
INTRODUCTION
Economics (from the Greek οίκος [oikos], 'house', and νομος [nomos], 'rule', hence
"household management") is a social science that studies the production, distribution,
trade and consumption of goods and services. Economics is said to be normative
when it recommends one choice over another, or when a subjective value judgment
is made. Conversely, economics is said to be positive when it tries to objectively
predict and explain the consequences of choices, given a set of assumptions and/or
a set of observations.
Economics, which focuses on measurable variables, is broadly divided into two main
branches, namely:
•
microeconomics, which deals with individual agents, such as households and
businesses, and
•
macroeconomics, which considers the economy as a whole, in which case it
considers aggregate supply and demand for money, capital and commodities.
Figure 1.1 depicts the difference between macroeconomics and microeconomics.
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INTRODUCTION
FIGURE 4.1: THE MACRO- AND MICROECONOMICS
Source:
https://cosmolearning.org/courses/microeconomics-macroeconomics-
tutorials-with-sal-khan/
Aspects receiving particular attention in economics are resource allocation,
production, distribution, trade, and competition. Economic logic is increasingly applied
to any problem that involves choice under scarcity or determining economic value.
The mainstream economic theory currently in vogue in the business schools of most
industrial countries is neo-classical economics.
Understanding the business environment in which the business operates is a very
important aspect of business management. It encapsulates many different influences,
and the difficulty in making sense of this complexity because the micro, market and
macro environments and their variable are interdependent.
For example, a rise in the interest rate will influence the cost of capital, meaning it will
be more expensive to borrow money from the bank to buy an office building or
machinery. Figure 4.2 illustrates the different layers of the business environment. The
layers can be compared to an onion with different layers.
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FIGURE 4.2: THE DIFFERENT LAYERS OF THE BUSINESS ENVIRONMENT
The
Organisation
Competitors
Industry (or
sector)
The macro
environment
Source: adapted from Du Toit et al. (2012)
When peeling the onion, the first layer of the onion is the macro-environment. This
environment consists of broad environmental factors that impact to a greater or lesser
degree on organisations. Having identified the key drivers of change from the broad
data, possible scenarios can be drawn, which will help the organisation to draw up its
strategy.
The next layer is called industry or sector. This is a group of organisations producing
the same products or services. A useful framework for analysing an industry is Porter’s
Five Forces Framework (Du Toit, et al., 2012). Porter’s five forces framework is
discussed in more detail later in this chapter (section 4.4.1.2).
The layer adjacent to the organisation itself is the organisation’s competitors and
markets. Within most industries or sectors, there will be many different organisations
with different characteristics, which compete on different bases. The concept of
strategic groups can help with the identification of both direct and indirect competitors.
Competitor analysis allows companies to identify and understand their competitors.
Furthermore, customers’ expectations are not all the same. Customers have a range
of different requirements, which can be understood using market segments and critical
success factors. Understanding how such factors might impact on and drive change
is only the starting point. Managers need to understand the key drivers of change as
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THE MICRO-ENVIRONMENT (THE ORGANISATION)
well as the impact of these external influences and drivers on particular industries,
markets and individual organisations.
The organisation needs to assess the factors which are the most important aspects
now (at present) and which can be overcome in the next few years. The future impact
must be assessed and fully understood.
4.2
THE MICRO-ENVIRONMENT (THE ORGANISATION)
Management organises, plans, leads, and controls the activities of the organisation.
Different levels of management operate in this environment and strive to create
synergy between various goals.
The microenvironment consists of the following participants and elements in the
organisation. All of these are under the control of the management of the organisation:
•
The mission and goals of the organisation;
•
The organisational culture, which is the set of values that helps everyone
understand what the organisation stands for, how it operates, and what is
important to the organisation;
•
The organisation and its management;
•
The resources of the organisation.
The resources of the organisation include human resources, physical resources and
financial resources. Let’s now look at the different resources of an organisation:
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4.2.1 HUMAN RESOURCES
The human resources consist of:
•
The board of directors, who determine the overall policies and strategies of the
organisation.
•
The managers, who decide on the resource acquisition and use.
•
The employees, who complete the tasks to achieve the organisation's goals
and objectives.
4.2.2 PHYSICAL RESOURCES
The physical resources consist of:
•
Buildings;
•
Equipment;
•
Warehouses;
•
Inventories;
•
Services- and distribution facilities.
To be competitive, these resources must be:
•
Strategically located,
•
Productive,
•
Low in operating costs,
•
Effectively distributed and
•
Quality product or service.
4.2.3 FINANCIAL RESOURCES
The financial resources consist of:
•
Cash flow;
•
Debt capacity;
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MACRO-ENVIRONMENT (EXTERNAL)
•
4.3
Available equity.
MACRO-ENVIRONMENT (EXTERNAL)
The macro-environment includes the following factors:
•
Political environment
•
Economic environment
•
Socio-cultural environment
•
Technological environment
•
Legal environment
•
Ecological/physical environment
•
International environment
Political environment (The state of government and public affairs in general)
The political and legal environment consists of the government and its political
programmes and policies. They include the laws of the country at all levels of
government. Many laws affect specific industries and impact the management of
organisations in those industries. Management decisions are affected by politics, as
governments influence the organisation’s market both internally (government
expenditure) and externally (political policy). Managers must be aware of the activities,
legislation, and control measures of government as well as political trends.
Variable in this environment include:
•
Political instability (for example, Iran, Iraq, Zimbabwe, Argentina, etc.)
•
Elections in the country
•
Legislation (for example legislation preventing the advertising of tobacco
products).
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Economic environment (Relating to trade, industry and the creation of wealth)
The economic environment consists of factors such as inflation and interest rates,
monetary and fiscal policies, foreign exchange rates and national economic growth
rates. The economic environment also includes the growth rate, levels of employment,
consumer income, the rate of inflation, the exchange rate. These forces result in
prosperity or adversity. The economic environment is also influenced by crime, social
inequality, natural disasters (i.e., wildfires, hurricanes, floods, tsunamis, COVID-19
pandemic) and technological trends. Management must be vigilant about economic
trends and the mission, goals, and strategy of the organisation. The economic
environment must be reviewed regularly.
Variable in this environment include:
•
Exchange rates (a change in the exchange rate or value of a currency can have
a significant impact on an organisation)
•
Unemployment rates
•
Inflation rates
•
Tax laws.
Socio-cultural environment (Relating to matters governed by common law and
factors dictating behaviour and responses)
The social- and cultural environment includes issues such as demographics, lifestyles
value and the need for satisfactory education, health, and housing. This environment
is most sensitive to cross-influences especially technology and the economy. The
culture of a society significantly influences organisations. The HIV/AIDS epidemic and
poverty cause changes in this environment. Management cannot ignore these social
influences.
Variable in this environment include:
•
Social norms
•
Concern for health and physical wellbeing
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MACRO-ENVIRONMENT (EXTERNAL)
•
Cultural diversity – interaction and barriers
•
Family structures
•
Unemployment (for example, the high unemployment levels in South Africa
create instability and pressures in all areas of a business.
•
Crime and corruption as well as HIV/ AIDS affect the community at large.
Technological environment (The scientific study and use of applied science)
Technology is involved in every process of the business, from manufacturing to
marketing and managing. Technology affects the ability to compete in a market and
has strategic implications for organisations as well as industries because the
organisations must plan and prepare for future changes.
The technological environment is changing rapidly. Therefore, it creates opportunities
for product and process innovation.
Variable in this environment include:
•
Speed of development
•
Diversity: networks, satellite, TV, radio, CD’s, online services
•
Cost implications
•
Constantly changing cell phone technology
Legal environment
This environment is either under the direct or indirect control of the government. The
government is reasonable for the legislative framework and regulations, which include
laws that influence employment, consumer protection, health and safety, trade unions
etc.
Ecological/physical environment (Natural / environmental concerns)
The ecological environment consists of natural resources, geographic and climate
conditions. This environment contains natural resources and receives waste, which
forms pollution. Managers must be aware of the limited resources, the cost of energy,
the cost of pollution and potential damage to natural resources. Managers in
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agriculture must be aware of temperatures and their influence on natural resources
and food production.
Variable in this environment include:
•
Cost implications, public opinion
•
Sites and locations
•
Weather (for example, the rise in global temperatures and the impact on the
environment)
International environment
The international environment includes issues such as multinational companies,
competitors who open plants in South Africa, legislation, economic conditions and
political trends and events. Businesses that operate internationally are in a complex
environment as each country has its unique environmental factors to contend with.
South Africa’s re-admission to international markets offers managers many
competitive opportunities. However, management must also constantly assess
possible global threats to their products and markets. For instance, cheap imports from
China and India may threaten many local industries.
Although management has no control over the variables in the external environment,
the variables in this environment have a direct as well as indirect influence on the
organisation. Uncontrollable environmental forces or ‘megatrends’ are represented
in this environment. Economic conditions such as inflation, interest rates, fluctuations
in the economy and the growth rate of the economy influence the level of consumer
spending and consequently the performance of the business sector. Other important
factors in the external environment include risk, labour legislation and tax laws, BBBEE
legislation, business cycles, the exchange value of our currency, degrees of
competitiveness, demand and supply, government and support structures etc. The
external factors are uncontrollable as far as the organisation is concerned and they
create opportunities and threats for an organisation.
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MACRO-ENVIRONMENT (EXTERNAL)
Figure 4.3 depicts the influences of the external environment on the internal
environment of the training and development function in an organisation.
FIGURE 4.3: THE INFLUENCES OF THE EXTERNAL ENVIRONMENT IN AN
ORGANISATION
Source: Erasmus, Loedolff, Mda, & Nel (2019, p. 7)
4.3.1 THE PEST ANALYSIS
The PEST analysis is a useful tool for understanding market growth or decline,
and as such the position, potential and direction for a business. A PEST analysis is a
business measurement tool.
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PEST is an acronym for Political, Economic, Social and Technological factors,
which are used to assess the market for a business or organisational unit. The PEST
analysis headings are a framework for reviewing a situation, and can also, like the
SWOT analysis (strengths, weaknesses, opportunities and threats), be used to review
a strategy or position, the direction of a company, the marketing proposition, or idea.
Where a PEST analysis most commonly measures a market; a SWOT analysis
measures a business unit, a proposition or idea. PEST analysis uses four
perspectives, which give a logical structure, in this case, organised by the PEST
format, which helps understanding, presentation, discussion and decision-making.
The four dimensions are an extension of a basic two heading list of pros and cons.
Figure 4.3 depicts the PEST factors that influence a business.
FIGURE 4.4: THE PEST ANALYSIS
Source: Available from https://www.mbacrystalball.com
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MACRO-ENVIRONMENT (EXTERNAL)
PEST becomes particularly useful and relevant to larger and more complex
businesses or propositions, although a PEST analysis can identify one or two very
significant issues that might otherwise have been missed for small local businesses.
The four quadrants in PEST vary in significance depending on the type of business.
For example, social factors are more relevant to consumer businesses and businesses
close to the consumer-end of the supply chain, whereas political factors are more
relevant to a municipality, while environmental factors will apply strongly to mining
businesses.
PEST analysis can be used for marketing and business development assessment and
decision-making, and the PEST template encourages proactive thinking, rather than
relying on habitual or instinctive reactions.
4.3.2 THE PESTLE ANALYSIS
The PESTLE analysis factors are Political, Economic, Sociological, Technological,
Legal and Environmental. The PESTLE analysis examines each factor to assess
what their impact or potential impact will be on the organisation.
In this way, organisations can prepare strategically for any change that needs to be
made or simply have an awareness of the external market to give the organisation a
competitive advantage over other organisations in the same industry.
TABLE 4.1: PESTLE ANALYSIS FACTORS
Politics
Economy
Social
Technology
Legal
Environment
Government
Economic
Population
Technology
Discrimination
Weather
policy
growth
growth rate
incentives
laws
Political
Exchange
Age distribution
Level of
Employment
stability
rates
innovation
laws
Corruption
Interest
Career
Automation
Consumer
Environmental
rates
attitudes
protection laws
policies
Foreign trade
Inflation
Safety
Technological
Copyright and
Climate
policy
rates
emphasis
awareness
patent laws
change
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Politics
Economy
Social
Technology
Legal
Environment
Tax policy
Disposable
Health
Technological
Health and
Environment
income
consciousness
change
safety laws
Unemploym
Lifestyle
ent rates
attitudes
Labour law
Trade
Cultural
restrictions
barriers
Source: Adopted from Malackanicova (2016, p 23)
4.3.2.1
Purpose of a PESTLE Analysis
The PESTLE analysis results can be used in the decision-making process. When a
new product is developed, or a new strategic plan must be implemented, a PESTLE
analysis can investigate the opportunity for change or the viability of a business
proposition. Thus, a PESTLE analysis eliminates or reduces the possible risk
associated with new products or strategic plans.
PESTLE analysis can assist an organisation to minimise the risk when the
organisation is trying to take advantage of the trends and changes in the marketplace.
The organisation can use the information gathered from the analysis to adapt and
change its products and vision to suit the needs of the market, thereby minimising the
potential risk.
By forecasting the needs of an increased market, the business can take advantage of
various opportunities that may arise. It also allows the business to make informed
decisions on any downturn in the marketplace. The analysis further enables the
organisation to be alert regarding any negative forecasts in the marketplace, which
may hurt the business and allow the organisation to plan accordingly.
The PESTLE analysis can further be used to manage or reduce potential risks that
could be incurred before setting up a business. It can be an essential planning tool for
predicting what the market requires at a specific time and what is commercially viable.
By looking at external factors such as political trends, legal aspects and social factors,
the business can plan ahead of other existing businesses in the marketplace.
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MACRO-ENVIRONMENT (EXTERNAL)
Case study – The Vibe
4.3.2.2
Thabo and James are considering opening a pub called 'The Vibe'. The business
partners are concerned about the risks involved and decided to do a PESTLE analysis
to assist them to develop a strategic plan. The PESTLE analysis for The Vibe is
illustrated in Table 4.2.
TABLE 4.2: PESTLE ANALYSIS FOR THE VIBE
POLITICAL
• Licensing Laws in line
with Government policy
• Opening hours and latenight operating hours.
• The minimum wage
ECONOMICAL
• The national and
SOCIAL
• A place to meet friends
international economic
and for people to
downturn means
socialise.
people generally have
• Easily accessible
less disposable income • The localised venue
affects salaries and
for socialising (i.e.,
known for live music-
wages.
COVID-19 pandemic,
themed nights for
social distancing
younger consumers.
• Legislation regarding
• Demographically
measures and sale of
measures and
alcohol
restrictions on social
increased local student
gatherings)
population
• National Government
guidelines regarding
• Rise in staff wages due • Media concern with
health and safety
to Minimum Wage
negative aspects of
issues
Increases
binge drinking and
• Local and National
• Cut-price offers for
social distancing.
Government concerns
alcohol in supermarket • Increased awareness of
regarding negative
promotions
health concerns
• Increases in transport
particularly during the
drinking’ and legal blood
costs in line with Fuel
COVID-19 pandemic
alcohol limit for drivers
pricing
aspects of ‘binge
• Increased advertising on
mainstream media of
consuming alcohol
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• Budget increases in
responsibly and
socialising responsibly.
duty on alcohol (i.e., sin
• Wider choice and taste
tax)
of alcoholic drinks in
supermarkets for
consumers
TECHNOLOGICAL
• Developments in the
delivery of cold beers
and draughts.
• Development of a wide
range of flavoured
alcoholic drinks.
ENVIRONMENTAL
• Recycling
LEGAL
• Smoking Ban and
• Waste, garbage, refuse
restrictions on social
gatherings
produced in the local
area
• Stronger enforcement of
• Transportation and
underage drinking and
implementation of
delivery costs of goods
• Local interest in nightlife
measures to ensure
social distancing.
promoted via
multimedia, websites,
• Changes in legal blood
blogs and social
alcohol content (BAC)
networking.
limit laws for drivers
• Advertisements for
• Legislation on measures
alcohol awareness and
responsible drinking on
of drinks served.
•
mainstream media
• Increased
advertisement for
alcohol brands via
multimedia
4.4
THE MARKET OR TASK ENVIRONMENT
The market environment refers to the variables directly outside the organisation's
control that might have a positive or negative influence on the organisation. This
environment consists of the market, suppliers, intermediaries, competitors, substitute
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THE MARKET OR TASK ENVIRONMENT
products, possible new entrants, and labour unions. It contains those variables that
revolve around competition and pose a threat or create opportunities for the
organisation.
4.4.1.1
The variables in the market environment
The variables in the market environment are as follows:
•
The market consists of people who have needs that they want to satisfy, and
the financial means to satisfy these needs. Consumer purchasing behaviour is
influenced by consumer needs, purchasing power, and purchasing behaviour.
These aspects are influenced by the variables in the macro-environment e.g.
demographic trends, economic factors and cultural values.
•
Suppliers provide the materials, capital or labour that is used as inputs, and
are converted into outputs, or products and services. The inputs must be of the
right quality, quantity, and price.
•
Intermediaries bridge the gap between the manufacturer and the consumer.
Examples of intermediaries are wholesalers, retailers, agents, brokers, banks,
insurers.
•
Competitors determine the actual quantity of a particular product and the price
levels of the product. The competition sees to it that prices of products do not
become too high, it provides an incentive for higher productivity and it
encourages new technology to be discovered. The consumer benefits from
competition between companies.
The market variables can be explained differently.
The market or task environment consists of the following factors, which are
influenced by management strategies, such as:
•
The organisation’s markets, which could be businesses or consumers, who
need products and services from an organisation. Each of these has unique
buying processes, behaviour, needs and attitudes. Extensive market research
is frequently needed to evaluate these issues.
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•
The organisation's suppliers of resources.
•
The organisation's competitors who compete for resources and customers in
the marketplace. Why do the competitors take business from the organisation?
Why does the organisation take business from the competitors?
•
The organisation's intermediaries distribute the organisation's products and
services to the markets.
•
Some authors believe that the shareholders are also part of this environment.
In the case of a public company, which is listed on the stock exchange, this
would be correct because most of the shareholders are anonymous as far as
company management is concerned.
•
An organisation could have strategic allies or partners, either in South Africa or
abroad.
4.4.1.2
Porter’s five forces model
Porter's five forces model assists managers to focus on the five most important
competitive forces or potential threats in the external environment namely:
•
Bargaining power of suppliers,
•
Bargaining power of customers,
•
Threats of new entrants,
•
Threats of substitute products
•
Rivalry amongst competitors.
Porter’s five forces include three forces from the horizontal competition (the threat of
substitute products or services, the threat of established rivals and the threat of new
entrants) and two other from ‘vertical’ competition (the bargaining power of suppliers
and the bargaining power of customers). The five forces of Porter are depicted in
Figure 4.5.
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SUMMARY
FIGURE 4.5: PORTER’S FIVE FORCES FRAMEWORK
Source: Du Toit, et al. (2012)
4.5
SUMMARY
Nieuwenhuizen and Oosthuizen (2010) point out that the business environment
comprises everything that can affect the establishment’s growth and survival
positively or negatively and therefore influences the achievement of the
organisation’s objectives.
The business environment presents opportunities and threats to the organisation and
is continuously changing. This means that the environment in which the organisation
operates is dynamic and that the organisation needs to adapt to change to maximise
its performance and competitiveness.
It is necessary to classify the numerous variables that influence the organisation. This
will enable organisations to identify certain trends for future analysis in each section
or sub-environment.
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Module 1: Introduction to Business Management
CHAPTER FIVE
Preparing for
Environmental
Change
IN THIS CHAPTER:
5.1
INTRODUCTION ......................................................................................... 56
5.2
CHANGING ENVIRONMENTS ................................................................... 56
INTRODUCTION
CHAPTER 5: CHANGE MANAGEMENT
LEARNING OUTCOMES
On completion of chapter 5 you should be able to:
•
Analyse a work-based scenario to evaluate the impact of environmental change
on a business and propose ways in which a business can prepare for
environmental change.
KEY TERMS AND CONCEPTS
•
Environmental scanning: a process of gathering, analysing, and dispensing
information for tactical or strategic purposes.
•
Strategic responses: Responding to information by making strategic changes
or plans.
5.1
INTRODUCTION
The rapid and discontinuous change that is taking place in the environment has a
direct impact on the way that businesses are being managed. Managers are finding
that old, proven recipes for success and specialised routines are no longer effective
and it is, therefore, necessary to adopt new approaches to management.
5.2
CHANGING ENVIRONMENTS
Change is a difficult concept to define. According to Smit, Cronje, Brevis and Vrba
(2011), change means altering a state of stability to one of instability, moving from the
predictable to the unpredictable, or from the known to the unknown. It is
immeasurable and causes uncertainty. Hellriegel et al. (2008) point out that a changing
environment is unpredictable because of frequent shifts in products, technology,
competitors, markets, and/or political forces. Changes are the norm, rather than the
exception. Have you ever heard the expression: “the only thing constant is change”?
A changing environment is reflected in (Hellriegel et al. 2008, p. 218):
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•
products that are continuously changing or evolving
•
significant technological innovations that make production processes or
equipment obsolete
•
sets and/or actions of competitors, customers, or other stakeholders that
change continually and
•
government actions that reflect the current level of political clout-wielding by
various interest groups for consumer protection, product safety, pollution
control, and civil rights.
Smith et al. (2008) state that insights into trends in the management/business
environment and the ability to predict their implications for decision-making are
becoming management’s priority. The extent to which the environment influences the
management of the organisation depends on the type of organisation and the nature
of the environment. The responses to the changes in the environment revolve around
two main aspects namely:
•
Environmental scanning:
The functioning of a system that effectively
promotes the acquisition, organisation and use of information about the external
environment will probably lead to better decisions which will, in turn, enhance
the organisation’s ability to survive and thrive in competitive markets and
•
Information management: Information has been considered as the most
important production factor for the modern organisation.
It is through the
effective use of information that the other resources can be effectively used.
Managing information is a major challenge for any organisation. Management
of information systems usually includes information that is needed to organise
and control internal organisational processes.
According to Smith et al. (2008), for an organisation that has knowledge of the
environment for decision-making purposes, its information management system
should make adequate provision for environmental scanning.
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CHANGING ENVIRONMENTS
Organisations operating in a changing environment usually experience constant
pressure to adapt their products and services to meet the demands of their customers
and their new preferences.
Hellriegel et al. (2008) point out that an organisation that provides goods and services
in an environment with slow technological innovation and relatively few competitors
(stable environments) have different problems than those organisations which operate
in a growing, changing, and highly competitive market with a lot of uncertainty
(changing environments).
We have learnt in the previous chapter that the competitive forces (customers,
competitors, suppliers, new entrants, and substitute goods and services) dictate the
type and amount of information that managers need to make decisions. Most
organisations operate in both stable and changing environments and as a result, some
functions may undergo little structural changes, whereas others may need to be
changed considerably.
5.2.1 UNCERTAINTY IN THE ENVIRONMENT
Smith, Brevis, and Vrba (2008) point out that an organisation’s environment can be
studied from two perspectives, namely the extent of change and the level of
complexity. The extent of change refers to the degree of stability or instability of the
environment.
The complexity of the environment depends on the number of variables, resulting in
either a complex or simple environment. The interaction between these two
dimensions determines the level of uncertainty that the environment holds for the
organisation.
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5.2.2 STABLE ENVIRONMENTS
A stable environment is characterised by a few changes. The changes that do occur
have minimal impact on the organisation’s internal operations. In a stable environment,
top management can easily keep track of trends and what is happening in the
business.
According to Hellriegel et al. (2008:217), a stable environment is reflected in:
•
products that haven’t changed much in recent years;
•
little technological innovation;
•
a fixed set of competitors, customers, and other stakeholders; and
•
consistent policies from the government.
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CHAPTER SIX
Corporate Social
Responsibility
IN THIS CHAPTER:
6.1
SUSTAINABILITY REPORTING ................................................................. 62
6.2
CORPORATE GOVERNANCE ................................................................... 65
6.3
SUMMARY .................................................................................................. 66
CORPORATE SOCIAL RESPONSIBILITY
CHAPTER 6: CORPORATE SOCIAL RESPONSIBILITY
LEARNING OUTCOMES
On completion of chapter 6 you should be able to:
•
Explain and define what “ethics” means in the business environment.
•
Explain and define what corporate social responsibility (CSR) is and why
organisations should consider implementing CSR programmes.
•
Explain what “corporate governance” means and entails.
KEY TERMS AND CONCEPTS
•
Corporate social responsibility: this implies that a manager, in the process
of serving his/her business interests, is obligated to take actions that also
protect and enhance society’s interests.
•
Social responsibility: the duty of a business to pay attention to the needs and
welfare of the community.
•
Sustainable development: the idea of limitations imposed by the state of
technology and social organisations on the environment’s ability to meet
present and future needs.
KEY POINTS
•
To make socially responsible decisions, managers should consider all possible
stakeholders.
•
Economist Milton Friedman said that when an organisation makes a profit, it is
socially responsible.
•
Other groups argue that social responsibility policies should be part of an
organisation’s mission statement.
•
Social obligation: because society allows organisations to exist, organisations
owe it to society to make profits.
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SUSTAINABILITY REPORTING
•
Social reaction: here the view is that organisations owe society more than the
provision of goods and services and that they should be accountable for the
ecological, environmental and social costs resulting from their actions.
•
Social responsiveness: this refers to the socially responsible actions of
organisations that exceed social obligation and social reaction.
•
Primary stakeholders: Shareholders, employees, suppliers, customers.
•
Secondary stakeholders: the local community, the country as a whole, the
international environment.
“I think all of us agree that the great challenge of this new century will be to
build and nurture sustainable communities social, cultural and physical
environments, in which we can satisfy our needs and aspirations without
diminishing the chances of future generations. - Fritjof Capra”.
6.1
SUSTAINABILITY REPORTING
Social responsibility is also known by several other names such as corporate
responsibility, corporate accountability, corporate ethics, corporate citizenship,
responsible entrepreneurship and triple bottom line.
Nieuwenhuizen and Oosthuizen (2010, p. 81) define social responsibility as a
practice whereby organisations integrate social and environmental concerns in their
business operations and their interaction with all their stakeholders voluntarily.
Hellriegel et al. (2013, p. 169) define corporate social responsibility as a company or
manager’s duty or obligation to make decisions that nurture, protect, enhance and
promote the welfare and well-being of stakeholders and society as a whole. In today’s
business world two fundamental issues play a critical role in business management
namely: ethics and social responsibility. There are a strong interrelationship and
mutual inclusiveness between the two concepts.
The focus on ethics is driven by the growing interest amongst consumers,
policymakers and businesses in the forms of production and consumption that is
sustainable and ethically orientated. There is an increasing demand for ethical
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investment products, organic produce and fair trade (Nieuwenhuizen & Oosthuizen,
2010, p. 69).
Research show that:
•
A problem in accounting for sustainability is that it is difficult to measure the
financial implications of environmental aspects and social activities.
•
In South Africa, sustainability reporting is becoming routine practice.
•
International and local indexes measure the performance of companies in terms
of recognised corporate responsibility standards.
Social responsibility is based on the shared values of the organisation without
questioning by whom the values are shared and how the shared meaning and values
were developed in the organisation.
Corporate social responsibility requires that South African companies contribute to the
development and implementation of Integrated Development Plans (IDPs).
The relationship between industry, government and society has been an issue since
the industry first began. We will briefly discuss the importance of CSR, as this topic
will be discussed in comprehensive detail in a module to follow.
6.1.1 THE THREE TARGET AREAS OF SOCIAL RESPONSIBILITY
The ethical behaviour of organisations can be seen through their approach towards
being socially responsible. According to Nieuwenhuizen and Oosthuizen (2010), social
responsibility has three target areas for action, namely:
•
Environmental: Clean production that respects sustainable development and
the saving of natural resources. We need to save and protect the environment
as it provides us with air, water, soil and vegetation that we need for survival.
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SUSTAINABILITY REPORTING
•
Social: rejecting products produced with forced labour or child labour and
giving greater consideration to the role of organisations in their local
environment.
•
Economic: Promotion of socially responsible investments concerned with
environmental and social aspects.
6.1.2 FOCUS AREAS OF SOCIAL RESPONSIBILITY
Nieuwenhuizen and Oosthuizen (2010, p. 81) point out that organisations, who are
serious about social responsibility, should focus on the following activities:
•
corporate governance and ethics;
•
health and safety;
•
environmental awareness;
•
human rights;
•
sustainable development;
•
industrial relations;
•
community involvement, development and investment;
•
involvement and respect for diverse cultures and disadvantaged people;
•
corporate responsibility and employees volunteering to do work in the
community;
•
customer satisfaction and adherence to principles of fair competition;
•
anti-bribery and anti-corruption measures;
•
corporate organisations must be accountable for what they do in the
communities; they must be open and transparent in why they do certain things
and do regular performance reporting;
•
good supplier relations, for both local and international supply chains.
6.1.3 FACTORS THAT INFLUENCE CORPORATE SOCIAL RESPONSIBILITY
Nieuwenhuizen and Oosthuizen (2010, p. 82) identified the following factors and
influences that have contributed to the increased attention to CSR:
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•
sustainable development;
•
globalisation;
•
size and number of corporate organisations;
•
governance from government-related organisations;
•
advances in communication technology;
•
consumer and investment interest in supporting responsible business
practices;
•
high profile breaching of corporate ethics;
•
global consistency in high standards of social and environmental care;
•
limits to government legislation and regulations to address all corporate social
relationship issues;
•
adopting an effective approach to CSR can reduce organisational risks.
6.2
CORPORATE GOVERNANCE
Corporate governance is essentially about leadership that is transparent. Responsible
companies regard the ability to demonstrate good corporate governance as a basic
requirement of doing business.
The King IV Report on Corporate Governance leads the world on its inclusion of
sustainability matters as a basic requirement of good governance. The King IV Report
promotes corporate governance as integral to running an organisation and delivering
governance outcomes such as ethical culture, good performance, effective control and
legitimacy. The report emphasises sustainability and describes it as follows:
Sustainability is the primary moral and economic imperative of the 21st Century.
It is one of the most important resources of both opportunities and risks for
business. Nature, society, and business are interconnected in complex ways
that should be understood by decision-makers. Most importantly, current
incremental changes towards sustainability are not sufficient – we need a
fundamental shift in the way companies and directors act and organise
themselves.
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SUMMARY
6.3
SUMMARY
In this chapter, we investigated the reason why organisations need to be socially
responsible. Corporate social responsibility implies that a business owner/manager, in
the process of serving his/her business interests, is obliged to take actions that also
protect and enhance society’s interest.
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CHAPTER SEVEN
The Concept of
Management
IN THIS CHAPTER:
7.1
INTRODUCTION ......................................................................................... 71
7.2
WHAT IS MANAGEMENT? ......................................................................... 72
7.3
UNDERSTANDING PRODUCTIVITY .......................................................... 73
SUMMARY
CHAPTER 7: THE NATURE OF MANAGEMENT
LEARNING OUTCOMES
On completion of chapters 7 you should be able to:
•
Apply the functions of management, namely, planning, organising, leading and
control.
•
Understand the different levels and functional areas of management in
business.
•
Explain the various managerial skills and competencies needed at the different
levels of management.
•
Distinguish between the three managerial roles that managers perform in a
business environment, namely interpersonal, decision-making and information
roles.
KEY TERMS AND CONCEPTS
•
Board of directors: a group of people assembled to lead and control a
company so that it functions in the best interest of its shareholders.
•
Business ethics: a system of ethics (principles of good behaviour) which, if
practised, make businesspeople act in a responsible, decent, honest,
transparent and accountable manner.
•
Figurehead: an individual in a prominent position, but without real authority.
•
Officiates: to perform the duties and functions of an office or a position of
authority.
•
Productivity: the ratio of the quantity and quality of units produced to the labour
per unit of time.
KEY POINTS
•
Boards are composed of both executive and non-executive directors.
•
The board is the focal point of the corporate governance system.
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•
Management is primarily responsible for implementing the strategy as defined
by the board.
•
Executive directors are full-time employees of the company.
•
Non-executive directors should be in a position to provide independent
judgement on issues facing the company.
•
A director stands in a fiduciary (trust) relationship with the company.
•
The chairman of the company is responsible for the running of the board.
•
The chief executive officer is responsible for running the company’s business.
•
It is sometimes required that the chairman be an independent non-executive
director.
•
King II identified seven characteristics of good corporate governance:
•
Discipline: a commitment by senior management to adhere to behaviour that
is universally recognised and accepted to be correct and proper.
•
Transparency: the ease with which an outsider I able to make a meaningful
analysis of the company’s activities.
•
Independence: the extent to which mechanisms have been put in place to
minimise or avoid potential conflicts that may exist.
•
Accountability: individuals or groups who make a decision and take actions,
must be accountable for their decision and actions.
•
Responsibility: pertains to behaviour that allows for corrective action and for
penalising mismanagement.
•
Fairness: the systems that exist within the company must be balanced in taking
into account all those that have an interest in the company and its future.
•
Social responsibility: a well-managed company will be aware of, and respond
to, social issues, placing a high priority on ethical standards.
•
There is no standard recipe for moral corporate governance, but there are
broad guidelines to follow.
Managers are classified according to two areas, by functions and by levels.
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SUMMARY
Basic management activities are:
•
planning;
•
organising;
•
leading;
•
controlling.
Management tasks include, but are not limited to:
•
decision making;
•
communicating;
•
controlling;
•
disciplining;
•
motivating;
•
coordinating;
•
evaluating;
•
delegating.
General management functions include:
•
human resources;
•
marketing;
•
public relations;
•
production;
•
finance management;
•
administration.
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7.1
INTRODUCTION
Organisations share three common characteristics, namely:
•
every organisation has a purpose;
•
every organisation is made up of people;
•
every organisation group people together in some way or another. (Hellriegel,
et al., 2013)
People in organisations can be divided into two categories: managers and operative
employees. Operatives are those people responsible for a particular task. Operatives
do not have authority over other people. Managers, on the other hand, can be
categorised as top, middle or first-line managers and have both supervising and
directing responsibilities. Figure 7.1 below demonstrates the various organisational
levels.
FIGURE 7.1: VARIOUS ORGANISATIONAL LEVELS
Top Managers
Middle Managers
First-Line
Managers
Operative
Employees
Source: Adapted from Hellriegel et al. (2013)
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WHAT IS MANAGEMENT?
7.2
WHAT IS MANAGEMENT?
The term ‘management’ refers to the process of getting things done, effectively and
efficiently, through and with people.
The term process refers to the main activities or tasks that managers perform,
namely:
1. Planning: setting an organisation’s goal and deciding how best to achieve
them.
2. Organising: once a manager set goals and developed action plans, his next
function is to organise human and other resources that are identified as
necessary by the plan to reach the goal.
3. Leading: Influencing or promoting employees to work together to attain
organisational goals.
4. Controlling: monitoring the organisational progress by measuring,
comparing, finding deviation and correcting organisational activities, to attain
organisational goals.
‘Management’ refers to the process of getting things done, effectively and efficiently,
through and with other people.
•
The term effectiveness refers to performing those activities that will ensure
that the organisation fulfils its purpose and attains its goals; in other words,
‘doing the right things’.
•
The term efficiency refers to how well the tasks are completed; in other words,
‘doing things right’. The measure of efficiency is the ratio of inputs to outputs
(Hellriegel et al., 2013).
Figure 7.2 illustrates the task of management, according to the management definition.
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FIGURE 7.2: EFFICIENCY AND EFFECTIVENESS
• Information
Resources
• Human
Resources
Planning
and
Decision
Making
Leading
Organising
Controlling
• Financial
Resources
• Physical
Resoucres
Source: Adapted from Machado, Strydom, and Cant (1999)
The purpose of business management is to produce the most units of products or
services at the lowest possible price. From this emerges the task of business
management, which is to determine how an organisation can achieve the highest
possible output (products and services), with the least possible input (human
resources, natural resources, capital).
More specifically, the task of business management entails an examination of the
factors, methods and principles that enable a business to function as efficiently and
productively as possible to maximise its profits (Du Toit, et al., 2012).
7.3
UNDERSTANDING PRODUCTIVITY
There are various definitions for productivity and most of them are complex. Yet
productivity is a very simple concept.
Productivity can be seen as a measure of how efficient a person or an operation is
and is determined by comparing:
•
the value of the output result with.
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UNDERSTANDING PRODUCTIVITY
•
the cost of the input resource.
Therefore, productivity refers to the quantity and quality of output of an individual or
an organisation relative to the input of resources. A productive organisation is one
where the value of the output produced, outweighs the costs of the inputs and
processing activities.
Everybody in the organisation, but specifically people in leadership roles need to
define acceptable and unacceptable productivity levels. Management has the added
accountability of maintaining a balance between what is desired and what is
unacceptable.
Inputs are normally items such as time, capital, equipment, and any other expenditure
employed to produce the output. The output can be a specific product or service that
is delivered to a customer at a specific price. The margin, by which the benefits
received for the output outweigh the cost of the inputs, is critical in today’s
organisations and has a direct influence on its survival in the world marketplace.
The four management functions as performed by each of the managerial levels are
illustrated in the figures below.
FIGURE
7.3:
MANAGEMENT
FUNCTIONS
PERFORMED
BY
TOP
MANAGEMENT
• Plans the long-term goals. Determines the mission and vision and overall
strategies of the entire organisations.
• Organises broad organisational structures.
• Leads the whole organisation through the top executive.
Top
Management • Controls the whole organisation.
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FIGURE
7.4:
MANAGEMENT FUNCTIONS
PERFORMED
BY
MIDDLE
MANAGEMENT
Middle
Management
FIGURE
• Plans the medium and short term goals. Implement plans, policies and
strategies formulated by top management.
• Organises the functional areas.
• Leads by means of department heads.
• Controls the management activities of own department.
7.5:
MANAGEMENT
FUNCTIONS
PERFORMED
BY
LOWER
MANAGEMENT
• Short term planning. Implementing plans of middle management.
• In terms of organising, lower management applies policies and procedures.
• Supervises. Provide technical assistance and motivates sub-ordinates.
Lower
Management • Controls the achieving of day-to-day goals.
Source: Author’s own compilation
7.4
THE TASKS OF MANAGEMENT
Any organisation, whether old or new, whether small or big needs to run smoothly and
achieve the organisational goals and objectives. For this, managers develop and
implement their own management concepts. There are basically four management
tasks that allow any organisation to handle the tactical, planned and set decisions,
namely planning, organising, leading and controlling.
These tasks use resources to achieve the organisations’ goals and objectives and are
interrelated. That means that you cannot decide on one area without considering its
effect on the other areas, as depicted in Figure 7.6 below:
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THE TASKS OF MANAGEMENT
FIGURE 7.6: THE PROCESS AND TASKS OF MANAGEMENT
Planning
Controlling
Tasks of
Management
Organising
Leading
Source: Author’s own compilation
7.4.1 PLANNING
Planning is management’s decision on what the organisation wants and needs to
attain. It consists of the following activities:
•
Developing a purpose and vision for the organisation.
•
Identifying and forecasting changes occurring in the macro-, market- and
microenvironment.
•
Setting integrated objectives and strategies for the organisation and each of its
functional departments. The management team must develop these objectives
and strategies together so that they are consistent vertically and horizontally in
the organisation.
•
Developing tactical and operational plans and schedules of action to achieve
the objectives in each functional department.
•
Developing integrated company and departmental budgets against which
performance is measured.
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7.4.2 ORGANISING
Organising is deciding how the strategies and plans will be executed and consist of
the following activities:
•
Identifying the work to be done and grouping it into logical operating functions
and units.
•
Establishing job positions and working relationships between the operating
units and departments.
•
Recruiting, selecting and placing people in these positions.
•
Establishing methods of coordinating activities between units and departments.
7.4.3 LEADING
Leading is getting people to work willingly together, to execute plans, and consists of
the following activities:
•
Communicating with employees
•
Motivating people.
•
Making decisions and solving problems related to people.
•
Managing conflict and change in an organisation.
•
Developing teams and individuals.
7.4.4 CONTROLLING
Controlling ensures that plans are executed correctly, and consists of the following
activities:
•
Establishing standards of performance. This is done at the planning stage for
each of the resources and functional departments.
•
Measuring actual performance against those standards.
•
Evaluating reasons for deviations from the set standards.
•
Taking corrective action.
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MANAGERIAL ROLES
7.5
MANAGERIAL ROLES
Managers perform about ten different roles, classified into three main groups namely
interpersonal, information role and decision-making role.
1.
The interpersonal role includes being a figurehead, a leader and a
relationship builder.
2.
The information role includes monitoring or gathering information, analysing
the information and acting as a spokesperson for the department.
3.
The decision-making role includes entrepreneurship and problem-solving.
Managers must also make decisions about resources and have to negotiate
with various parties and stakeholders.
The Canadian academic, Henry Mintzberg who had trained as a mechanical engineer,
conducted his PhD thesis at the MIT Sloan School of Management by analysing the
actual work habits and time management of chief executive officers (CEOs). In 1973,
Mintzberg's thesis on the nature of managerial work was adopted and published. He
reduced the thousands of things managers do in the course of planning, organising,
leading and controlling to ten roles, which he grouped into three broad categories:
decisional roles, interpersonal roles and informational roles. He then identified ten
separate roles in managerial work (Hellriegel et al., 2013). Mintzberg found that,
although individual capabilities influence the implementation of a role, it is the manager
that determines the need for a particular role, addressing the common belief that it is
predominantly a manager's skill that determines success. Effective managers develop
protocols for action given their job description and personal preference and match
these with the situation at hand. Table 7.1 below depicts the ten managerial roles
identified by Mintzberg.
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TABLE 7.1: MINTZBERG’S TEN MANAGERIAL ROLES WITH SOME
EXAMPLES
Category
Role
Monitor
Informational
Disseminator
Examples of possible activities
Seek and receive information, scan papers and reports,
maintain interpersonal contacts
Forward information to others, send memos, make phone
calls
Spokesperson
Represent the unit in speeches and reports
Figurehead
Perform ceremonial and symbolic duties, receive visitors
Direct, motivate and influence subordinates to do tasks
Interpersonal
Leader
willingly to the best of their abilities. Conduct training
sessions and associated duties
Liaison
Entrepreneur
Disturbance handler
Decisional
Resource allocator
Negotiator
Maintain information links in and beyond the organisation
through networking
Initiate new projects, identify new opportunities and areas
for growth and development
Resolve conflicts, assist subordinates to deal with and
embrace change, provide solutions
Set priorities, draw up budgets etc.
Represent organisation during negotiations with unions,
suppliers etc.
Source: Author’s own compilation
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MANAGERIAL SKILLS AND COMPETENCIES AT DIFFERENT LEVELS OF MANAGEMENT
7.6
MANAGERIAL SKILLS AND COMPETENCIES AT DIFFERENT
LEVELS OF MANAGEMENT
KEY TERMS AND CONCEPTS
•
Competent: the quality of being adequately or well qualified physically and
intellectually.
KEY POINTS
Skills needed by top management differ from lower management.
Three main skills:
1.
conceptual skills;
2.
interpersonal skills; and
3.
technical skills.
An excellent characteristic of a good leader is to be able to provide consistent
motivation to his/her team, encouraging them to attain excellence and quality in their
performance. A good leader is always looking for ways to improve production and
standards. Management skills enable a leader to create a quality effective team.
The recently established Management Charter Initiative (MCI) focuses on what
managers should do in the workplace, and not what they should know. Being
competent means being able to demonstrate capability in a work situation. Skills and
competencies must be understood against the background of the environment in
which a manager works.
We have learnt thus far ‘what management is’ and ‘what managers do’. We have also
learnt various definitions of management and what the management process is all
about. Figure 7.7 provides a structure of management’s definitions.
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FIGURE 7.7: STRUCTURE OF MANAGEMENT'S DEFINITIONS
Management is the process of getting things done, effectively and efficiently,
through and with other people
What
How
Management is a
science and art
To manage means to
decide and to execute
Managing production factors: natural
resources, human resources,
information resources and capital
Managerial roles: informational,
decision-making and interpersonal
roles
Managing the system, resources,
processes, situations and relations
Managerial phases: path finding;
problem-solving and implementation
Managers have a duty and
responsibility to the organisation to
get results.
Management functions: planning;
organising, leading and controlling
Technical and Human
Operational and strategic
Managerial Knowledge and skills
Source: Adapted from Shenhar and Renier (1996)
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MANAGERIAL SKILLS AND COMPETENCIES AT DIFFERENT LEVELS OF MANAGEMENT
7.6.1 MANAGERIAL COMPETENCIES
One way to improve productivity is to improve the methods used for performing work.
Any change in the way a task is performed to lower the costs, completion time, or
improves the quality of the product or service provided by the task, is referred to as
the methods improvement process. The methods improvement process normally
involves observing each minute segment of a job and then examining these segments
for ways to conduct the job better as a whole. It may also be known as work
simplification, time-and-motion study, operations analysis, systems engineering,
methods and systems analysis, waste reduction, motion economy, or even quality
circles. Hellriegel et al. (2008) define managerial competencies as the knowledge,
skills, behaviours, and attitudes needed by managers to be effective in a wide range
of managerial jobs and various organisational settings.
Hellriegel et al. (2008) identified six specific competencies that are transferable from
one organisation to the next namely:
(i)
communication;
(ii)
planning and administration;
(iii)
teamwork;
(iv)
strategic action;
(v)
global awareness; and
(vi)
self-management.
7.6.1.1
Communication Competency
This term refers to the effective transfer and exchange of information that leads to
understanding between managers and employees. We have learnt in our definition of
management that it involves getting work done through other people. Thus,
communication is essential for effective managerial performance. Communication
competency
includes
informal
communication
(i.e.,
casual
and
unofficial
communication and spontaneous exchange of information), formal communication
(i.e., communication through official channels of the organisation), and negotiation
(i.e., communication aimed at reaching an agreement).
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7.6.1.2
Planning and Administration Competency
Planning and administration competency involve deciding what tasks need to be
completed, how they should be executed, what type of resources should be allocated
to enable execution of tasks, and finally monitoring progress to ensure that the tasks
are executed according to the plans.
Some of the management tasks include:
•
information gathering, analysis and problem-solving;
•
planning and organising projects;
•
time management;
•
budgeting and financial management.
7.6.1.3
Teamwork competency
Accomplishing tasks through small groups of people who are collectively responsible
and whose work is interdependent, requires teamwork competency. Managers in
organisations that utilise teams can become more effective by:
•
designing teams,
•
creating a supportive team environment, and
•
managing team dynamics.
7.6.1.4
Strategic Action Competency
Managers need to understand the overall mission and values of their organisations to
ensure that their actions and those of their subordinates are aligned. This process
involves strategic action competency.
Strategic action competency includes:
•
understanding the industry in which the business operates
•
understanding the organisation and its business processes
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MANAGERIAL SKILLS AND COMPETENCIES AT DIFFERENT LEVELS OF MANAGEMENT
•
taking strategic action.
7.6.1.5
Global awareness competency
Carrying out an organisation’s managerial work by drawing on the human, financial,
information, and material resources from multiple countries, and serving markets that
span multiple cultures, requires global awareness competency.
7.6.1.6
Self-Management Competency
Taking responsibility for one’s life at work and beyond involves self-management
competency. Self-management competency includes:
•
integrity and ethical conduct,
•
personal drive and resilience,
•
balancing work-life issues, and
•
self-awareness and development. (Hellriegel et al., 2008)
Managers have various roles to fulfil. A managerial role is a behaviour pattern
expected of an individual within a unit or position. We are going to focus on these
managerial roles, identified by Henry Mintzberg, in this management programme. As
discussed above, Mintzberg reduced the thousands of things managers do in the
course of planning, organising, leading and controlling to ten roles, which he grouped
into
three
broad
categories:
decisional
roles,
interpersonal
roles
and
informational roles (Hellriegel et al., 2013). Figure 7.8 below identifies several
important aspects of each managerial competency.
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FIGURE
7.8:
IMPORTANT
ASPECTS
OF
EACH
KEY
MANAGERIAL
COMPETENCY
Communication
• Informal communication
• Formal communication
• Negotiation
Planning and administration
• Information-gathering, analysis and problem-solving
• Planning and organising projects
• Time management
• Budgeting and financial management
Teamwork
• Designing teams
• Creating a supportive environment
• Managing team dynamics
Strategic action
• Understanding the industry
• Understanding the organisation
• Taking strategic actions
Global awareness
• Cultural knowledge and understanding
• Cultural openness and sensitivity
Emotional intelligence and self-management
• Integrity and ethical conduct
• Personal drive and resilience
• Balancing work and life issues
• Self-awareness and development
• Spiritual intelligence
Source: Adapted from Hellriegel et al. (2013)
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CHAPTER EIGHT
Management
Theories
IN THIS CHAPTER:
8.1
CLASSICAL APPROACHES ....................................................................... 88
8.2
CONTEMPORARY APPROACHES ............................................................ 94
MANAGEMENT THEORIES
CHAPTER 8: MANAGEMENT THEORIES
LEARNING OUTCOMES
•
Describe the various classical and contemporary management theories.
KEY TERMS AND CONCEPTS
•
Bureaucratic: one who follows a routine in a mechanical, unimaginative way,
insisting on proper forms and petty rules.
•
Classical: designating of a specified course of study that is or has been
standard and traditionally authoritative, not new, recent, or experimental.
•
Contemporary: in the style of the present or recent times, with other words
‘modern’.
•
Entropy: The process of systems disintegration (the opposite of synergy). It is
dependent on the environment in which it operates
•
Open system: a system is open if:
•
Subsystem: a system within a system.
•
Synergy: the whole is greater than the sum of its parts, or individual efforts are
simultaneously applied in such a way that the result of the simultaneous
application is greater than the sum of the individual efforts.
•
System: a set of interrelated elements functioning as a whole. The environment
is dependent on the system
•
Theory: theories are analytical tools for understanding, explaining, and making
predictions about a given subject matter. There is a specific interaction between
system and environment
KEY POINTS
•
Theories bring predictable success to the world of management. The theories
of management can be classified into the classical approach and the
contemporary approach.
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CLASSICAL APPROACHES
•
Circumstances in the capitalist world gave rise to a need for professional
management. Management had to invent solutions to problems, and they
developed their theories about the organisation and its management.
•
Managers have to distinguish between poor and sound theories, to predict the
future with some degree of confidence. A sound theory describes the
circumstances under which it does and does not work.
FIGURE 8.1: EVOLUTION OF MANAGEMENT THOUGHT
Source: Robbins, Judge, Odendaal, & Roodt (2009)
8.1
CLASSICAL APPROACHES
The classical era covered the period from about 1900 to the mid-1930s. The classical
viewpoint is one of the oldest and most widely accepted views of the management.
The emphasis was on the internal functioning of the organisation. This approach is
divided into three main branches namely: scientific management, bureaucratic
management and administrative management and emerged during a time when
engineers were trying to make organisations run like well-oiled machines.
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8.1.1 SCIENTIFIC APPROACH
The focus is on ways to improve the performance of individual workers. It also focused
on the issue of managing work and not people. Frederick Taylor, Frank and Lilian
Gilbreth and Henry Gantt were contributors to scientific management. Taylor
described how the scientific method could be used to define 'the one best way' for a
job to be done. He analysed each aspect of a task and measured everything possible
to find the best way to complete the task. He tried to eliminate unnecessary movement
that slowed production down and determined the exact sequence of activities. A
standard time to accomplish each task was then determined - this was referred to as
time and motion studies.
TAYLOR'S FOUR PRINCIPLES OF MANAGEMENT
1.
Develop a science for each element of an individual's work.
2.
Scientifically select, train and develop the worker.
3.
Cooperate with workers to ensure that all work is done following the
principles of the science that has been developed.
4.
Divide work and responsibility almost equally between management and
workers. Management takes greater responsibility.
Taylor believed workers are motivated by money and therefore he supported the
individual piecework system as the basis for pay (Robbins, Odendaal, & Roodt, 2007).
ADVANTAGES OF THE SCIENTIFIC APPROACH
Productivity and efficiency.
DISADVANTAGES OF THE SCIENTIFIC APPROACH
People are not machines and should be treated like human beings (overlooked social
needs).
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CLASSICAL APPROACHES
8.1.2 PROCESS OR ADMINISTRATION APPROACH
Planning and the organisation of people in the workplace became the focus of
consideration. It focuses on the manager and the basic managerial tasks. Henri Fayol,
a French industrialist, was the contributor to the process or administration approach.
According to Fayol, management is a skill that one can learn once its underlying
principles are understood. He argued that management was an activity common to all
human undertakings in business. He was of the view that, to be successful as a
manager, you only had to understand the basic managerial tasks namely planning,
organising, controlling, leading and applying certain management principles to these
tasks.
Fayol's 14 principles for effective management were:
1.
Division of Labour
2.
Authority and responsibility
3.
Discipline
4.
Unity of command
5.
Unity of direction
6.
Subordination of individual interest to the common good
7.
Remuneration
8.
Centralisation
9.
Hierarchy
10.
Order
11.
Equity
12.
Stability of staff
13.
Initiative
14.
Team spirit (Esprit de corps) (Smit et al., 2011)
ADVANTAGES OF THE ADMINISTRATIVE APPROACH
Clear structure and the professionalisation of managerial roles.
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DISADVANTAGES OF THE ADMINISTRATIVE APPROACH
Internal focus overemphasises the rational behaviour of managers.
8.1.3 BUREAUCRATIC APPROACH
The bureaucratic management approach relies on rules, a set hierarchy, a clear
division of labour and detailed procedures. Max Weber was the contributor to the
bureaucratic approach. He was a German sociologist who developed a theory of
authority structures and described organisational activity as based on authority
relations. He was one of the first to study management and organisational behaviour
from a structural perspective. He based his studies on Germany's governmental
bureaucracy and was therefore mostly concerned with the broad social and economic
issues facing society. Bureaucracy was a system characterised by the division of
labour, a clearly defined hierarchy, detailed rules and regulations, and impersonal
relationships.
•
Limitations: managers were compensated to do what they are told to do.
Managers were often rewarded for complying with outdated rules.
•
Early approaches emphasised the technical aspect of work at the expense of
the personal aspect.
•
Depression, changes in economic, political, social, technological environments
caused managers to challenge these approaches.
•
Managing people became the focus.
•
Studies at the Hawthorne plant led to human relations approaches.
CHARACTERISTICS OF A BUREAUCRATIC MANAGEMENT
•
Rules;
•
Impersonality because employees were evaluated according to rules and
objective data, such as sales or units produced;
•
Division of labour;
•
Hierarchical structure;
•
Authority structure;
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CLASSICAL APPROACHES
•
Lifelong career commitment;
•
Rationality as the most efficient method was used to achieve the set goals.
(Hellriegel et al., 2013)
ADVANTAGES OF BUREAUCRATIC MANAGEMENT
•
Efficiency and consistency.
•
Functions best when many routine tasks need to be done; this enables lowerlevel employees to focus on handling the bulk of the work by simply following
rules and standard operating procedures.
DISADVANTAGES OF BUREAUCRATIC MANAGEMENT
•
Rigid rules, red tape and slow decision making.
8.1.4 BEHAVIOURAL VIEWPOINT OF MANAGEMENT
During the 1920s and 1930s, industrialised nations experienced vast social and
cultural changes. Mass production led to a second industrial revolution. The theorists
during this period advocated a theme that focused on behavioural management, the
study of how managers should personally behave to motivate employees and
encourage them to perform at high levels and be committed to achieving
organisational goals.
Mary Parker Follett, an American social worker, made important contributions to the
behavioural viewpoint in that she believed that management is a flowing, continuous
process.
Follett advocated the involvement of workers in solving problems, group dynamics,
dynamics of management rather than static principles and coordination in the
workplace. Much of her studies were in response to Taylor's work who ignored the
human side of the organisation.
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8.1.5 HUMAN RELATIONS MOVEMENT
•
Elton Mayo, a Harvard Professor, was the contributor to the Human Relations
Movement.
He studied people in the work environment, using scientific
methods. Maslow and McGregor were two well-known behavioural scientists.
Maslow proposed the widely recognised theories of motivation. McGregor is
best known for his Theory X and Theory Y assumptions.
The Hawthorne studies (1924-1933) made the most important contribution to the
human relations movement within organisational behaviour conducted at Western
Electric Company's Hawthorne Works. The Hawthorne effect concluded that when
employees are given special attention, production is likely to change, regardless of
whether working conditions change. Informal workgroups and the social environment
of employees greatly influences productivity. Awareness of employees’ feelings and
involvement in decision-making reduces resistance to change.
Some of the characteristics of the Human Relations Movements are that employees
are:
•
more motivated by social needs and get a sense of identity through their
association with one another.
•
more responsive to the social influences of their colleagues than to
management's financial incentives and rules.
•
more likely to respond to a manager who can help satisfy their needs. Managers
need to coordinate work with subordinates to improve efficiency.
8.1.6 QUANTITATIVE MANAGEMENT THEORY
The quantitative management approach developed as a result of the intervention of
computers and enabled experts to apply mathematical techniques to management
problems.
Quantitative techniques have four basic characteristics, namely:
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CONTEMPORARY APPROACHES
•
The primary focus is on decision-making.
•
Alternatives are based on economic criteria
•
Mathematical models are used
•
Computers are essential.
This theory is used during planning and control activities, product strategies,
production scheduling, capital budgeting, cash flow management, inventory control.
The limitations of the quantitative theory are that it is mainly used as a tool or aid in
decision-making, as many aspects of management cannot be quantified.
8.2
CONTEMPORARY APPROACHES
Contemporary approaches developed as the business environment became
increasingly turbulent and volatile and it was difficult for managers to focus only on
their internal environment. The interaction between the external environment and the
organisation became the focus of the systems theory of management.
The contemporary management approaches include:
1.
The Systems Approach
2.
The Contingency Approach
3.
Total Quality Management
8.2.1 SYSTEMS APPROACH
Concepts from the theory of systems are used to explain the interdependence
between the business organisation and its environment. A business organisation is a
system that operates in a specific environment. A business obtains inputs from the
environment (e.g., labour, raw materials, knowledge, and expertise). Inputs are
transformed into outputs (e.g., products and services), as depicted in figure 8.8 below:
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FIGURE 8.2: ENVIRONMENTAL INFLUENCES
Source: Erasmus et al. (2019, p. 11)
According to the systems approach, management must combine viewpoints of various
subsystems so that the overall goal of the system as a whole can be obtained. The
functions of management should be seen as interdependent components that
complement each other (synergy).
According to this theory, the organisation is an open system, which is influenced by
and influences the external environment. Any changes in the system or its
environments will influence the other parts of the system. Figure 8.9 depicts a model
of a basic system.
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CONTEMPORARY APPROACHES
FIGURE 8.3: MODEL OF A BASIC SYSTEM
Source: Romiszowski (1981, p. 6)
It is a management approach that enables the leadership to see the company as a
unified part of a major section of the larger outside of the corporate environment. Even
a small activity in part has a substantial effect on other sections of the company. Such
a system may be biological, physical or social; and may enable the management to
efficiently determine the long-term goals of the company. The systems approach
states that, for realising the operations of an entity, it is essential to see the entity as
a complete system.
The system comprises out of four elements, namely:
1.
Input (resources)
2.
Transformation process (managerial, systems etc.)
3.
Outputs (procedures or services)
4.
Feedback (reaction from the environment)
According to the systems approach, management must combine viewpoints of various
subsystems so that the overall goal of the system as a whole can be obtained. The
functions of management should be seen as interdependent components that
complement each other (synergy).
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The systems approach to management views an organisation as a group of
interrelated parts with a single purpose: to remain in balance (equilibrium). The action
of one part influences the other parts and could cause imbalances.
The characteristics of a system are:
•
A system is complex: each aspect of the business must be dealt with differently.
•
A system can be opened or closed.
•
A system is open if:
o
it is dependent on the environment in which it operates;
o
the environment is dependent on the system;
o
there is a specific interaction between the system and external
environment.
•
A system strives for equilibrium.
•
A system strives towards achieving a multiplicity of goals.
Managers can therefore not deal separately with individual parts: they should view the
organisation as a whole and should anticipate the effect of their decisions on the other
parts of the organisation.
From a systems point of view, management should maintain a balance between the
various parts of the organisation as well as between the organisation and its
environment.
This is why we will discuss the macro-, market-, and micro-environments and the
variables that comprise each of these later in this study guide.
8.2.2 CONTINGENCY APPROACH
The contingency approach developed from the systems approach to management.
The application of management principles depends on the particular situation that
management faces at a given point in time. There is no right way to manage as every
department or unit within the organisation is unique. Every organisation exists in a
unique environment with unique employees and unique goals. Thus, there is more
than one way to achieve a goal.
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CONTEMPORARY APPROACHES
According to Hellriegel et al. (2013), the essence of the contingency viewpoint is that
management practices should be consistent with the requirement of the external
environment, the technology used to make the product or deliver the service and the
people who work in the organisation. The relative importance of each contingency
variable depends on the type of managerial problem identified.
8.2.3 TOTAL QUALITY MANAGEMENT (TQM)
TQM focus on continuous improvement and emphasises never being satisfied with the
quality. Organisations feel pressure from customers and competitors to deliver highquality products and services on time, to reward the ethical behaviour of employees
and to develop plans to manage highly effective and diverse workforces. The quality
viewpoint stresses the meeting of customers’ expectations in terms of the value
(performance and quality) of goods and services. One way for top management to
gain the support of employees in efforts to deliver quality is to implement TQM
practices that reward employees for meeting quality goals. The TQM philosophy
requires a high level of coordination throughout the organisation through for example
teamwork. Management is driven by competition; customer needs and expectations
and it is, therefore, important to create learning organisations and promoting
motivation for learning to employees for them to produce quality services and
products. It is a myth that low costs are the only way to increase productivity.
ASPECTS
COMMON
TO
TQM
AND
CONTINUOUS
IMPROVEMENT
PROGRAMMES
According to Thomson and Strickland (2003), the following aspects are common to
TQM and CI programmes:
•
Committed leadership: Unwavering, long-term commitment by top managers
to the philosophy, usually under a name something like Total Quality
Management, Continuous Improvement (CI), or Quality Improvement (QI).
•
Adoption and communication of TQM: Using tools like the mission
statement, and themes or slogans.
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•
Closer customer relationships: Determining customers' (both inside and
outside the organisation) requirements and meeting those requirements no
matter what it takes.
•
Closer supplier relationships: Working closely and cooperatively with
suppliers (often sole-sourcing key components), ensuring they provide inputs
that conform to customers' end-user requirements.
•
Benchmarking: Researching and observing operating competitive practices.
•
Increased training: Usually includes TQM principles, team skills, and problemsolving.
•
Open organisation: Lean staff, empowered work teams, open horizontal
communications, and a relaxation of traditional hierarchy.
•
Employee empowerment: Increased employee involvement in design and
planning, and greater autonomy in decision-making.
•
Zero-defects mentality: A system in place to spot defects as they occur, rather
than through inspection and rework.
•
Flexible manufacturing (applicable only to manufacturers): Can include
just-in-time inventory, cellular manufacturing, design for manufacturability
(DFM), statistical process control (SPC), and design of experiments (DOE).
•
Process improvement: Reduced waste and cycle times in all areas through
cross-departmental process analysis.
•
Measurement: Goal-orientation and zeal for data, with constant performance
measurement, often using statistical methods
Total Quality Management (TQM) is a management strategy aimed at embedding
awareness of quality in all organisational processes. TQM has been widely used in
manufacturing, education, government, service industries, as well as NASA space and
science programmes.
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CHAPTER NINE
Problem Solving
and Decision
Making
IN THIS CHAPTER:
9.1
ELEMENTS OF PROBLEM-SOLVING ...................................................... 101
9.2
THE FRAMEWORK FOR DECISION MAKING ......................................... 104
9.3
CERTAINTY, RISK AND UNCERTAINTY ................................................. 105
9.4
PROBLEM-SOLVING ABILITIES .............................................................. 106
9.5
CREATIVE THINKING TECHNIQUES ...................................................... 107
9.6
ANALYTICAL THINKING TECHNIQUES .................................................. 120
9.7
STEPS IN THE PROBLEM-SOLVING PROCESS .................................... 121
PROBLEM-SOLVING AND DECISION MAKING
CHAPTER 9: PROBLEM-SOLVING AND DECISION MAKING
LEARNING OUTCOMES
•
Explain which responsibilities managers have regarding problem-solving.
•
Explain the problem-solving process and apply relevant problem-solving aids
to solve problems and make decisions that are ethical and socially responsible.
9.1
ELEMENTS OF PROBLEM-SOLVING
Much of what managers and supervisors do is to solve problems and to make
decisions. They solve problems and make decisions by reacting to them. Moreover,
they often work under great pressure.
Consequently, when managers and supervisors encounter an unfamiliar problem or
are faced with an unprecedented decision, they usually base their decision on what
seemed to have worked in a similar situation. By following this approach, management
is often trapped in a circle of solving the same problem repeatedly in the same manner.
For this reason, it is important to find an organised approach to problem-solving and
decision-making.
The activities of problem-solving and decision making are closely intertwined because
problem-solving implies decision-making. Ferreira, et al. (2009) argue that problems
are solved by making one or more decisions.
There are many ways to solve a problem, but some are irrational and not well thought
through. For the best solutions, it is essential to make use of a rational, decisionmaking technique, followed by a systematic and structural approach.
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ELEMENTS OF PROBLEM-SOLVING
FIGURE 9.1: ELEMENTS OF A PROBLEM
Doubt
Opportunities
Uncertainty
What is
problem?
Challenges
Undesired
situation
Source: Ferreira, et al. (2009)
Ferreira et al. (2009) state that there are many ways to solve problems, but some are
irrational and should be guarded against.
The following are not suitable approaches to solving problems:
•
The headless chicken approach: the decision-makers rush back and forth in
a senseless, fruitless search for solutions without analysing the problem
logically and carefully. This only results in anxiety and irrational decisions.
•
The overreaction approach: the decision-makers react impulsively to the
situation. The reactions are usually too dramatic and do not justify the
circumstances.
•
The indigestion approach: the decision-makers keep using solutions that
worked in the past.
•
The scapegoat approach: the decision-makers are only interested in who is
responsible for the problem and who should be punished for it.
•
The ostrich approach: the decision-makers bury their heads in the sand and
wait for the storm to pass. They simply wait for problems to disappear.
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However, this is not the way to approach problems. In this chapter, we are going to
learn how to solve problems by making use of a rational, decision-making technique
(i.e., a structured, systematic approach) to get the best solution for a specific situation.
9.1.1 STATING THE PROBLEM
The nature of the problem will naturally determine how the problem should be
approached. Ferreira et al. (2009) point out that, when solving a problem, a distinction
needs to be made between the problem and the symptoms - the two are sometimes
confused. Although the symptoms are generally eliminated when the problem is
solved, it is counterproductive to treat the symptoms rather than to solve the problem.
The first step in the problem-solving process is to be sure what the problem looks like.
There is a saying that a properly stated problem is already half-solved!
9.1.2 NEGATIVE STATE
A well-defined problem is not a statement in respect of the absence of a solution but
a description of an existing negative state. If your description of a problem includes
anything that suggests the absence of a solution, that definition will limit your search
for a creative solution as you will immediately start concentrating on the supposed
absence. By defining the problem in terms of a negative state, you put no limitations
on the number of possible solutions. The following three examples should illustrate the
point.
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THE FRAMEWORK FOR DECISION MAKING
FIGURE 9.2 EXAMPLE OF DEFINING A PROBLEM IN TERMS OF A
NEGATIVE STATE
Absence of a solution
• No safe water
• No equipment available to manage information in the
department
• No pesticides available
Negative state
• Existing water source is contaminated with bacteria
• Information is not properly untilised in the execution of
tasks
• Harvest is invested with pests
Source: Author’s own Compilation
9.2
THE FRAMEWORK FOR DECISION MAKING
Problem-solving is a leadership skill, and managers need to understand the
consequences of their decisions for the organisation. Managers must have good
knowledge about the organisational policies, budgets, and procedures to enable them
to understand the implications of their decisions.
The types of problems and decisions that managers will have to deal with fall into two
categories, namely:
•
Routine or programmed decisions (routine problems) are mostly structured
and occur regularly in the daily running of the business. Routine decisions are
usually predictable and repetitive, and the manager can work through a definite
approach to handle the problem. An organisation’s standard operating
procedures and policies mostly govern these decisions. Examples of
programmed decisions may include disciplinary procedures and handling
confidential information.
•
Non-routine or un-programmed decisions (creative) are often a result of
unique and unpredictable problems that require quick solutions. There is no
one specific way to resolve a non-routine problem and managers will have to
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make use of creative problem-solving techniques to analyse the situation and
to consider alternatives. It is important to note that different decisions are also
made under different conditions in the working environment (i.e., certainty, risk,
uncertainty). (Ferreira et al., 2009)
9.3
CERTAINTY, RISK AND UNCERTAINTY
Figure 9.3 below illustrates the various conditions under which decisions can be made.
FIGURE 9.3: THE FRAMEWORK FOR DECISION-MAKING
Source: Adapted from Ferreira et al. (2009)
9.3.1 CERTAINTY
If you know precisely what the outcome of a specific decision will be, you are in a
position of certainty. You have accurate, measurable, and reliable information to base
your decision on and the future is predictable. Ferreira et al. (2009) point out that those
problems that are caused by routine tasks can be solved with greater certainty.
Managers can control events and consequences to a certain extent and, in certain
situations, can even predict them.
9.3.2 RISK
Managers, who do not have sufficient information at their disposal, will have to decide
on a position of risk. Managers with many years of experience in a particular industry
can predict certain events and consequences. They use their experiences to make
decisions. If past trends are available, they may base their decisions on these trends.
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9.3.3 UNCERTAINTY
In a situation of uncertainty, managers do not know what the possible choices are,
risks associated with each choice and possible consequences. These uncertain
situations occur because of constant changes in the environment and organisational
dynamics. Managers are faced with problems that do not have obvious solutions.
Because there are too many variables and unknown facts, an outcome of a decision
cannot be predicted. In these situations, creative decisions need to be made, based
on the managers’ intuitions and feelings to achieve the desired result.
9.4
PROBLEM-SOLVING ABILITIES
Managers who are confronted with a problem can only solve a problem effectively if
they are well informed about the problem and the circumstances and has enough
background information about the causes. Managers require certain human abilities
to solve problems effectively:
•
Creativity: this ability help generates useful ideas and proposes various
alternatives for solving problems. Creativity can be stimulated through
brainstorming.
•
Logic: creativity and logic go together during the problem-solving process.
Logic refers to collecting relevant facts, using these facts in an orderly and
unbiased manner, and then reasoning out the facts systematically and
analytically. This process will lead to solving a problem with an open mind.
•
Intuition: this means giving thought to feelings, judgement and experience
gained over many years. Good managers know that certain methods or
techniques work better in certain situations than others. You must have heard
the expression ‘trust your gut feeling’. We all experienced it at some point, the
feeling that something is either right or wrong. We find it difficult to explain, but
due to our experience in a particular field or industry, we know that we should
rely on our intuition.
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Managers use their creative and logical ability to solve problems, but in certain
situations, if time is limited, they might have to rely on their intuition to make a particular
decision (Ferreira et al., 2009).
We can either solve a problem ourselves, or we can call on the help of employees or
subordinates. Groups usually take longer to solve problems, but the information
gathered from the decision–making process is invaluable.
9.4.1 RESOURCES FOR SOLVING PROBLEMS INCLUDE
•
Self.
•
Group.
•
Committee.
•
Task group.
•
Specialist.
9.5
CREATIVE THINKING TECHNIQUES
9.5.1 THE SIX HAT THINKING TECHNIQUES
Edward de Bono is one of the leading authorities in the field of creative thinking. He
developed the ‘Six Thinking Hats’ as a thinking framework.
To use this method, you start by pretending to wear the black hat and look at all the
dangers relating to the problem. Then, you pretend to wear the yellow hat and identify
all the benefits relating to the problem. You continue the process until you have tested
all the coloured hats and have noted the solutions to the problem. See Figure 9.4
below.
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FIGURE 9.4: THE SIX THINKING HATS TECHNIQUE
Source: Available from mindmaptutor.com and Nieuwenhuizen & Oosthuizen (2010)
9.5.1.1
The Blue Hat – Overview
Think sky. You are looking down at the problem from the sky. You have a bird’s eye
view of the situation.
This hat is often controlled by one person in the group. This person normally serves
as the chairperson, if it is a brainstorming session. The rules are defined, the period is
managed and the wearing of one hat at a time is enforced.
Keywords that come to mind are:
•
Process control
•
Agenda thinking
•
Next step thinking
•
Can ask for another hat
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•
Summaries, conclusions and decisions
•
Comments
9.5.1.2
The White Hat – Information
Think paper. Think fax machine, photocopier, books.
Gather all information you have on the subject. This includes all forms of
documentation, including emails, notes, word documents, spreadsheets, websites,
blogs. Once you have gathered the information, look at the facts. Try to be as objective
as possible. Look at the known facts as well as the unknown facts.
Keywords that come to mind are:
•
Information
•
Data
9.5.1.3
The Yellow Hat – Benefits
Think of the sunshine. Think of the positive, warm feeling of sun rays.
The yellow hat looks at what is working. Look for advantages on the current way of
doing things and how it can be influenced. This is the time to add ideas. Look for
positive ideas and try to add value. Focus on the idea, not the person. An idea is
often rejected, just because it came from a certain person. Finally, look for a way
forward to improve the current processes.
Keywords that come to mind are:
•
Optimism
•
Positive view
•
Feasibility
•
Benefits
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9.5.1.4
The Green Hat – Creativity
Think Grass. Think vegetation. Think growth.
This is the creative hat. The green hat represents a growth by being creative and
innovative. New ideas should be tabled without criticism. Think outside the box. Do
not edit your ideas at this point. In this way, you will generate new ideas and new
solutions – solutions that you would not have naturally thought of.
Keywords that come to mind are:
•
Creative thinking
•
New ideas
•
Additional alternative
•
Possibilities
9.5.1.5
The Red Hat – Feelings
Think heart. Think blood. Think of ‘seeing red’.
Emotions and feelings play a huge role in our lives. This is where you state how you
feel about the matter. Often the heart thinks differently to the mind. We have learnt
that many good decisions have been made on gut feelings. When wearing this hat, do
not think about why you are feeling. Do not justify your thinking.
Revisit your feelings after you have gone through the other hats. You may be surprised
how your feelings have changed. It is good if your feelings have changed- it means
that the method is working.
Keywords that come to mind are:
•
Feelings
•
Emotions
•
Intuition
•
Hunches
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9.5.1.6
The Black Hat – Caution
Think black spot on a dangerous road!
This is where you express caution. Caution is just a checkpoint to ensure that you are
not running into dead ends. It also highlights the dangers and faults in your thinking.
While it focuses on the negatives, it is there to prevent time wasters.
Keywords that come to mind are:
•
Caution
•
Critical
•
Possible mistakes
Figure 9.5 illustrates possible questions to ask when using the six thinking hats as a
process to solve problems and to make decisions.
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FIGURE 9.5: QUESTIONS FOR THE SIX THINKING HATS
Source: Author’s own compilation
9.5.2 BENEFITS OF THE SIX THINKING HATS
•
Streamlines your thinking
•
Creates mental energy
•
Enables you to make quick decisions
•
Gets real group participation
•
Focuses on the issue, not the person.
9.5.3 BRAINSTORMING
Ferreira et al. (2009) identified brainstorming as another possible creative thinking
technique involving a group of people, usually between six and twelve. The objectives
are to get ideas, suggestions, and solutions from everyone. Brainstorming is one of
the oldest techniques to stimulate creativity and was developed in 1948 by Alex
Osborn, to increase the flow of ideas during decision-making. It is a familiar and
effective technique for generating solutions. It provides an excellent means of getting
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the creative juices flowing. Brainstorming is one of the most important techniques to
generate and develop new ideas. This technique is more effective than an individual
who is working alone generating ideas. The brainstorming process involves seven
steps, namely:
•
Step 1: Members need to define and agree on the purpose of the meeting.
Members have to ensure that everyone understands and agrees to the aim of
the meeting (i.e., to formulate a new contract of employment and job description
for the sport manager).
•
Step 2: After the purpose is defined and agreed to, the members need to
brainstorm the ideas and agree to a time limit. Time limits will keep the
brainstorming activity on track and under control.
•
Step 3: The ideas are then categorised, condensed, combined, and refined.
Different colour pens can be used to group, categorise, link, and connect ideas.
Ideas are condensed by making new lists or headings. Weaker ideas can
diplomatically be combined with other themes to avoid rejecting or dismissing
contributions.
•
Step 4: The ideas are assessed and analysed. The whole group evaluates,
analyses, and assesses the validity and effects of the ideas or lists.
•
Step 5: The ideas are prioritised, or ideas are ranked according to
appropriateness. The ideas are prioritised or developed in a more finalised list,
options or set of actions.
•
Step 6: Members agree to actions to be taken to resolve the problem and
timescales are set. The group agrees on the next action that will be taken. A
timescale is developed, and responsibilities are given to group members.
•
Step 7: Actions are monitored through follow-ups to ascertain whether the
progress is still on track.
During brainstorming sessions, many ideas are followed by silent periods. When all
the members become quiet, it can be assumed that the group listed all the possibilities,
and the idea-making phase is called to an end. It is also possible that quiet periods
precede an outbreak of new ideas. It is, therefore, necessary to set a time boundary
in advance.
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Some comments that reduce the effectiveness of brainstorming are:
•
that it won’t work.
•
that it is too radical
•
that it is against the company policy.
•
that the problem cannot be solved.
•
it is not done in that way before.
•
there is not enough time.
•
it is not ‘our job’.
9.5.4 THE NOMINAL GROUP TECHNIQUE
This method of solving problems uses a group of people to find potential solutions to
an identified problem. It is a very productive technique that can generate lots of good,
high-quality ideas, it involves all the members of a group and uses consensus to
evaluate and rank all the ideas generated. Its outcome is a group agreement about
the action needed to solve a problem. This technique is normally used when members
do not have enough time on hand to meet for a brainstorming session and could also
be used as a lead-in to other decision-making methods, for instance, brainstorming. A
leader and a recorder are also required during this technique.
This technique is used when:
•
Some members in the group are more vocal than others.
•
Some members in the group think better in a quiet place.
•
There are concerns about some members that do not participate.
•
Quantities of ideas are not easily generated in the group.
•
Members are new to the group.
•
There is heated conflict, and the issues are controversial.
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The following steps are normally followed:
•
Step 1: The team leader presents the problem or opportunity to the group. This
must be done in a way that does not suggest a preferred solution. The process
and ground rules are also explained at this stage.
•
Step 2: Working on their own, everyone writes down a list of potential solutions
to the stated problem.
•
Step 3: Everyone, in turn, reports a single idea. This is recorded on a flip chart
or board. The name of the person who suggested the idea is not recorded, nor
are any comments or evaluations made. This continues until all the ideas have
been recorded.
•
Step 4: During a brief discussion, any clarification of ideas needed is given,
and similar ideas are amalgamated, but only if the owners of the original ideas
are in agreement.
•
Step 5: Each group member then identifies what they think are the 'top five'
ideas of this composite list. They write these down on a piece of paper and
gives this to the leader - without sharing them with the group.
•
Step 6: The leader generates a top-five list for the group from these lists.
•
Step 7: This is reported to the group and then discussed. Another vote is taken
to identify the idea/s to be put into action.
Most people find it difficult to report their ideas briefly without commenting on their
merits. The group leader must maintain the discipline of quickly moving on to the next
person for each new idea. It is also important that the group stay together while the
team leader - or someone else - is analysing the options to find the group's top five.
9.5.5 FORCE FIELD ANALYSIS
It was an American social scientist called Kurt Lewin who first expressed the view that
how people behave can be represented as a balancing act. What we balance are the
opposing forces that act upon us. In any situation there is a number of these forces some of these will seek to promote a change in our behaviour and others will seek to
restrain or limit that change.
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This balancing act or equilibrium is not fixed or frozen, it is dynamic and interacts
with the environment in which we work or play.
If we want to change this equilibrium situation, we must either weaken one or all of the
restraining forces or strengthen one or all of the forces for change. The resulting
imbalance will mean that a shift or change occurs, and a new equilibrium is
established. The forces can be anything that acts upon or is relevant to the situation.
The Force Field Analysis method can be used to solve project problems. It is a simple,
practical and proven way of deciding what needs to be done to solve a problem. It can
be used by one person or in a team.
9.5.5.1
Steps for a Force Field Analysis are:
•
Step 1: Identify the problem and the desired outcome.
•
Step 2: Identify the forces involved - it may help if you classify them as either
'helping' or 'hindering' towards achieving the desired outcome.
•
Step 3: Decide which are the strongest 'hindering' and 'helping' forces.
•
Step 4: Decide whether you are going to:
•
increase the 'helping' force, or
•
eliminate or reduce the 'hindering' force.
•
Step 5: Develop action plans to increase or decrease the forces.
•
Step 6: Implement the action plans.
For this technique to be successful, it must have:
•
clear and unambiguous identification of the problem and the desired outcome
•
detailed and comprehensive identification of the forces
•
a practical and realistic implementation plan to bring about change
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This implementation can be seen as a sequence of three separate but connected
stages:
•
Unfreezing from a current position;
•
Moving to a new position;
•
Refreezing in the new position.
During the unfreezing stage, the environment should be unfrozen. Resistance to
change will occur and needs to be overcome. Management intervention is important
during the unfreezing stage and managers start with the process by unfreezing the
current situation or problem. During the moving stage, programmes, policies and
strategies are implemented. During the refreezing stage, a crucial final stage, the
organisation aims to gain the most benefits from the change. The organisation needs
to ensure that the changes are institutionalised during the refreezing stage. The
organisation’s procedures, policies, strategies, and reward system must be aligned
with the changes to be established in the organisation. If this final stage is not
effectively applied, the organisation will regress to the previous culture. Each of these
stages must be carried through to completion.
9.5.6 THE FISHBONE OR ISHIKAWA DIAGRAM
Diagramming can often help us to solve our problems. The Ishikawa, 'Fishbone' or
‘cause-and-effect diagram’ is one of the most powerful problem-solving diagram
techniques. The fishbone diagram, as illustrated in figure 8.6 below, was developed
by Dr Kaoru Ishikawa. It has as its starting point, a box located on the right-hand side
of a sheet of paper.
The problem to be solved is written in this box, and an arrow is then drawn across the
sheet, pointing towards the box, and four further arrows are drawn pointing towards
and joining the main arrow.
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FIGURE 9.6: FISHBONE DIAGRAM
The diagram results in a thorough and often penetrating identification of all possible
causes. It does not indicate which of those possible causes the actual cause is, but it
does, if generated with care, give individuals the confidence that all the possible
causes have been listed. It is often worthwhile sticking to Ishikawa's original 5M
headings to ensure that the review of causes is comprehensive and methodical.
Each of these side arrows represents a family or group of causes that could have led
to the problem. In its purest form, the Fishbone diagram labels these side arrows with
the tags of the 5M’s: machinery, manpower, methods, materials, and maintenance.
These can be extended to the 6M’s, by the addition of Mother Nature, or shrunk to the
4M’s by taking out maintenance.
The technique can be used by a group or an individual and follow the following steps:
•
Step 1: Clearly define the problem.
•
Step 2: Identify all possible causes, by brainstorming or by using the early steps
of the Nominal Group Technique to generate lists of causes rather than
solutions.
•
Step 3: Group the causes generated under the 4, 5 or 6M headings.
•
Step 4: Visually connect all causes back to the problem using the Fishbone
diagram. It may be necessary to condense the cause descriptions at this stage.
•
Step 5: Use the diagram to continue the identification of possible causes until
all of these, even the improbable ones, have been written down.
•
Step 6: Review the diagram and decide which of the causes needs to be
investigated first.
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For example, let us assume that we have decided to solve our problem of inaccurate
or out-of-date data for activity work rates by changing from a manual system to a new
project management information system (PMIS). The first - and unfreezing - step
would be to choose the new system and inform everyone that we are going to
introduce this new system. The movement step would involve the commissioning of
the PMIS. The last - and refreezing - step in this simple example would be to ensure
that all future client records are completed and stored on the new system. If any stage
is not completed, then the solution to our problem will not work.
9.5.7
OSBORNE’S CHECKLIST
Vertical thinking can build on the ideas already generated (piggybacking) or it can look
at the different parts of the problem to generate new ideas. One of the vertical thinking
techniques is Osborn's checklist, namely:
•
Substitute: who else, where else, or what else
•
Combine: Combine parts, units, ideas, blend, compromise etc.
•
Adapt: How can this (product, plan, idea, etc.) be used as is? What other uses
can it be adapted for?
•
Modify (magnify, minify) Change the meaning, material etc., or magnify by
adding new ingredients to make it better, stronger etc. or minify by splitting it
up, taking something out etc.
•
Put to other uses: can it be put to other uses if modified or can new ways be
found of doing things?
•
Eliminate: can we remove something, reduce the time? cut costs?
•
Rearrange: reverse roles, sort it, etc.
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9.6
ANALYTICAL THINKING TECHNIQUES
9.6.1 PARETO ANALYSIS
Most of our project problems have a range of possible causes. When Vilfredo Pareto
studied the distribution of income in the late 19th-century in Italy, he found that around
80% of income went to about 20% of the population. He argued that this type of
distribution is not just restricted to wealth or income, but also occurs in many other
situations.
He then developed the Pareto principle. This tells us that, in general terms, the
significant items in any group are in the minority - 'the vital few’ - and the majority of
the group are of relatively minor significance - 'the trivial many’. In other words, the
minority of items in any group is the most significant in terms of their effect or
consequences. We can use Pareto analysis to identify the key causes of our project
and hence adjust our monitoring and reporting to reflect their importance. In our
struggle to find solutions to our project problems, Pareto analysis can help us to
identify those causes with either the highest frequency or the greatest
consequence.
In short, it enables us to focus our problem-solving efforts on those key causes. As a
result, we should achieve maximum gain for minimum effort.
9.6.1.1
The following steps can be followed to conduct a Pareto analysis:
Step 1: Assemble your data
Since we are considering each cause relative to the others, absolute accuracy is not
that important. What is important is that the data for all the causes have the same level
of accuracy and that this level of accuracy enables you to discriminate between the
individual effects of the causes. At this time, you will need some idea about the factor
that will be used to contrast the effect of the individual items. This can be, for example,
cost or frequency or consequence.
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Step 2: Confirm the factor
It must be measurable but can also be generated by multiplying or adding or
subtracting data for individual items. For example, the material usage costs can be
generated by multiplying units used by unit cost. If it does not meet these criteria, it
must be changed.
Step 3: Generate a table for the data in which you
•
arrange it in descending order, i.e. with the largest figure at the top
•
generate the total of these figures
•
calculate the individual percentages of that total for each cause
•
calculate the cumulative percentage values
Step 4: Identify those items whose cumulative percentage lies below the 80% level in
the above table.
These are the 'vital few' and can be shown graphically by plotting these cumulative
percentages against the cumulative number or percentage of items or by generating
a bar chart for an individual percentage of the total cost. You will subject these
significant items to analysis that is more detailed or monitored. The object of that
further analysis and monitoring is to identify and eliminate the causes of problems.
9.7
STEPS IN THE PROBLEM-SOLVING PROCESS
Problem-solving, together with decision-making, are processes that consist of various
steps. In this chapter, we list the steps in the problem-solving process and identify
problems that occur in administrative departments, which are:
•
Diagnose the problem: determine the cause and symptoms of the problem.
•
Analyse the environment: collect information such as:
•
Where it occurs, and why it occurs there;
•
When it began;
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•
How it started and why;
•
Who is responsible?
•
Identify the actual problem: if the correct cause is identified, you can
concentrate on it and start solving it.
•
A useful technique for determining possible causes of problems is the causeand-effect analysis:
o
Describe the effect of the problem
o
Write down all causes and effects of general problems
o
Brainstorm to determine the possible causes for the specific problem
o
Obtain consensus on the most likely causes
o
Repeat the process using a likely cause of the problem to determine the
fundamental cause.
•
Develop alternative solutions: do not consider too many possibilities; identify
only enough possibilities to make a good choice.
•
Evaluate alternative solutions: look at each alternative and decide what
would happen if you select a specific one. Decide on criteria to use to make a
choice.
•
Choose the best alternative: the best choice is the best solution in given
circumstances, considering limitations. Choices will be based on available
resources.
•
Implement the chosen alternative: draw up a plan of action to decide who will
do what and when and inform everyone (including other departments) of the
decision. Accept the fact that there is usually more than one answer to any
question.
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FIGURE 9.7: THE CREATIVE PROBLEM-SOLVING PROCESS
Assessing
the situation
Formulating
a plan
Exploring
the vision
Exploring
acceptance
Formulating
solutions
Formulating
challenges
Exploring
ideas
Source: Author’s own compilation
9.7.1 TYPES OF PROBLEMS
Organisational problems often revolve around employees’ issues, the systems, and
economic issues.
Some examples of these types of challenges include:
•
Employee issues: problems include matters such as employees’ perceptions
of things, frames of reference in which employees perceive and experience
things, what motivates employees and factors that pose a threat. Employeerelated issues should first be solved, as they are responsible for most issues
and problems that occur in the department.
•
Economic issues: money is needed to keep an organisation going. Problems
associated with money are misappropriations, employees taking too long to
complete tasks, theft, overspending.
•
Systems problems include amongst other issues:
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o
High cost
o
Equipment and machinery that breaks down
o
Poor working conditions
o
Ineffective procedures and forms
o
Unorganised filing
o
Poor control.
Module 1: Introduction to Business Management
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