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Study Unit I The Business World And Business Management

The Role Of Business In Society

The business world is a complex system of people and organisations, which, in a market economy
combine scarce resources, to provide goods and services to satisfy the community wants, with a view to
make a profit.
There are 4 categories of scarce resources:
1) Labour
2) Capital (= machinery)
3) Entrepreneurship
4) Land (=natural resources: minerals, forests)
Businesses and the society in which they function influence each other in a number of ways:
Businesses influence on society: Remember these 4 points:
1. businesses are catalyst for economic growth
2. they bring about a high standard of living
3. they are the source of technological progress, research
and innovation, and improvement to infrastructure.
4. the play a crucial role in supporting (e.g. through
sponsorships) education, arts, sports
Influence of society on businesses: (These influences are exercised through legislation)
Remember these 5 points
1. Social responsibility: businesses are expected to act
responsibly towards the community
2. Business Ethics: Managers are expected to maintain
high ethical standards (eg toward workers,
3. Affirmative Action: They have to create equal
opportunities towards every social group
4.Environmental damage: Business are forced to take into
account the preservation of the air, water and soil from
5. Consumerism: various actions aimed at protecting the
consumer from abuse and misleading promises.
Needs and need satisfaction
Human needs are unlimited. Abraham Maslow classify them into 5 categories.
5.Self Realisation needs (aiming at self development)
4.Esteem needs (eg prestige needs: bigger car, luxurious house..)
3. Social needs ( eg needs for friends)
2. Security needs (eg: insurance protection)
1. Physiological needs (food, clothes.)
He argues that humans try to satisfy the most basic needs (group 1), when these are satisfied, they
move to the need of group two. Until they reach the last group (no5).
Need Satisfaction: a cycle

Entrepreneurs, in order to produce goods and services for the community have to answer these 3
What must be produced? Consumer goods (eg bread, shirts)? or capital goods (tractors, machines)?
Who will produce these goods? Private organisations (eg companies)? or government-owned
For whom these goods must be produced (this is a question of distribution of goods in society)

The main economic systems


Remember 3 economic systems

Free market economy (= capitalism): Remember the characteristics:


Factors of production belong to private individuals


distribution of resources are left to market forces


Freedom of choice for members of community


Minimum interference of the Government


Profit is pursued in the production of goods.

Eg: US, Canada

Command (= communism):

All factors of production belong to the state


Goods are distributed following a system of quotas.


A system of communal ownership where individuals can only own

private domestic goods.


Full state control.

Example: ex Soviet Union, Cuba, China

Socialism: it is the intermediate system between the previous two

the state only own strategic industries and leaves the less
important ones to private entrepreneurs

The Need Satisfying organizations of the free market

Remember these 3 Groups

1. Business organizations They are privately owned, seek profit when they satisfy community needs.
The various forms are: Sole proprietorships, Partnerships, Close corporations, Private and public
2. Government Organizations: They are either non-profit seeking organisations which are funded
through taxes: e.g. Government departments, or Profit-seeking organisations that function more like
private organizations : (eg Eskom, transnet)
3. Non profit seeking organizations: They are private organizations that do not have profit as they
main objective: Sports clubs, NGOs, cultural associations

The Nature of Business management

While economics aims at studying the entire economic system, business management is an applied
science that aims at studying the business organisation with the view of finding techniques, methods,
and processes which can help it to function effectively. That is to attain the highest profit using a
minimum of resources.


Study Unit II Entrepreneurship

What is Entrepreneurship?
There is not a single definition: Some definitions are:
1. For Economists: entrepreneurs combine the communitys scarce resources to produce
goods and services for a profit.
2. For Psychologists: entrepreneurs are achievement oriented individuals to whom
milestones offer specific challenges
3. For Marxists entrepreneurs are exploiters
4. Corporate managers regards them as just small operators
5. Proponents of the market economy regard them as the economic force behind the
prosperity of a country.
Entrepreneurs therefore:
1. have innovative ideas
2. Identify opportunities (in the form of needs that are not yet satisfied in the community)
3. Find resources (land, capital, and labour)
4. Take risks
5. Bring about changes, growth and wealth
6. Create jobs
7. Manage small businesses
What entrepreneurs do and why they do it
There are three broad categories determinants or reasons why individuals become entrepreneurs
Reason 1: Influence of environmental variables : factors such as the fall of communism in Eastern
European countries has allowed many entrepreneurs to emerge.
Reason 2: Experience in a particular industry ( or having particular skills)
Job termination or job dissatisfaction will force others to start they own business in their area of
Reason 3: Traits of psychological variables that distinguish some as entrepreneurs.
These traits are:
Achievement motivation: According to McClelland, Murray and Gould, entrepreneurs have a higher
need to achieve than others. They are single-minded people who apply intense actions and efforts to
achieve a difficult task.
Locus of control: Entrepreneurs have a strong internal locus of control, the need to be in control of their
own lives. They dont believe in Luck or change of fate.
Innovation and creativity: Entrepreneurs have the ability to conceive and create new products
Risk Taking: The successful entrepreneur correctly interprets the risk situation and positively exploits it.
Other traits: High level of energy, confidence, commitment
The Small Business
It is difficult to formulate a universal definition for small business: We use qualitative and quantitative
criteria to determine what a small biz is.
* Quantitative criteria are:
Number of employees
Sales volumes
Value of assets
Market share
* A qualitative criterion is that for a business to be classified as small, its owner must be part of its
In South Africa, a small business

Has fewer than 200 employees

Annual turnover of lees than 5 millions

Capital assets of less than 2millions

Direct managerial involvement by owners

The strategic role of a small business in the economy


In advanced nations the entrepreneur innovate, take risks and employ people. The strategic role of
small businesses in an economy is:

Producing products and services: they have less bureaucracy, are more flexible

Innovation: A great deal of new inventions were created by small businesses

Aiding big businesses: small businesses are useful as suppliers and distributors
for large corporations

Job creation: small businesses are most labour intensive, therefore, the majority
of a country workforce is employed by small businesses.
The entrepreneurial process
Entrepreneurship is the process of identifying, creating, or sensing an opportunity and of finding and
combining resources to pursue an opportunity until it becomes a successfully established business.
Step 1. Decision to become entrepreneur (= enter/ not enter the business world?)
Step 2. Entrepreneurial anilities and skills (= Do I have the necessary entrepreneurial abilities and
Step 3. Resources (= Do I have the required resources, or can I get access to resources?)
Step 4. Opportunities and ideas (= Do I have an above average chance that the idea will work?)
Step 5. Feasibility (= Does the feasibility analysis show that the opportunity is feasible?)
Step 6. Business plan (= Did the business plan convince investors, banks?)
Then, proceed with the implementation
Skills required for entrepreneurship

Strategy skills
Planning skills
Marketing skills
Financial skills
Project management skills
Human resources skills

Resources needed to start a business

Financial resources (self-owned or borrowed)

Human resources
Physical resources (or operating resources)

New Busines opportunities

(see page 51 and 52 of prescribed book)


Study unit 3 the establishment of a Business

Legal Forms of Business Ownership
There are Four main forms:
Sole Proprietorship Remember these characteristics
Number of members: 1
Legal personality: none
Authority & control: Owner has full authority and is entitled to profits.
Legal requirements: very few. Business Names Act, Licenses Act, health regulations.
Access to capital: limited to owners creditworthiness
Transfer of ownership: easy
Tax requirements: profits are taxed in the hands of owner.
Number of members: 2-20
Legal personality: none. Partners are jointly and severally liable for claims against the biz
Authority & control: Shared between partners
Legal requirements: very few. Business Names Act, Licenses Act, health regulations.
Access to capital: better than sole proprietorship. Partners provide contributions/ security for
Transfer of ownership: more difficult
Tax requirements: Similar to Sole proprietorship
Close Corporation (name followed by CC)
Number of members: 1-10
Legal personality: Yes
Authority & control: Equal between members
Legal requirements: Close Corporations Act. Registration at a nominal fee. Founding statement
accompanying application incorporation. Appointment of an accounting officer
Access to capital: easier than partnership. Similar to private company. Members provide
Transfer of ownership: conditioned with agreement of all members
Tax requirements: Similar to private company
Private Company (name followed by (pty) ltd)
Number of members: 1-50
Legal personality: yes
Authority & control: General meeting of Shareholders has highest authority and control over the
business. It confers part of authority to board of directors.
Legal requirements: Companies Act. Appointment of 1 director.
Access to capital: Members provide contribution. Good access to capital
Transfer of ownership: submitted to approval of shareholders
Tax requirements: Profits are taxed before dividends are distributed to shareholders
Public Company (name followed by limited or(ltd))
Number of members: 7- unlimited
Legal personality: yes
Authority & control: General meeting of Shareholders has highest authority and control over the
business. It confers part of authority to board of directors.
Legal requirements: Companies Act. Appointment 2 directors, an auditor.
Access to capital: Easy. Share are issued and available to members of the public.
Transfer of ownership: easy. Shares are freely traded at a Stock Exchange (e.g. JSE)
Tax requirements: Profits are taxed before dividends are distributed to shareholders

* Legal personality = ability of an organization to acquire assets and liabilities, independently of its
members assets and liabilities.


Entry Strategy
Buying an existing business
Questions to ask before buying an existing business:
Why is the business being sold?
How much does is cost to set up a
similar business from scratch
What will be effect of the former owner
How much does the biz cost
How good is the cash flow, and
* the business is up an running
*The success (of failure) has been already
*The existing business is probably located at the
best spot.
*The business has already experienced workers,
suppliers, and equipments. Easy to calculate its
*The new owner can learn from the previous.
*The purchase can be a good bargain.
Purchasing a franchise
Definition: Agreement between a Franchisor and a franchisee to give the
franchisee the right to use the name of an existing business, distribute its
products/services, access to its suppliers E.g. KFC, 7eleven, Wimpy
*low risk. Better chances for success in the 1st year
*Management support from franchisor
*Initial assistance/financial support from franchisor (finding
suitable location & staff)
*Training provided by franchisor (administrative &
*Buying bulk through the use of Franchisors suppliers and
discounts negotiated by him
*The Breakeven point is reached sooner
There are 3
Entry strategies


*No fixed ownership: franchisee has only a limited

*Prescribed work schedule set by franchisor to all
*Control by franchisor. If his standards are satisfactory
*Franchises cost money: paying royalties, paying the right
to use the businesss name and distribute its products,
contributions for advertising costs.
Sole proprietorship

Starting a new business

Close Corporation



Study unit 4 The business environment

The business and its environment
Business environment = system made up of people and organizations which in a market economy strive
to combine the communitys limited resources in order to satisfy its unlimited needs.
A business depends on its environment for: raw materials
The environment needs the business for:

Goods and services to satisfy its needs


Environmental change
Environmental change = continual shift from the known situation to the unknown, for the stable to the
Examples of change:
Politically: end of apartheid, new government, new labor laws
Economically: high interest rates, inflation, unemployment
Socially: new demographic patterns, people are closer since the end of
Internationally: End of international sanctions, need for competitiveness on
the international market, globalization of markets
Physically: Raw materials become scarcer
Technologically: new innovations at an increased rate.

The composition of the business environment

Three components OR SUBENVIRONMENT:
1.The microenvironment = (the business)

2.The market environment =

3.The Microenvironment =

1.Its objectives: mission & long-term/

short-term objectives
2. Its resources: human, physical,
informational and financial
3.Its management: functional areas of
management: marketing, financial, HR
1.The market:(a) consumer market, (b)
resale market, (c) international market,
(d) government market, (e) industrial
2.the competitors: existing and new
entrants, & industries offering substitute
3. The suppliers
4. The intermediaries: Retailers,
middlemen, sales representatives
5. Opportunities and threats

1.Technological sub environment(*)

2.Institutional/ political sub environment
(# )
3.Physical sub environment (**)
4.International sub environment (***)
5.Economic sub environment (****)
6.Social sub environment (*****)


Characteristics of the business environment: Increased instability

Factors and variables are interrelated
(*) Technological sub environment: Increased pace of innovations and inventions. Characteristics:
Keener competition, creation of complexity, insatiable demand for capital.
(#) Institutional/ political sub environment: New government, new labor laws
(**) Physical sub environment: Factors to be taken into account: Scarcer resources, the cost of energy,
the cost of pollution, environmentalism.
(***) International sub environment: Need for SA businesses to be competitive in order to survive in a
global economy.
(****) Economic sub environment: factors such as interest rates, inflation rates, unemployment,
productivity, monetary policies, tax policies
(*****)Social sub environment: factors to be taken into account : Demography : population growth,
composition (age, sex, race), changing role of women, consumerism: right of consumers to be informed,
right to freedom of choice, right to be heard, right to safety. Pressure on the business
to be socially responsible.

Environmental Scanning
Environmental Scanning = monitoring of the environment to detect those factors that pose a threat and
those that are an opportunity to be seized by the business.
Three levels:
Basic scanning: Recourse to specialized publications to keep abreast of environmental change:
government reports, financial journals, reserve bank reports, organizations own data
Advanced level: hiring internal staff or external consultants be carry out special monitoring
Environmental researches.
More advanced level: establishing of a permanent scanning unit within the business itself (more relevant
to big businesses).


Study Unit 5 Introduction to General Management



Process whereby human, financial, informational and physical resources of a

business are employed for the attainment of a businesss objectives.

Importance of management

Direct a business towards the attainment of its objectives

To set and keep the operations of a business on a balanced course. Balance between: (a) the
objectives of a business, (b) its resources, (c) the employees personal objectives, and (d) the
interests of the owners.
To keep the organization in equilibrium with its environment.
To reach the businesss goals as productively as possible and synergistically.
3. Management tasks

Managers apply these four basic tasks:

1. Planning: setting the (a) mission, (b) long-term, (c) medium and (d) short term objectives of a
business, and determine processes and ways in which they will be achieved
2. Organizing: dividing larges activities into smaller tasks, allocation of resources to each
3. Leadership: setting people and activities in motion and keep them going so as to reach the
objectives and mission of the business as effectively as possible.
4. Control: Verifying whether the mission and objectives of a business are being attained and
providing corrective action.


Management levels

We find managers at three levels:

TOP management: responsible for the mission and long-term objectives of a business and its strategic
MIDDLE management: concerned more with medium-term and short term functional objectives.
LOWER management: supervisors: concerned with daily activities and short term objectives


Management functions

Management activities are grouped together according with the particular activities that are taking
places. Seven functions, which usually take place at the middle management level.
1. General management
2. Marketing management
3. Financial management
4. Production (or operational) management
5. Purchasing management
6. Human resources management
7.Public relations management
6. Management Roles
Managers assume 10 roles grouped into three categories:


Group 1. Interpersonal Role:

Representative figure
Good relationships (with public)

Group 2. Decision-making role


Allocator of resources

Group 3. Informational Role



7. Management skills
Four skills are required of a manager. Depending on the management level, those skills vary in
1. Interpersonal skills
2. Technical skills
3. Conceptual skills
4. Analytical and diagnostics skills.
See table in the relevant chapter.

8. Development of the management theory

Four main schools:
1. Scientific school (FW taylor)
Characteristics: Concentrates on lower management. Scientific application of observation, job analysis,
job measurement, redesigning of jobs and financial incentives. Workers are seen as robots who all
respond the same way.
2. Classical school: (Henry Fayol)
Characteristics: concentrates on top management. It identified 6 most important functions. Devided the
management process into Planning, Organizing, Leadership and control.
3. Human resources/ behaviorist school (Elton Mayo)
Characteristics: Importance is given to sciences like sociology and psychology. Emphasizes on human
relations between workers themselves, & between workers and managers. Social interaction,
motivation, pattern of power, organizational design, communication
4. Quantitative school
Management is seen as a system of mathematical models.

9. Contemporary approaches to management

1. System approach (1950s): sees management as an integrated system made up of related systems
2. Contingency approach: Integrates the advantages of different schools depending with the prevalent



3. Ouchis Theory Z: Combines American (type a) management practices with Japaneses type (j). See
relevant table in the book.
Other approaches:
Excellence movement
Total Quality management
Dynamic engagement
Learning organization.



Study Unit 6: The Basic Elements of planning



Planning is the first task of the management process. It is the activity that determines (1) the businesss
mission, as well as the long-term, medium-term and short-term objectives. And
(2) The methods and processes to be used to achieve those objectives.

Perspectives to planning

There are 3 perspectives to planning:

(a) determination perspective: what is to be
achieved (mission and goals).
(b) Decision-making perspective: Specify the
actions necessary to achieve those objectives.
(c) Future perspective: Establish the relationship
between things to be done now to attain a certain state of affairs in the future.

Importance of Planning

a) Gives direction
b) Promotes cooperation
c) Helps the business to keep abreast with technology
d) Forces managers to look into the future
e) Promotes cohesion
f) Promotes stability

Planning Process

Three steps:

Goal setting
Development of plans
Implementation through the rest of the management process

Step 1 Goal Setting

Here, managers determine
1. The mission / purpose of the business Activity of owners/ top management.
2. The long-term (or strategic) objectives (time frame: 5-10 yrs or more) by Top
3. The medium term (functional) objectives (time frame: 1-3 yrs) by middle management.
(e.g. marketing departments objectives, HR departments objectives)
4. The short term (operational) objectives (time frame: less than 1yr) by lower
management. Day to day objectives.

Setting objectives
* Objectives should be measurable
* The responsibility of their achievement should be allocated to a person or a group
* Objectives must be consistent:
- horizontal consistency: there is no conflict between goals of
different departments.

- Vertical consistency: there is no conflict between the goals of a

department and the goals of its subsections.

* Goals must be linked to a remuneration system.
* Subordinates should accept the goals in order for them to work willingly to achieve them.



There are two approaches on how goals should be set:

Approach 1: Top-up or Hierarchical approach: top management sets goals, as only top management
knows the direction of the business
Approach 2: Bottom up approach or management by objectives: (brainchild of Drucker). Subordinates
work together with managers to set goals. A remuneration system is linked to this approach; workers are
remunerated on the basis of the goal they reach.
Step 2: Developing plans

Here, managers consider different options/ alternatives that can be applied to attain the plans set at
Factors to be taken into account when choosing between different alternatives:
External factors such as market factors and macro environment factors.
Strong and weak points of the business; strong points may be: possessions of a patent, of a raw
material, never expose your weak points.
Rational decision-making when weighing cost/benefit of each alternative

Strategic plans are developed to reach long-term objectives top management

Functional plans are developed to reach medium-term objectives middle management
Tactical plans are developed to reach short-term or operational objectives lower managers
(See time frame of each)

Strategic planning
It is developed by top management in broad terms (no concern to details) to realize the mission of the

Time frame 3-10 yrs or more

Carried out by top management
Focuses on business as a whole
Future oriented
Constant adaptation to environment
Is not concerned with details



Is used to deploy resources to take advantage of opportunities and avoid

risks to function as profitably as possible.

Examples of strategies:

Market development
Product develpement
Horizontal integration
Vertical integration
Joint venture

(See the definition of each term in the book).

Functional planning

Medium term planning carried out by middle management. Each department carries out its plans (in
cooperation with top management). See Vertical and horizontal consistency.
Many businesses rely mainly on functional planning due to environmental uncertainties.

Tactical planning (or short term)

Developed by lower managers for periods shorter than 1 year. Concerned with day-to-day performance
of tasks. Budgeting is the main method used to allocate resources for short term plans.

Step3 Implementation

After Goals are set (step1), and plans to attain them are determined (step2), implementation is carried
out through the rest of management process (organization, leadership and control).



Study Unit 7 organizing the business Organization

Second task of the management process: Organizing

1. Definition
Organizing means developing a framework/ structure to implement strategies and plans.
Organizing entails: (a) dividing activities into smaller tasks, (b) allocating those tasks to people/ groups,
(c) allocating resources necessary to perform those tasks, (d) allocating the authority necessary to
people/ groups so that they can achieve goals and objectives.
2. Importance of organizing
Organizing allows a:
(1) Detailed analysis of the work to be done, and resources to be used
(2) Division of activities into smaller tasks that can be performed by a small group
(3) Promotes productive application of resources
(4) Activities are grouped together into specialized departments where experts can perform their
duties. E.g. marketing, finances
3. Basic principles of organizing
specialization division of labor
Departmentalization grouping of activities

2 basic principles:


Labor is divided to take advantage of specialized skills/ knowledge. Workers are used
in their field of specialization. The most known example is the assembly line (created
by Henry Ford).
The more a business grows the higher the
pressure to divide its numerous activities into
smaller tasks.
*reduced training costs
*Reduced transfer time
*Development of specialized equipment
*Individual abilities are used to increase productivity


Grouping of similar activities into specific department. Marketing activities,

production activities, Public relations activities



Forms of departmentalization:
(a) Functional organizational structure
Activities are resources are grouped following the functional structure. E.g.:
Managing Director

Financial manager

Marketing manager

HR manager

(b) Product Departmentalization: activities and resources

are grouped according with the products manufactured.
E.g. each department works autonomously while taking
into account the top management objectives.

Managing Director
Consumer products

Industrial products
PR manager

marketing manager

(c) Location departmentalization:

Activities and resources are grouped following the
geographic location (multinationals or nationwide
businesses). Each department works autonomously while
taking into account the top management objectives.
Managing director
Manager: Gauteng

Manager: Eastern Cape

Manager: Limpopo

Customer departmental: Activities and resources are grouped following the

customers targeted. Each department works autonomously while taking into
account the top management objectives. E.g.
Managing Director
Electronic equipment for TV

Electronic equipmt for Air force

The matrix organizational structure is a

combination of different departmentalization
structures. See book



4. Authority Relations
After being allocated tasks and resources, people need authority to carry them out.
Authority = Right to command/ demand action; to take action to compel execution of activities; and to
Responsibility = obligation/ commitment of middle/ lower managers (or even subordinates) to carry out
tasks and account on them.
Delegation of authority: Formal authority flowing from: Owners Top management Middle
management Lower management subordinates.
Acceptance theory of authority = authority originates from subordinates: no one has authority unless
subordinates accept orders and carry them out.
Centralization of authority = top management holds all the authority and delegates little to middle and
lower management.
Decentralization = is the opposite.
Line authority = Authority is delegated down the hierarchy line: OwnersTOPMiddleLower.
Staff authority = special authority based on special knowledge or skills. Legal adviser, marketing
research section
5. Coordination
Coordination = integration of groups tasks and objectives at all levels departments to enable the
business to function as a whole. Developing harmony of aims.
Mechanisms to promote coordination:
organization chart
The budget
A committee
The brad policy and procedures
The information system of the business
Span of management: relates to the number of subordinate each manager has authority over.
Tall structure: few subordinates per manager, many management levels, long line of command
Broad/ flat structure: many subordinates per manager, few management level, overworked managers.
(see book)

6. Informal structure

Informal structure = structure that originates from people regularly interacting in the work place. Informal
relations exist between groups or between people.

Encourages team work

Communication takes place more quickly with the informal structure increased productivity.
Informal structure supports the formal structure.

Factors that influence the organization structure

Factor 1 The environment: is the basis for designing the organizational structure. Is the starting point
of developing a strategy. Businesses have to keep in touch with their environment.
Businesses in a stable environment will adopt the functional structure
Businesses in a turbulent environment will adopt the product departmentalization
Businesses in a technologically dominated environment will select an adaptable organizational
structure: one form of departmentalization or another.
Factor 2 the businesss strategy
Factor 4 the staff employed by the business
Factor 5 the organizational climate