Business Management Study Guide

# 2010 University of South Africa
All rights reserved

Printed and published by the
University of South Africa
Muckleneuk, Pretoria
MNB1501/1/20112013
98629158
3B2
MNB Style
Contents
INTRODUCTION
iv
TOPIC 1: INTRODUCTION TO BUSINESS MANAGEMENT
STUDY UNIT 1:
THE BUSINESS WORLD AND BUSINESS MANAGEMENT
STUDY UNIT 2:
ENTREPRENEURSHIP
14
STUDY UNIT 3:
ESTABLISHING A BUSINESS
30
STUDY UNIT 4:
THE BUSINESS ENVIRONMENT
43
STUDY UNIT 5:
CORPORATE SOCIAL RESPONSIBILITY
57
TOPIC 2: THE MANAGEMENT PROCESS

STUDY UNIT 6:
PLANNING
86
STUDY UNIT 7:
ORGANISING
97
STUDY UNIT 8:
LEADING
110
STUDY UNIT 9:
CONTROLLING THE MANAGEMENT PROCESS
127
(iii)
Introduction
Welcome
Welcome to this module, Business Management 1A. The field of business management in South Africa today is an extremely dynamic and challenging one, with ongoing
changes to the domestic and international business environment.
The learning content and activities contained in this study guide provide you with
opportunities to explore the latest developments in the field of business management
and help you discover the field as it is practised today. We hope you will enjoy this
module. Take time to read through the whole preface section to this study guide as it
contains important information on how you should approach your studies of this
module and this study guide, as well as important guidelines pertaining to the
formative and summative assessment for this module.
Module aim
The aim of this module is to establish a foundation for the study of business
management; and to develop the learner's understanding of the concept of strategic
management and of the specific management tasks (planning, organising, leadership,
control). This will enable qualifying learners to develop basic business plans that reflect
an entrepreneurial approach to maximising the use of resources. These business plans
are of the type that could be used to seek funding from financing institutions.
Module outcomes
After working through this module, you should be able to
. explain how business performance relates to strategic management
. analyse a business case study and identify issues related to the managerial tasks and
skills
. differentiate between entrepreneurial and non-entrepreneurial approaches to
business management
. develop a basic business plan for a small to medium-sized enterprise
Studying the prescribed book

The prescribed book for Business Management I, which is used for both modules
MNB1501 (previously MNB101D) and MNB1601 (previously MNB102E), is
Introduction to business management, 8th edition, by Du Toit, GS, Erasmus, BJ and
Strydom, JW. 2010.
Getting an overview
What was your reaction to an academic textbook of more than 500 pages? If you felt
overwhelmed by the amount of study material contained in the book, then you
(iv)
probably had the same feelings as about 24 000 other Business Management I
learners. However, instead of feeling discouraged, the best thing to do is to tackle the
study material systematically.
So where do you start? The first suggestion would be to read through all the FAQs on
the myUnisa webpage for MNB1501. These should give you more clarity and should
help reduce much of the anxiety you may be experiencing.
When you study the textbook, begin by reading the preface right at the beginning of
the book. A preface usually tells the reader what purpose the authors had in mind
when they wrote the book, and how they structured it. In obtaining an overview of the
book, it is also essential to read through the table of contents which follows the
preface.
The contents give us the framework according to which the authors have structured
the book. For our study purposes, however, we have divided the study material into
two modules, namely module MNB1501 and module MNB1601.
This module, MNB1501, will cover the following two topics:
Topic 1: Introduction to Business Management
Topic 2: The management process
Division of the study material for module MNB1501
For our study purposes, we have divided the study material into the following topics:
TOPIC 1: Introduction to Business Management
.
.
.
.
.
The business world and business management

Entrepreneurship
Establishing a business
The business environment
Corporate social responsibility
TOPIC 2: The management process
.
.
.
.
Planning
Organising
Leading
Controlling the management process
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The assignments
The best way to work through the prescribed book is to study one topic at a time. That
is why the assignment questions have been based on the different topics of the study
material.
Getting a feel for the layout of the prescribed book

At this stage you are still not ready to start reading the actual text. You first need to get
a feel for how the study material has been set out.
Learning outcomes and layout

At the start of each chapter you are given the learning outcomes and layout. These
outcomes and layouts tell you what the author had in mind when the chapter was
written and they can sometimes serve as a useful summary of the topics dealt with in
the chapter.
Just looking at the outcomes and the layout at the start of each chapter and listing the
topics sets the stage for understanding what the chapter is all about.
Figures and tables

As you page through the book you will also see figures and tables. For example, in
section 5.2 of the prescribed book you will see table 5.1, while in section 5.4 you will
see figure 5.1. These figures and tables are intended to illustrate a point covered in the
text. For example, just before table 5.1 you will see reference made to table 5.1, while
in the paragraph just before figure 5.1 reference is made to figure 5.1. Thus you do not
have to take note of any figures or tables until they are actually referred to in the text.
Then, before reading any further, you should turn to the figure or table (it will
sometimes be on the next or the previous page) and you see what you can learn from
the information presented. You must understand that these figures and tables are
intended to illustrate, but you do not have to memorise their contents for examination
purposes.
Illustrations
You will also see information given in the grey squares. These illustrations are usually
not referred to in the text itself. They are intended to give you additional insight into
the text that surrounds the square, and to reinforce a point the author has made in the
text. Again, make sure that you understand the point the author is trying to reinforce
with these illustrations; but you do not have to memorise the contents for examination
purposes.
The study process

When you have listed the main topics as set out in the outcomes and layout, you
should read through the entire chapter just to get a feel for what it is all about. Don't
(vi)
worry too much at this stage if you don't understand every detail. The important thing
here is to make a few notes of the key issues as you read. Then draw a diagram or
simple mind map to visualise the key issues.
You are now ready to start studying. Tackle one study unit at a time. If there is
something you do not understand, read through it again and try to figure out what the
author is saying. Do not skim over any study material that you do not
understand. Ask someone else to help you understand a sentence or paragraph, and if
you really cannot figure it out contact one of your lecturers at Unisa. They are there to
help you.
One of the best ways to make sure that you understand the material is to make a
summary in your own words one study unit at a time.
A good summary length is about 5% of the original text, so that section 1.1 in the
prescribed book should be summarised in approximately two written pages. The
reason for summarising your study material stems from an adage (or saying): `À
thought expressed is a thought impressed.'' This means that the more you write down
(in your own words) what the message of a particular study unit is, the more it will be
impressed or imprinted on your own mind.
Please note: The purpose of studying is to understand the concepts, not to memorise
them.
How to use the study guide

The primary purpose of this study guide is to provide you with guidelines to help you
understand some of the most important theoretical perspectives, general principles
and contextual factors that underlie the nature and dynamics of business management.
All of this is, however, done from a management perspective. You must therefore use
the study guide as a source of additional information and to help you work through the
material contained in the prescribed book. You will find that certain terms are
repeatedly used to structure this study guide and your thinking:
. A topic represents an important component of the module and study material. Each
topic has one or more learning outcomes. These outcomes indicate the general
standard or level of competence you should achieve in respect of each topic.
. A study unit is an identifiable part of a topic. Each topic therefore consists of one or
more study units.
The learning outcomes are very important for the purposes of your studies. For each
topic, specific outcomes are set, which you as a learner must be able to achieve.
These learning outcomes are linked to the assignments as well as the examination and
are therefore the means by which you and your lecturers can evaluate the extent to
which you have in fact mastered a specific topic (ie your knowledge and understanding
of it).
Certain icons are used throughout the study guide:
(vii)
Learning outcomes. The learning outcomes indicate what aspects of the

particular topic or study units you have to understand and be able to
demonstrate your understanding.
Study. This icon indicates which relevant sections of the prescribed book or
the study guide you need to study and internalise.
Key concepts. The key concepts indicate which terms or keywords are
important for a particular study unit.
Read. This icon will direct you to read certain sections of the prescribed book
for background information.
Activity. This icon refers to activities that you must do in order to develop a
deeper understanding of the study material.
Mind map. Mind maps are provided to help you to see the relationship
between various parts of the study material.
Assessment. When you see this icon you will be required to test your
knowledge, understanding and application of the material you have just
studied.
Feedback. This icon indicates that you will receive feedback on your answers
to the self-assessment activities.
Please note
You should always read through the study guide first and then study the relevant
sections in the prescribed book as indicated in the study guide (along with the study
material in the study guide).
This study guide therefore has certain specific functions:
. It provides you with material that you have to study.
. It indicates which parts of the prescribed study material you have to study.
. It contains certain activities that will help you master the field of study.
The steps in the study process

1
Get an overview of the book as a whole. You should have completed this step
already.
Get an overview of the parts. Draw a mind map of the parts.

(viii)
Read the first chapter of that part. Draw a mind map of the topics in the
chapter.
Study the first section of the chapter. Write a summary in your own words.
Read through the corresponding study unit in the study guide. Amend your
own summary, if necessary.
Read through the next section of the chapter. Repeat steps 4 to 6 until you
have completed the chapter.
Tackle the next chapter in that part. Repeat steps 3 to 7 until you have
completed the part.
Completing the assignments

Multiple-choice questions
The assignments as well as the examination comprise only multiple-choice questions.
For every question there will usually be four options to choose from, numbered from 1
to 4, of which you must select only one. For example:
1
Which one of the following statements is correct?

1
Capitalism ensures a more even distribution of wealth.
Socialism discourages private initiative.
Communism ensures a better utilisation of resources.
South Africa's economic system tends towards socialism.
You cannot select more than one option. In other words, your answer will always be
either option 1 or 2 or 3 or 4.
Sometimes the question asks you to select the wrong statement. You should be extra
careful when answering such questions and not get confused and indicate a statement
that is correct (and therefore the wrong answer). Please look at the assignments in
Tutorial Letter 101. You will find the occasional question asking you to indicate which of
the options is wrong.
In some questions, however, there will be several statements that could be correct. In
such cases the statements will always be indicated by letters (a, b, c and d), and the
answer will still be either option 1, 2, 3 or 4, but these answers may refer to more than
one statement. For example:
2
Which of the following statements are correct?

a
A business owned and managed by one person may be a private company.
A partnership is usually limited to 20 partners.
The owner of a sole proprietorship does not pay tax on his or her business's
profits.
(ix)
A public company may not offer its shares for sale on an open market.
1
abcd
abd
bc
cd
This question asks you to indicate which two of the statements are correct. If you
therefore think that statements b and c are correct, you will mark only option 3 as the
correct answer.
In all the above examples, the stem of the question asks you to identify the correct
statement(s). Sometimes the options are a continuation of the stem. For example:
3
The economic principle ...

1
is an endeavour to achieve the maximum with the minimum.
does not apply to government organisations because they do not strive for a
profit.
is mainly an indication of how low the operating costs were.
is always measured in terms of the business's profitability.
In a question such as the above, you have to read the stem plus option 1 then you
have to read the stem again plus option 2, the stem plus option 3, and so on.
There is one other type of question that some of you may find somewhat confusing.
For example:
4
Match the management level in the first column with the corresponding
organisational objective in the second column:
a
top management
the mission of the organisation
middle management
ii
functional objectives
lower management
iii
operational objectives
a (i)
b (ii)
c (iii)
a (i)
b (iii)
c (ii)
a (ii)
b (i)
c (iii)
a (iii)
b (ii)
c (i)
In this question you have to match the items in one column with the items in a second
column. Let's say that you think that top management (a) is involved in the formulation
of the mission of the organisation (i), then you already know that your answer could be
either option 1 or 2. By comparing the other options in column one with those in
column two, you should be able to choose between options 1 and 2.
(x)
Answering a multiple-choice question

Make a photocopy or record your answers on a separate page.
You will find the multiple-choice questions in the assignment extremely useful when
you prepare for the examination. However, if you mark your answers (or the correct
answers) on the actual page in Tutorial Letter 101, you will not be able to use these
questions for revision. We strongly recommend that you either make a photocopy of
the assignments, and use that for revision, or else write down your answers on a
separate sheet of paper to avoid making any marks on Tutorial Letter 101 itself. You
will then be able to work through these questions again in preparation for the
examination, without seeing the marks that indicate the correct answers.
Decide on each option independently
When answering a multiple-choice question, a good deal of time is often wasted
(especially in the examination) by reading through all four options before deciding
which is the correct one. The secret is to read and decide on each option separately.
For example, look at question 1 above. The stem asks you to identify which statement
is correct. Take a ruler and cover the other three statements so that you only see
statement 1. Read it, and then, without reading any other statement, decide whether
the statement is correct, wrong or that you don't know. Put a tick (Y) next to it if you
think it is correct; put a cross (x) next to it if you think it is wrong; and put a ``?'' if you
are not sure. Then move the ruler down so that you can read statement 2. Again
decide and mark the category into which it falls.
When you have done that with every one of the four statements, you may find that you
have marked one statement correct and three statements wrong. That is then your
answer. If you find that you have marked two correct, then compare the two
statements and choose the one that seems to be the most correct, or the most
comprehensive.
Write down your reasoning
When you have selected your answer to a particular question, it is essential that you
write down your reasons for doing so. For example, if you chose option 2 as the correct
answer to question 2 above, implying that statements a, b and d were correct, you
should write on a separate sheet of paper why you think statements a, b and d were
correct. Write down the actual reference in the prescribed book on which you base
your reasoning. However, you must even go a step further. You must also write down
why option c is wrong. Again make specific reference to the prescribed book to back
up your reasoning.
This step is probably the most important learning step that you can take. We want our
learners to understand the study material and to be able to explain the concepts and
apply the principles. We are not interested in whether a learner has memorised the
study material and can repeat it in an examination. That is why it is so important for
you to be able to give a reason for your answer.
A few weeks will pass between the time that you answer an assignment and the time
that you receive back the correct answers and explanations. By that time you will have
forgotten why you chose a certain option in a particular question, unless you wrote
(xi)
down your reasons. The real learning takes place when you compare your reasoning
with that of the lecturers. So don't take the easy way out by just answering the
multiple-choice questions.
The flow diagram below will help you to picture the process.
(xii)
MAKE A PHOTOCOPY OF
THE ASSIGNMENT OR
.
statement.
statement.
statement
statements
Draw an appropriate line

on the mark-reading
sheet.
statement.
(xiii)
Topic 1
Introduction to business
management
Aim of this topic
The aim of this topic is to provide an overview of the business world and business
management, the role of entrepreneurship and its nature and role in society; to look at
how a business can be established; and to examine the business environment in which
a business functions. We also discuss corporate social responsibility.
Learning outcomes
After working through topic 1, you should be able to
.
.
.
.
.
demonstrate an understanding of the role of business in society and the position

of business management in the business world
identify an entrepreneur and explain his/her role in society
recognise how an organisation functions and how it is established
explain the term ``business environment'', examine its composition and
investigate aspects of environmental scanning
explain what corporate social responsibility is, and what it entails
Overview of the topic

Topic 1 comprises the following study units:
Topic 1
Study unit 1
Study unit 2
The business world Entrepreneurship

and business
management
Study unit 3
Study unit 4
Study unit 5
Establishing a
business
The business
environment
Corporate social
responsibility
Study unit 1
The business world and business management
Contents
Key concepts
Learning outcomes
Getting an overview
1.1 The role of business in society
1.2 Needs and need satisfaction
1.3 The main economic systems
1.4 The need-satisfying institutions of the market economy (free market)
1.5 The nature of business management and the classification of the study material for
business management
1.6 Summary
Self-assessment questions
Key concepts
business world
community
needs
economic systems
society
institutions
development
classification
free market
market system
market economy
Learning outcomes
After working through study unit 1, you should be able to
. demonstrate an understanding of the role of business in society
. explain the needs of society and how need satisfaction occurs
. discuss the three main economic systems in the world
. explain the differences between need-satisfying institutions and non-profit
institutions
. explain the inherent nature of business management and elaborate on how the
study material for business management is classified
Getting an overview
This study unit discusses the role of business in society and explains how a business
organisation in a market economy employs the limited resources of a nation its
natural resources, human resources, financial resources and entrepreneurship to
satisfy the needs for products and services. The study unit gives an overview of the
main prevailing economic systems in the world and explains how the business
organisation functions in a market economy. Against this background the purpose and
nature of business management is examined: specifically the task of business
management, namely studying the factors, methods and principles that enable a
business to function as efficiently as possible. A classification of the study material for
business management is also presented.
1.1 The role of business in society

Study section 1.2 in the prescribed book.
The business activity generally involves the transformation of resources into goods and
services to meet society's needs. Business cannot operate without society at large. It is
important to understand how closely any business organisation is linked to the society
in which it operates. The needs and values of a society have a strong influence on what
a business does. For example, if the people in the society are very aware of the need to
protect the environment, they will soon bring pressure to bear (often through the news
media) on any business that pollutes the environment with its waste materials. See the
report on the steel organization, Mittal Steel, below.
Steel giant Mittal Steel taken to court
A group of about 100 impoverished residents of smallholdings near
Vanderbijlpark are engaged in litigation against Iscor (now called Mittal
Steel), blaming the industrial giant for large-scale pollution in the area in
which they live.
This is following another claim ... successfully launched against Mittal Steel in
which they had to pay R33 million. Iscor paid the settlement to hundreds of
families who lived on smallholdings in Linkholm, Drakeville and Steelvalley
shortly before a High Court judgment in 2000.
Businesses should be aware of not only their influence on the physical environment,
but also of the effect their business activities have on consumers, the economy at large
and competitors. See the excerpt below on how business activities could have serious
financial implications.
Pioneer Foods heavily fined
The Competition Tribunal has, on 3 February 2010, imposed a penalty of
R195 718 614 on Pioneer Foods for its role in a bread cartel and has ordered
Pioneer Foods to desist from such conduct forthwith. The cartel involved the
3
four primary bakeries of Tiger (Albany), Premier (Blue Ribbon), Foodcorp

(Sunbake) and Pioneer, which owns Sasko and Duens bakeries. Together the
four bakeries enjoy a market share of between 50 and 60% of the domestic
bread market in South Africa. The case concerns two complaint referrals
brought against Pioneer Foods regarding a bread cartel operating in the
Western Cape and a bread cartel operating in the inland region.
The Tribunal says, in its decision, that hard-core cartel activities are
considered to be the most egregious offences under the Competition Act
and, absent mitigating factors, deserve the maximum penalty provided for in
the Act.
Adapted from: http://www.comptrib.co.za/list_judgement.asp?jid=1120
Through the spheres of social responsibility, consumerism and the prevention of
environmental damage for example, a society can persuade an organisation not to
pollute or damage the environment or fix prices. This is illustrated in the insert above.
Just as a society can influence its business organisations, so these organisations can
have a significant influence on the society. By developing new products, businesses can
influence the behaviour patterns of people in a particular society. Just think of the
impact that the electronics industry (with its production of cellphones and DVD
recorders for example) has had on the social life of our society. The success of
businesses also has a major impact on the prosperity of a society. In a town like
Secunda for example, Sasol employs many of the inhabitants. If Sasol were to go
bankrupt, thousands of people would be left jobless and the entire town would be
affected. The situation in the North West Province's mining town of Stilfontein provides
a real-life case study of the influence of the success and failure of a business, in this
instance Simmer & Jack Mines and DRDGold, on a community.
The effect of the mine closure at Stilfontein, North West Province
The North West Province's mining town of Stilfontein was brought to its
knees when DRDGold announced at the beginning of 2005 that it was
shutting down its two mines in the area, leaving 6 000 miners unemployed.
DRDGold applied for the provisional liquidation of its Hartebeestfontein and
Buffelsfontein mines. The CEO (chief executive officer) of DRDGold stated at
the time that high risk and little return on these two mines led to the closure.
The earthquake at the Hartebeestfontein mine during this time provided the
last straw for the closure. Members of the community who were employed
by DRDGold were devastated by the news and hardship prevailed for months
thereafter. Feeding schemes were introduced to try to help miners and their
families who had no means to survive. By November 2005 a white knight in
the form of Simmer & Jack Mines was responsible for reopening the
Buffelsfontein mine, employing 4 000 miners of Stilfontein, resulting in
benefits for about 15 000 of their dependants in the town.
Having read through this section and the discussion above, complete the activity that
follows.
4
Activity 1.1
In the past few years we have seen a number of newspaper articles with the
following headlines:
. ``Miners and their families without food in Stilfontein''
. ``New questions raised about the fiduciary responsibilities of directors of
Saambou Bank''
. ``Jonathan Oppenheimer of De Beers announces a black economic empowerment partner''
. ``Small landholders lodge claims against Mittal Steel for environmental damage''
. ``Consumer organisation complaints about the high telecommunication prices''
Identify from the five headlines above what type of influence South African
organisations are exerting on society.
The Stilfontein situation has been described in detail above. A mining group has a
certain responsibility to its workers. Liquidating their mine and leaving the mineworkers
to their own devices created a major media disaster for DRDGold. Simmer & Jack
Mines, on the other hand, was seen as the white knight coming to the rescue of the
workers and opening up the mines so that gold and uranium could be exported.
Simmer & Jack therefore fulfilled its social responsibility while still trying to attain profits
in taking over these mines.
Saambou Bank was liquidated a few years ago and some of the bank's directors are
now being charged with allegations of reckless business dealings and putting
shareholders' and clients' capital at risk. The basic allegation is unethical behaviour
on the part of the directors, which assumes that they have betrayed the trust of the
shareholders.
De Beers' announcement of a BEE (Black Economic Empowerment) partner refers to
the implementation of the various Acts of government to level the economic playing
field in South Africa. Through this, affirmative action and employment equity in the
South African business environment will be achieved by giving African people an
opportunity to share in the economic wealth of the country.
The Mittal Steel case was discussed in the excerpt above. It is clear that Mittal Steel was
found guilty on charges of damaging the environment and harming the lives of small
landholders in the areas mentioned. Mittal Steel was forced to buy out some of these
landholders, thus trying to rectify the environmental damage that they caused.
The high cost of telecommunications is well known in South Africa. When consumer
organisations complain about this they are fulfilling their obligation to be a social force
to guard the interests of the consumer, thus hopefully influencing players such as
Telkom to reduce the prices of their services.
1.2 Needs and need satisfaction

1.2.1
Unlimited needs
Human beings have many varied and seemingly unlimited needs. Society, however, has
limited resources to satisfy those needs, and so a choice has to be made as to how best
to utilise those resources. Most of us would like to live in a mansion, drive a luxury car,
own a seaside cottage, go on an overseas trip every year, wear the latest fashion
clothes, and so on, but very few people have enough money to afford all these
products and services. Most of us have limited resources (money) so we have to decide
how to utilise the little we do have to obtain the greatest satisfaction possible. The
decision to obtain the greatest possible benefit (or satisfaction) with the limited
resources we do have is guided by something known as the economic principle.
Since the business world is geared to satisfying needs in the society, it is important for
management to know what those needs are. According to Maslow, all people have the
same basic needs, but not everybody strives to satisfy the same ones. In countries with
severe famine for example, people will direct a great deal of their energy towards the
satisfaction of physiological needs such as hunger and thirst. However, according to
Maslow, once these are satisfied, people will strive to satisfy the next level of needs (ie
security needs), and so on.
In the business world, there are four types of resources available to manufacture goods
or provide services. These resources are known as production factors and refer to all
the resources used for producing goods or services. Whether a certain item is a
production factor or an end product will depend on the use it is put to. For a truck
manufacturing company, a truck is not a production factor but is the end product.
However, for a transport company, a truck is a production factor, since without it the
company would not be able to provide the basic service of transporting goods. The
figure below depicts the four production factors.
Society faces this fundamental economic problem: how to ensure the highest possible
satisfaction of needs with the limited scarce resources available. Within a community,
needs satisfaction occurs within a cycle, as can be seen from figure 1.5 in your
prescribed book. One of the elements within this cycle is the economic system
determined by the community. We will look at the main economic systems in the next
section.
follows.
6
Activity 1.2
You the consumer are confronted with the following situations:
. Not having eaten lunch you feel quite hungry and thirsty.
. You are scared to sleep at night after a neighbour was murdered.
. You are worried about your continuing relationship with your partner as he has
indicated that he wants to move out of the flat that you share.
. Your boss has shouted at you at work in front of your fellow workers.
. You want to enrol for further studies in the field of management in order to
further yourself in life.
Use Maslow's hierarchy of needs to classify the above situations.
Using Maslow's hierarchy of needs we can classify the above as follows:
.
.
.
.
.
Being hungry is classified as a physiological need; it is the most basic need.

Being scared to sleep at night reflects a need for security a right that is guaranteed
by the Constitution of the Republic of South Africa.
Having problems with your partner reflects a social need for love and affection,
which seems to be negatively affected.
Having had your boss shout at you in front of your fellow workers affects your selfesteem negatively. Self-esteem is a very important part of the hierarchy of needs
and may adversely affect your productivity at work.
Finally, having aspirations to further yourself in life through education is classified as
a self-realisation need, which is the pinnacle of the hierarchy of needs.
1.3 The main economic systems

Socialism
Free-market economy
The world is divided into three basic economic systems: the free-market economy,
socialism and the command economy. Socialism is in the middle, between the two
extremes. The following figure puts this position into perspective.
Command economy
At one end of the spectrum we have the free-market economy, also referred to as
capitalism. This economic system is based on the principle that each individual in the
society is free to choose his or her own economic activity. Private individuals mostly
own the society's resources and they are free to utilise those resources in whatever
way they wish. Everyone is free to work where they like, providing whatever service
they like or manufacturing whatever they want to, and so on.
At the other end of the spectrum we have the command economy, also known as
communism. This system is based on the principle that the state (the government)
owns almost all of the country's resources and that the state (in the form of
government officials) decides what products and services should be manufactured/
provided, who should be employed where, what each person should earn, and so on.
7
In-between these two systems is the system known as socialism. According to this
system, individuals may certainly own private property and choose their own form of
economic activity. However, the state also owns many of the country's resources and
plays a far greater economic role than in a free-market system. Many of the large
corporations, for example, are owned by the state and therefore managed by
government employees.
Table 1.2 in the prescribed book provides a useful summary of the key differences
between the three economic systems. You do not have to memorise these differences,
but to understand the different economic systems you must read through this table. It
is also important to note that no country in the world has an economy that is a pure
capitalist economy, or a communist economy, or a socialist economy. The economic
system of a country may range along a scale from pure communism to pure capitalism,
or vice versa.
Some countries have a mixed economy. See the table below for the definition of a
mixed economy.
A mixed economy is an economic system that includes a mix of both public and
government control, or a mix of capitalism and socialism.
There is no one single definition for a mixed economy, but relevant aspects include:
a degree of private economic freedom (including privately owned industry)
intermingled with centralised economic planning and government regulation
(which may include regulation of the market for environmental concerns, social
welfare or efficiency, or state ownership and management of some of the means of
production for national or social objectives).
Adapted from: http://en.wikipedia.org/wiki/Mixed_economy
For more information on the South African economy visit the following website: http://
en.wikipedia.org/wiki/Economy_of_South_Africa
follows.
Activity 1.3
Read through the following excerpt and answer the questions below:
When a giant private organisation, such as Masterbond or Saambou in
South Africa or Enron in the USA, goes bankrupt, critics of capitalism are
given a handy stick to beat this economic system. In South Africa we
regularly hear voices saying that the solution to South Africa's problems lies
in socialism, that is an economic system where the rich are heavily taxed
and where government intervention, ownership and control are the order
of the day.
What is important to remember, however, is that the downfall of
organisations such as Saambou and Enron actually shows that capitalism
is functioning very well if an organisation is inefficient it will go bankrupt. If

government intervenes to keep such organisations afloat it will keep
inefficient companies going for a longer period of time. On the other hand,
state organisations cannot fail, even if they perform badly, because they are
supported by taxpayers' money!
1
How would you classify the South African economic system?
Would socialism be the answer to South Africa's economic problems?
Even though South Africa is often classified as a socialistic economic system

together with other developing nations such as Brazil and developed nations such
as France and the United Kingdom, very rarely do any of the three economic
systems in use occur in a pure form. Keeping this in mind, the most appropriate
description of the prevailing economic system in South Africa is a mixture
between the free-market system and the socialist system. In other words, it is
moving towards a market-orientated economy, yet has a high degree of
government participation and control within the economy.
Some members of the government alliance see socialism as the best alternative
economic system. They state that only in a socialist South Africa will problems of
unemployment, lack of housing and other needs of society be solved. The opinion
is that without the planned, rational, equitable and sustainable use of South
Africa's resources the survival of all the people of South Africa is at risk.
In this section we looked at the three main economic systems, which include the
free-market economy, the command economy and socialism. In the next section
we will look at the need-satisfying institutions of the free market.
1.4 The need-satisfying institutions of the market economy

(free market)
The functioning of the South African economy is affected by need-satisfying institutions
such as business organisations, government institutions and non-profit-seeking
institutions.
Business organisations are also referred to as profit-seeking businesses since their
aim is to conduct their business in such a way that it will lead to a profit for the owners.
Most of these business organisations are privately owned, but remember that the state
also owns business organisations. These are called public corporations (eg Transnet)
and they function just like any other kind of business organisation.
There are also government organisations that do not operate on a profit-seeking
basis. They are usually referred to as government departments. The Department of
Public Works and the South African Police Service, for example, are examples of
government departments that do not operate on a profit-seeking basis. They provide a
service to the community and they obtain their funds from the Treasury. In other
words, the people in the society pay for these services by means of taxes.
9
Not all non-profit-seeking businesses are state-owned. There are also privately
owned organisations that do not strive to make a profit. Most of them seek to obtain
just sufficient income to cover their costs. Sports clubs, welfare organisations and
religious organisations usually fall into this category.
follows.
Activity 1.4
How would you classify the following organisations in the South African economy?
. Telkom
. The Treatment Action Campaign (TAC)
. Pirates soccer club
The telecommunications organisation, Telkom, was owned by the state. Then Telkom
was privatised and its shares are now traded on the Johannesburg Stock Exchange.
However, the South African government still holds shares in the organisation.
The Treatment Action Campaign (TAC) is a non-profit private organisation that
campaigns for the rights of South Africans suffering from HIV/Aids. It is described as a
non-governmental organisation (NGO).
Pirates is a private profit-seeking organisation owned by private businesspeople.
1.5 The nature of business management and the classification

of the study material for business management
Study sections 1.6 and 1.7 in the prescribed book.
In the study of business management it must first be emphasised that there is a
difference between economics and business economics or, as it is called nowadays,
business management. The key difference between Economics as a subject and
Business Management as a subject is that the former studies the ``management of the
national economy'' and the latter studies the ``management of a need-satisfying
institution''. Economics is a study of the broader area of economic problems in the
community, while business management focuses on the problems of individual
organisations in the same community. Business Management as a subject entails the
study of how to manage a business as productively as possible. This ties in with the
economic principle, which states that the business must strive to attain the highest
income with the lowest cost, with the difference between the income and cost being
the profit. Note that the economic principle applies as much to non-profit-seeking
business as it does to profit-seeking business the difference is that any form of profit
is ploughed back into the community for which the non-profit-seeking organisation is
working.
The business organisation performs a number of activities, such as researching markets
to find out whether there is a need for the product of the business; acquiring and
10
!
!
General
management
Financial
function
Production/
Operational function
Public relations
function
Human resources
function
Marketing
management
processing raw material for the manufacturing process; and appointing people to
operate the machinery in the manufacturing process. Capital must be obtained and the
income generated must be managed, while creditors must be paid and workers
remunerated. These are just a few of the activities being performed in a business
organisation. These activities must furthermore be coordinated and managed. This is
the reason why activities are grouped into functional areas to ensure proper
coordination and management. The functional areas are depicted in the following
figure.
Purchasing function
As we can see, general management is in the centre and deals with the planning,
implementation and control of activities (management functions) that are needed to
run the business. These management functions will be dealt with in considerably
greater detail in the rest of the prescribed book, but section 1.7 provides a useful
summary of what these functions entail.
Having read through these sections and the discussion above, complete the activity
that follows.
Activity 1.5
The following information was given by the Governor of the South African Reserve
Bank:
. The unemployment rate in South Africa is too high. Consumers are warned to
use credit with caution, because there is a strong case for increasing the interest
rate by 2%.
. The labour laws of the country are very restrictive and are hampering economic
growth.
Which of these statements have to do with the broad South African economy and
society in general? What are the implications of these statements for South African
businesses?
All of these statements have implications for the broad South African economy and
society in general. However there are also implications for business organisations, in
that businesses such as retailers must be careful about granting credit to consumers
because an increase of 2% in the interest rate will have a negative impact on the
11
disposable income of consumers. This could therefore adversely affect the turnover of
these organisations. As such, this statement must be carefully considered by the
financial function of the business, which deals with the granting of credit. The reference
to the labour laws is also important for each and every business in South Africa that is
currently very hesitant about employing more workers because of labour laws that are
perceived to be restrictive.
1.6 Summary
You now have a basic insight into the business world, economic systems, institutions of
the free market and the nature of business management. In the next study unit you will
learn about entrepreneurship in business.
1
Which of the following statements are correct?

An entrepreneur is someone who ...
a
b
c
d
pursues profit.
accepts risk.
makes the most of opportunities in the environment.
combines expertise and resources to produce products and services.
1
2
3
4
Which of the following attributes are characteristics of a free-market economy as

an economic system?
a
b
c
d
private ownership of production factors

free competition
profit motive recognised
limited right to strike in state enterprises
1
2
3
4
ab
cd
bcd
abcd
a
a
a
a
b
c
bc
bcd
Which of the following statements about the state and economic systems are
correct?
a
b
c
d
State intervention to solve an economic problem in a market economy

indicates a move towards a command or centrally controlled economy.
Government intervention in the economic system aims at encouraging
economic growth and stability.
Control of strategic organisations cannot be left to profit-seeking
entrepreneurs.
An expanding entrepreneurial role by the state eventually leads to a
democracy.
1
ac
12
2
3
4
abd
bc
abcd
Answers to self-assessment questions

Question 1
All four of the statements are correct regarding the characteristics of an entrepreneur.
Such a person normally pursues profit in starting and running a business, and in the
process also accepts risk. An entrepreneur also makes the most of opportunities in the
environment; in fact one of the traits of an entrepreneur is he or she can foresee
opportunities in a dynamic business environment far more quickly than other people.
Finally entrepreneurs also combine expertise and resources to provide products and
services. The correct answer is therefore option 4 (a b c d).
Question 2
In a free-market economy the economy is characterised by private ownership and free
competition, and the profit motive is recognised. There is also freedom of association
and the right to strike. So statements a, b and c are correct and d is incorrect. The right
answer is therefore option 3 (a b c).
Question 3
The first statement referring to state intervention to solve an economic problem in a
market economy does not necessarily mean a move towards a command or centrally
controlled economy. The elected government of the day is duty-bound by the
Constitution to improve the lives of all its citizens, which could entail state intervention
from time to time. The second statement about government intervention in the
economic system that aims at encouraging economic growth and stability is obviously
correct, as explained earlier. Control of strategic organisations cannot be left to profitseeking entrepreneurs only, because these strategic organisations must be managed to
the benefit of all the citizens. This statement is therefore correct. The last statement is
obviously wrong expanding the government's entrepreneurial role does not have a
corresponding positive influence on the development of a democracy. The right answer
is therefore option 3 (b c).
Reference
.
.
The Star, 23 March 2005

Mining Weekly, 11 November to 17 November 2005
13
Study unit 2
Entrepreneurship
Contents
Key concepts
Learning outcomes
Getting an overview
2.1 Entrepreneurs and entrepreneurship
2.2 The role of entrepreneurs and small-business owners in society
2.3 The entrepreneurial process
2.4 Summary
Key concepts
entrepreneur
entrepreneurship
role of the entrepreneur
motivation of entrepreneurs
the small business
the entrepreneurial process
skills required of an entrepreneur
resources needed to start a business
starting a new business
buying an existing business
Learning outcomes
.
.
.
.
.
.
.
explain the concept of entrepreneurship and the entrepreneurial process

define an entrepreneur
describe the roles that entrepreneurs and small-business owners play in the
South African economy
discuss how to become an entrepreneur
discuss the skills and resources required to become an entrepreneur
distinguish between and describe the different ways in which an entrepreneur
may start a business
discuss the implications of choosing a specific business opportunity
14
Getting an overview
`Èntrepreneurship'' is a term that has been batted around in the business and media
environment alike in recent years. In this study unit we take a closer look at
entrepreneurship as the fourth factor of production. We look at the role of
entrepreneurs and business owners in society, as well as at the entrepreneurial process.
There are various sources that define what an entrepreneur is. All the definitions come
down to the following: An entrepreneur is a person or personality type that takes up a
new venture and is willing to accept full responsibility for the outcome. Entrepreneurs
are those individuals in society who take the initiative and risk by harnessing the factors
of production to generate products and services.The entrepreneur's reward for taking
the initiative and risk is profit. And a loss is the result of taking the wrong decision.
Entrepreneurship is also a scarce human trait since not everyone in a country has the
skills or is prepared to take risks in generating products and services.
In this study unit, we also refer to the different ways of entering the business world and
present recommendations on the choice of a business opportunity.
Entrepreneurship is described as the process of identifying, creating or sensing an
opportunity where others do not see it and of finding and combining resources (often
owned by someone else) to pursue the opportunity until it becomes a successful,
established business. Let us take a closer look at the role of entrepreneurs in society.
2.1 The role of entrepreneurs in society

Entrepreneurship is a vital ingredient in the development of any country and even more
so for a country such as South Africa that has been plagued by growing joblessness in
recent years. Different sources are available regarding the total number of unemployed
people in South Africa. Depending on whose figures you use, and which definition,
unemployment may range from as much as 30% and more to less than 10%! Without
getting involved in arguments we can say that the rate of unemployment is too high
and is damaging to social stability. There is a lively debate about the reasons for the low
rate of entrepreneurial activity in South Africa. In the following discussion we will refer
to these reasons and look at the practical problems encountered by entrepreneurs. The
Global Entrepreneurship Monitor1 (GEM) report states for instance that men, and
people between the ages of 25 and 34, are the most likely entrepreneurs in South
Africa.
Read through sections 2.1 and 2.3 in the prescribed book.
2.1.1
Entrepreneur
Read through this interesting discussion on who or what an entrepreneur is, as well as
the conclusion which states that there are no hard-and-fast rules by which
entrepreneurs can be classified. Read through all the excerpts below on the
entrepreneur Patrice Motsepe to see what we mean by ``no hard-and-fast rules''.
15
Successful entrepreneurs in Southern Africa2

Patrice Motsepe, CEO of ARMgold, South Africa
``Patrice Motsepe is one of the most successful of the new generation of black South African mining
entrepreneurs. Patrice began his business training at the age of six when he would wake early to help
his entrepreneurial father by selling liquor to mine-workers to supplement the income his father
earned from owning a beer hall. He went on to earn a BA from Swaziland University, an LLB from Wits
University, and became a partner at the law firm of Bowman Gilfillan, where he specialized in mining
and business law. In 1994, he shifted to the mining industry. Nobody would give him a loan when he
started and so for the first nine months he ran his business from his briefcase. He founded a contract
mining operation called Future Mining, which provided various services to the then Vaal Reefs gold
mine, now part of AngloGold. That put him in the right place at the right time to benefit from the
restructuring of the South Africa gold mining industry.''
``Major South African gold groups like AngloGold restructured their operations to survive an extended
downturn in the gold price. Part of the solution was to dispose of marginal shafts those which were
high-cost or had a short life to focus on the remaining low-cost, long-life shafts. Motsepe formed
African Rainbow Minerals (ARM) in 1997 and acquired a number of marginal shafts at Vaal Reefs in
January 1998 on favourable financial terms. He followed that with the purchase of other marginal
shafts owned by AngloGold in the Free State. The challenge was then to turn them around through
tighter cost control and better working efficiencies.''
``Patrice's strong personality, innovation and determination, coupled with an unflinching desire to
succeed, has enabled the development and implementation of a ``we do it better'' management style,
culminating in a set of management and operating principles focused on enhancing operations. He
values strong corporate governance and believes in empowering employees at all levels, training them
in basic business principles and the necessary skills and expertise to make appropriate decisions. Taking
the approach that mining is about people and not rocks, it is important to Patrice that his employees
participate meaningfully in any decisions relating to the company's operations. This strategy improves
productivity and employee understanding of the business's objectives. Patrice says the most important
elements in business are employee buy-in and applying innovative leadership to maintain a contented
work force. He regards developing a relationship of trust as the cornerstone of a happy working
environment.''
`Èach of the separate units in ARMgold is given free rein to exhibit entrepreneurial spirit. As an
innovator, Patrice has an employee pay scheme of a low basic salary supplemented by performancerated bonuses. ARMgold intends to focus on its strengths to enhance shareholder value by increasing
gold production and reserves through acquiring mines where its management style and operating
principles can be applied. By improving operating performance and reducing costs it feels it can pursue
increased profitability aggressively. ARMgold aims to optimize its current resources and improve its
ore reserve management.''
`` 'In just eight years after leaving Bowman Gilfillan, Patrice had established ARM as the fifth-largest
gold producer in South Africa. ARM owns and operates thirteen gold mining shafts in South Africa. In
2002, ARM had become the eleventh-largest gold producer in the world and employed approximately
9 000 employees in its Sandton offices, and Orkney and Welkom mining operations. In May 2002, the
company achieved a major milestone. ARM's gold assets were listed on the Johannesburg Stock
Exchange (JSE) as ARMgold, the first black empowerment mining company to list on the JSE and the
first new gold mining company to list on the JSE in fifteen years. Patrice had become a rand billionaire
since various Motsepe family trusts own a total of 55.8 per cent of ARMgold, which in 2002 had a
market capitalization of nearly R7 billion (US$672 million). The company is currently focusing on
acquisition opportunities primarily in South Africa and then in the rest of Africa.''
``Still privately held and unlisted in 2002 was ARM's 50 per cent stake in the new Maandagshoek
platinum mine being developed by Anglo American Platinum, a project likely to be worth far more
than the R1.35 billion development cost. Asked about his plans for platinum Motsepe says it took five
to six years to get the gold company listed; however, he suggests that a million ounces of output from
the platinum division would probably trigger another stock exchange listing. Motsepe adds that, like
ARMgold, platinum would become part of an internationally competitive company.''
16
`Ìn October 2002, in recognition of his successful leadership of ARMgold, Patrice was named as South
Africa's Best Entrepreneur for 2002. Robert Emslie, managing executive of Absa Business Banking
Services, co-sponsors of the award, says Motsepe has created a world-class company. ARMgold
competes on a global stage and truly reflects the spirit of South Africa energy, determination,
perseverance, ingenuity and an African philosophy and way of life called Ùbuntu' (humanness).''
References cited:
``Mining is about people, not about rocks.'' 2002. Business Day (October 10).
Ryan, Brendan. 2002. `Ìn the right place at the right time.'' Financial Mail (September 27).
Shone, Hilton. 2002. ``From zero to hero in just five years.'' Sunday Times (October 6).
Now that you have read through an example of a South African entrepreneur, let us
take a closer look at the descriptions of an entrepreneur and entrepreneurship in South
Africa.
2.1.2 Descriptions of an entrepreneur

It is important that you understand the different descriptions of an entrepreneur. Bill
Gates is an entrepreneur who had the innovative ideas that started the Microsoft
computer company in the United States. Henry Ford was an entrepreneur who
identified the opportunity for the mass manufacturing and selling of cars to the broad
American population. This opened up new opportunities for other businesses such as
motels, petrol filling stations and fast-food businesses. Ernest Oppenheimer came to
South Africa in 1902 and was instrumental in the development of the diamond mining
business in South Africa. He used a natural resource (diamonds) to start a mighty
empire called Anglo American Corporation of South Africa. His son Harry
Oppenheimer followed in his footsteps and this dynasty continues today, with the
third and fourth generation actively involved in the South African mining industry.
Also look at the route that Patrice Motsepe followed. It would seem that having an
entrepreneurial father helped him on his way to success. Of course not all people have
an entrepreneurial heritage. Dr Annique Theron started with a very small business, but
with sheer determination and drive she offered help to people who had numerous
health ailments. This help was in the form of Rooibos tea.
In the next excerpt we will look at an interview that Dr Annique Theron had with a
reporter of Carte Blanche with regard to her entrepreneurial journey.
Rooibos and Dr Annique Theron
At 80 this lady is not yet ready to slow down. Still steady at the wheel, Dr Annique Theron often pops
into the head office of the company she founded 40 years ago.
The name Annique Theron has been synonymous with rooibos tea for more than forty years. She is
widely credited for discovering the exceptional healing properties of the indigenous plant, and having
made rooibos one of South Africa's most recognisable exports the world over.
Suzette Ferreira: `She remains the centre, the culture, the motivator ...'
Daughter Suzette Ferreira, is marketing director of the company founded by her mother.
17
Suzette: `The one big thing that I picked up is you've got to keep your mind going otherwise your
body will stop.'
Bongani Bingwa (Carte Blanche presenter): `Because she just doesn't stop does she?'
Suzette: `No well, it is good or bad. We don't know ... ja, it is hard to keep up with her.'
Ernest du Toit, the CEO of her company, says a selfless motive brought her this success.
Ernest du Toit: `She never thought about this as a commercial enterprise. She was in the business of
helping people, of saving lives, of changing and improving people's lives.'
Dr Annique Theron: Ì was driven. That's the best I can describe it. I was absolutely driven.'
But the journey has had its ups and downs.
One of several books that flowed from her pen has been translated into Japanese and she's been
honoured across the world.
Dr Theron: `The first one was when I was 60: Èntrepreneur of the Year'. And then, of course, the two I
received in Geneva.'
Among the honours `Best Female Inventor' and for `Discovering the Therapeutic Value of Rooibos'.
Dr Theron: `That was glory ... that really was a wonderful thing to happen to me. I couldn't believe it. I
was floating on air.'
But ten years ago, Dr Theron was accused of illegally registering the name rooibos in America.
It's something she denies emphatically.
Dr Theron: À plant cannot be registered as a sole trademark in the country of origin, but in another
country it can. Like rooibos doesn't grow in America so it was legal and acceptable to register it as a
trademark.'
Bongani: `Growing up in what was then rural Northern Transvaal there was almost nothing that could
have prepared Annique for the road that lay ahead except her insatiable curiosity and enquiring mind.'
As a child she played with foxes, squirrels and steenbok, but later dreamt of becoming a medical
doctor.
One day the determined teenager asked her teacher what subjects she needed for medical studies.
Dr Theron: Ànd you know Bongani, he looked at me as if I was an alien from another planet. And later
on I realised it was because girls didn't pursue medical careers. You know there were so few. if there
were there were so few, and here I wanted to know ... That was a goal I actually set for myself.
Bongani: Ànd did you achieve that goal?'
Dr Theron: `Yes but 60 years later.'
That happened at the age of 72, and the doctorate wasn't just bestowed on her. This hefty thesis was
the result of over 30 years of research.
But if that wasn't enough, she spent the next eight years writing her autobiography, which was
launched in time for her birthday in April.
Bongani: `From its humble beginnings as a foul smelling brew first introduced to the Dutch by the Khoi
Khoi at the Cape, rooibos tea has made its transition to be the drink of choice served in homes, in
restaurants, and even amongst royalty.'
Dr Theron: `Today I call it an aroma, Bongani, because I have elevated it from what it was at the time
to what it is today.'
Rooibos grows only in a small area in the Cederberg region of the Western Cape and the herbal
beverage is manufactured from the plant's needle-like leaves and stems.
The modern day hype around the brew began in 1968 by what can only be described as a twist of fate.
Annique's youngest daughter, Lorinda, suffered from colic as a baby.
Dr Theron: `She cried from the third day. And right through her next 14 months we had a terrible time
with her.'
One morning, to warm up the baby's milk, an increasingly desperate Annique added some rooibos to
Lorinda's bottle.
18
Dr Theron: `Bongani, it was the first time in her live she slept longer than half-an-hour. I was up and
down in the hallway, listening to see if she was still breathing ... and after three hours three hours!
she woke up and I was so relieved. But my life went on ...'
Bongani: Ìt took you a while to see what had happened?'
Dr Theron: `Yes, I had to find out what I had done out of rhythm so to speak that could have brought
on this wonderful positive result. And I came to the tea that Monday morning ... the only time I'd given
it to her. And I said to myself, `That couldn't be.' After about six weeks I realised that I'd stumbled onto
something miraculous and I started telling everybody.'
Just as excited was the Rooibos Tea Control Board.
Dr Theron: `They wanted to know whether they could use it for promotions for their product and
what they would have to pay me. So I thought to myself, The moment they pay me I lose it,' and I
decided to do it myself.'
And she did.
Over the next few years she received a stream of pictures and letters from grateful mothers, whose
allergic babies were helped by rooibos during those early days.
Her late husband, Meiring, provided most of the funding for Annique's work.
Dr Theron: `My husband sponsored me because you know it was manageable in the beginning.'
But not for long.
What Annique needed was something she could sell and she found it in a slimming product.
That led to a series of weight loss competitions in national magazines and newspapers, which cast
Annique the entrepreneur and her rooibos remedies in the spotlight.
It was a marketing success, especially as one of the winners happened to be Deirdre Barnard, the
daughter of famous heart surgeon, Dr Chris Barnard.
By 1976, a unique rooibos skincare range had been launched and Annique's ever-youthful complexion
became the face of the products.
Dr Theron: Ì had to learn everything about skincare, Bongani, because it doesn't fall into your lap.'
Bongani: `Not everyone who invents something or stumbles upon a discovery is able to take it to the
next level where it becomes a successful enterprise. It takes a unique combination of skills, vision and
tenacity.'
Today, a business that began in a garage in 1968 has a turnover of more than a R150-million a year,
and it's still one hundred percent family-owned.
12 000 distributors sell more than 300 products in the range, which is also exported.
Last year the top distributor's turnover was around R60-million.
Bongani: `Did rooibos discover her or did she discover rooibos?'
Ernst: `You know, that is a wonderful philosophical question. At the end of the day I believe that
everything happens exactly the way that it should. And if Dr Theron didn't discover rooibos, rooibos
would have discovered her because she had a purpose of fulfil, she had a role to play, there were
people who were waiting for this to impact their lives. So I believe that it was a mutual two-way street.
They would have found each other somewhere along the line.'
Dr Theron: `Bongani, I regard my discovery as my gift to the world.'
But, despite all the recognition she's received Dr Theron wants to be remembered most of all for
bringing happiness to people's lives.
Dr Theron: Ìt was a long but delightful journey. And I'm so happy that I could've been the instrument
to have achieved that ... as far as rooibos is concerned.'
Bongani: `Looking back, is there anything you would have done differently on this journey?'
Dr Theron: Ì would never change what has been given to me so generously and so benevolently.'
Bongani: Àny regrets?'
Dr Theron: `No regrets either.'
19
2.1.3 Entrepreneurship in South Africa

Entrepreneurship is a relatively new phenomenon in South Africa, mostly due to
legislation and a high unemployment rate. The number of entrepreneurs in business is
still very limited. Study section 2.4 in the prescribed book on the reasons for this.
Furthermore, looking at world statistics on women entrepreneurs, there are also fewer
women entrepreneurs in South Africa but this situation may be changing. For more
information on this trend, read through the article below.
Are South African women lagging behind as entrepreneurs?
Highly rated South African trend strategist Dion Chang identifies this as the ``the start of the female
century'' in his latest Flux Trend Review release. He points to research that shows that in 2009, for the
first time, more women than men were employed in the US workforce. A big contributor to this is the
fact that the industries hardest hit were banking and manufacturing, traditionally dominated by males.
Chang said: ``This is the most significant social change in a single generation, and sees women gaining
more power in terms of their income and spend.''
For those who dismiss ``trend strategies'' in favour of hard research, more and more data suggest that
women are becoming bigger drivers in the global economy.
Women will create 70% of the global growth in income at the household level over the next five years,
US-based Boston Consulting Group (BCG) predicts based on its research.
Women already spend more than 70% of consumer dollars worldwide, making them a powerful and
influential part of the economy for businesses to consider and understand, says BCG.
Dr Marjolijn Dijksterhuis, director of the Women in Leadership programme at the University of Cape
Town Graduate School of Business, says the fallout from the global economic crisis could further count
in women's favour as they look to achieve more senior positions in organisations.
She says that increasing complexity and business uncertainty in a globalised world is alerting us to the
limitations of traditional management paradigms.
`Ìt is becoming clearer that the ability to lead people through change and towards cooperation and
innovation has become essential to the success of organisations, and companies are now looking for
leaders who can inspire that change. I believe women have a lot to offer in terms of these more
people-orientated demands.''
There are some encouraging signs of female entrepreneurship in South Africa. While the technology
sector has traditionally been dominated by males, more than 35% of the members of the recently
launched Silicon Cape initiative for innovation and technology are women.
However, this is not necessarily translating into entrepreneurs prepared to tap the venture capital
markets for opportunities. Brett Commaille of venture capital firm InVenFin says that less than 10% of
the proposals they receive are from women; and when women do pitch, they are often accompanied
by a male business partner.
He says that while it is difficult to generalise, in his experience he has seen that men are far more likely
to jump into entrepreneurship early on, while women will tend to build up skills in the workplace
before going on their own.
Commaille added: `Ì believe we will see far more women entrepreneurs running their own businesses
in a start-up stage as they see the successes of others and realise their potential. Our space needs more
women entrepreneurs in early-stage businessses.''
Adapted from: Ashton, M. 2010. Are SA women lagging? [online]. [Accessed 26 February 2010].
Available URL: http://www.fin24.com/articles/default/display_article.aspx?ArticleId=
1518-2386-2399_2568586
20
2.2 The role of entrepreneurs and small-business owners in

society
Study sections 2.5 and 2.6 in the prescribed book.
Not all small-business owners are entrepreneurs. Some small-business owners are
satisfied with some autonomy and earning a reasonable income. They do not have the
intention of growing the business entrepreneurially.
We will now take a closer look at why entrepreneurs do what they do.
Entrepreneurial activity plays an essential and valuable role in society. Three broad
categories of determinants of or reasons why individuals initiate business ventures are
the following:
. The traits and characteristics that entrepreneurs hold. These traits and characteristics include:
achievement motivation
an internal locus of control
innovation and creativity
risk-taking
. Entrepreneurs' skills and industry experience
. Opportunities arising due to outsourcing
Of course the three categories mentioned above are not the only reasons for people
embarking on an entrepreneurial journey. The influence of environmental variables,
such as low interest rates, will also make it attractive for a person to be an
entrepreneur. We will now look at the small business and see how it is linked with the
role of the entrepreneur as well as the economy at large.
2.2.1 The small business

We can say that a business is a small business if it has at least two of the following
characteristics (which are also called qualitative measures):
. The management of the small business is independent, which means that the owner
is usually also the manager of the business.
. Capital is provided by the entrepreneur or a few people who start the business
together.
. The activities of the enterprise are mainly local (in South Africa).
21
. The enterprise is small in comparison with the largest competitors in the particular
industry, for example the small supermarket down the road in comparison with the
Shoprite Checkers group of retailers which is the largest retailing group in Africa.
Quantitative criteria measure something that can be measured or counted. To be able
to give a more specific definition of a small business, we also need to look at certain
criteria for measuring the size of a business. You should then be able not only to define
a small business but also to judge whether a business is big or small.
The National Small Business Act3divides SMMEs into the following categories:
Category of SMME
Description
Survivalist enterprises
Operate in the informal sector of the economy

Mainly undertaken by unemployed persons
Income generated below the poverty line, providing
minimum means to keep the unemployed and their
families alive
Little capital invested, not many assets
Not much training
Opportunities for growing the business are very limited
Between one and five employees, usually the owner and
family
Informal no license, formal business premises or labour
legislation
Micro enterprises
Turnover below the VAT registration level of R300 000 per

year
Basic business skills and training
Potential to make the transition to a viable formal small
business
Part of the formal economy, use technology
Very small enterprise
Fewer than 10 paid employees

Include self-employed artisans (electricians, plumbers) and
professionals
Fewer than 100 employees
Small enterprise
More established than very small enterprises, formal and

registered, fixed business premises
Owner-managed, but more complex management structure
Up to 200 employees
Medium enterprise
Still mainly owner-managed, but decentralised management structure with division of labour
Operates from fixed premises with all formal requirements
Definition of a small business

A good general definition of a small business is that it is owned and managed
22
independently and in no way predominates in the industry in question. Small

businesses provide ample opportunities for personal initiative, innovation and the
development of new products.
Refer to section 2.7.1 in your prescribed textbook for a better idea of the difference
between a micro business, a small business, a medium business and SMMEs.
The role of small businesses in the economy

Entrepreneurs and the small businesses they own have a strategic role to play in a
country's economy. This strategic role of small businesses revolves around the
following:
.
.
.
.
the production of goods and services

innovation
the aiding of big business
job creation
Activity 2.1
Have you ever thought about your prospects of becoming an entrepreneur? Read
through the following three scenarios and then answer the questions that follow:
1
Freddie Marais grew up on a farm in the Cape. His father had his own business
selling fruit and vegetables from the farm. At the age of 12, Freddie started
delivering potatoes to the housewives in Goodwood. Today, at the age of 30,
he has his own delivery/transport business in Cape Town and makes a fortune.
Beauty Davids, a 35-year-old housewife with a baby, was cleaning her house
when she suddenly thought about how many other working people need
someone to clean their houses. She started a business, ``The Cleaning Lady'',
with four workers. They charge R60 an hour and spend (on average) two
hours cleaning a house and ironing where necessary. Beauty's mother was also
a housewife.
Roderick Delaney graduated with a BCom and started working as an articled

clerk in a large auditing firm. He soon got bored, because his personality is such
that he needs to be in control and be creative. He started to approach people
for accounting jobs to do in his spare time. At first, he only helped others to
complete their tax returns. Then he bought a computer and started doing the
books for small firms. Today, he has his own business, giving financial and tax
advice and doing small audits.
Now answer the following question:

What makes the people in the above scenarios entrepreneurs?
Each of the persons in the above cases is an entrepreneur. This follows from the fact
that they all started their own businesses. Freddie, for instance, started on the road to
entrepreneurship when he was 12 years old. Beauty became an entrepreneur when she
started the cleaning business. Roderick started his accounting business when he did
accounting jobs in his spare time while still employed as a clerk.
23
2.3 The entrepreneurial process

The framework as explained in figure 2.2 of the prescribed book is a visual framework
that prospective entrepreneurs may use to help them in the process of starting a
business. You will see that the framework provides questions that need to be answered
by the prospective entrepreneur. If the person proceeds through these phases he or
she will be in a better position to succeed in the business venture. The phases are the
following:
. Abilities and skills. The main question here is: Do I the prospective entrepreneur
have the background/knowledge to be able to succeed in the business?
. Access to resources. For instance do I have enough finance to start the business?
. Opportunity/idea. Is there a chance that my idea will work?
. Feasibility. Is my idea feasible in terms of rands and cents?
. Business plan. Compile a business plan to obtain the necessary finance.
. Managing the business. Launch the business and manage it.
Skills
A skill is simply knowledge, which is demonstrated by action. Potential entrepreneurs
therefore need the following management skills:
. strategy skills to position the business in the competitive environment
. planning skills to plan for the future of the business
. marketing skills to identify the target market and meet the wants and needs of this
market
. financial skills to manage the finances of the business
. project management skills to organise the business activities
. human relations skills to deal with the workers employed by the business
Resources
Without resources no entrepreneur would be successful. So you need financial
resources, human resources and operating/physical resources. For instance, a spaza
shop selling groceries must at least have a proper room (part of the physical resources)
where groceries can be displayed (and with secure storage against unfavourable
weather conditions and theft).
Starting a new business or buying an existing business?

The advantages and disadvantages of purchasing an existing business versus starting a
new business have been debated for a long time. When it comes to starting a new
business, you have to consider all the factors about establishing a business (the size, the
structure, the location, the form of enterprise, etc). Buying an existing business means
you are buying a going concern with its opportunities, as well as latent problems that
you sometimes do not know about!
The concept of franchising lies somewhere between starting a new business from
24
scratch and purchasing an existing one. If you are thinking of opening a fast-food
business, for example, you could apply to a franchised operation like Wimpy to open a
Wimpy restaurant in a particular area. If your application is approved, it means you can
run a Wimpy restaurant as your own business, but have the advantage of getting raw
materials at a lower cost (because the Wimpy company purchases basic ingredients in
bulk for all its outlets) and you would be offering a standard product and service that is
already well known. However, you would have to manage the restaurant the way this
franchiser wishes its restaurants to be managed. Wimpy will also conduct regular
inspections to ensure that you adhere to its standards. You will also have to pay Wimpy
a regular fee for the right to use its name and to make use of its facilities.
Activity 2.2
Consult the website
http://www.wimpy.co.za/fr-overview.htm
where you will find a full discussion on the requirements and the problems of a
franchise operation such as Wimpy.
Activity 2.3
FROM STREET HAWKER TO THE OWNER OF A PROSPEROUS BUSINESS4
The responsibility of providing for a wife and three children was the driving
motivation for Mr Witness Ndamane to be a successful entrepreneur. After 23 years
working as a driver for a packaging company he was retrenched in 2000. He
frantically looked around for nearly a year to find a new job in the formal sector and
finally in desperation started hawking SAE40 cans of oil at stop streets to passing
taxi drivers. After a while he approached the Engen oil company and asked to be
appointed as a distributor to sell SAE40 oil in the Nelson Mandela Metropole. Engen
was interested in his proposal but redirected his efforts towards selling paraffin in
the townships, as there is a great demand for this product for cooking and heating
purposes. He installed a 1 000-litre tank of paraffin on his old delivery vehicle and
started selling to spaza shops and housewives who found it hard to get to the shops.
His sales immediately reached 3 000 litres a week. He decided to expand his
business by installing a 2 200-litre storage tank at his house that was regularly filled
up by Engen tankers. Today he has an additional 9 000-litre storage tank in the
industrial area and sells no fewer than 16 000 litres per week. Mr Ndamane
currently employs four people who work in his two paraffin shops in the townships.
Further growth was ensured when he was awarded a R900 000 contract spread
over three years by the Nelson Mandela Metropole to supply them with this basic
commodity. Current turnover varies between R1 million and R2,5 million per year.
Now answer the following questions:
1
What management skills did Mr Ndamane use in his quest to be a successful
entrepreneur?
2
What resources did Mr Ndamane use to start his business?
How did Mr Ndamane identify the new business opportunity?
25
Question 1
The skills required to be a successful entrepreneur are the basic functional skills required
to be a manager, namely to understand and apply the principles of management. In
other words, one needs to be able to plan and implement an idea and to control
aspects of a business and people. If we take a closer look we will see that Mr Ndamane
had some strategic skills. He was jobless and started to sell tins of oil to taxi drivers in
the area in which he lived. He realised then that he could do more than just be a
reseller of oil because there was a need for this kind of service (a reseller is a person
who buys a product with the intention of reselling the product and usually making a
profit from this effort). If he could convince Engen (the oil company) to make him a
distributor he would enlarge his business (a distributor is an organisation that sells the
product to different resellers who then sell it to the customer). This also means that he
had some planning skills because he saw the opportunity and planned to utilise the
opportunities available to him (ie to grow his business and to get other people to help
him sell the product). This brings us to the marketing skills that he used: he could see
that he was satisfying his customers (the taxi drivers) because he was offering them
convenience. The taxi drivers did not need to visit a shop to buy oil instead they could
buy it at a stop street on their taxi route. When he started the new paraffin business he
also fulfilled the needs of his other customers: housewives who could not travel to a
shop. Obviously Witness also had some financial skills because he realised that he could
buy tins of oil and resell them at a profit and so try to make a living. When he started
the paraffin business he really hit the jackpot! Even at a low profit of 10 cents a litre he
could be earning R100 000 per year with a turnover of R1 million. Witness also used
project management skills when he started the paraffin business. Just look at how he
organised an uninterrupted supply of paraffin, first installing a 1 000-litre tank at home
and thereafter as the business expanded an additional tank of 9 000 litres, ensuring a
steady supply of paraffin to his customers! When Witness started employing people (he
currently employs four workers in two shops) he was also using his human relations
skills, among other things by motivating them and communicating with these
employees in order to keep the customers happy.
Question 2
The resources used by Mr Ndamane are not clearly stated in the case study. There were
obviously some financial resources available to Witness when he was retrenched. In
terms of legislation he was owed some money by his previous job in the form of
severance pay. It is also mentioned that he was driving a delivery vehicle, which must
have been bought with money available to him. He also had some human resource
skills in that he was involved in the transportation business (maybe building up a
network of people who could help in his new venture) and he gained additional selling
and marketing skills in his hawking of oil at stop streets. He also had some operating
resources because he had a delivery vehicle to make it possible for him to sell the
paraffin to customers in the township.
Question 3
This question refers to the identification of opportunities by an entrepreneur. Mr
Ndamane had a business idea when he proposed to the Engen company that they
should make him a distributor of oil in the township. The problem was the venture's
feasibility. The investment opportunity was restricted because there are usually a
limited number of taxis operating in a certain township. How many litres of oil do you
sell per day to taxis? These would surely not be enough to be really profitable and to be
able to care for your family? The people from Engen had a better opportunity in mind
26
when they redirected Witness to the idea of selling paraffin. There is a proven need for
paraffin in the townships because it is used in Primus stoves to prepare food and for
heating purposes. It is also evidence that there was growth potential, because initial
demand for the product exceeded his initial expectations. The timing was right because
there was a latent need for an entrepreneur to provide a service to the spaza shops and
to the housewives in their homes.
2.4 Summary
You now have a basic insight into the concept of entrepreneurship and the
entrepreneur as the driving force behind the business. We have examined the role
of entrepreneurs in the economy and the reasons why people become entrepreneurs.
The business plan and the professional management of the new venture will be
discussed in the next study unit.
Self-assessment quesitons
Four friends, Thabo, Musomi, Sam and Robert, are having lunch at a
restaurant in Hillbrow. Each one had an opportunity to tell his life story. Here
are their stories:
Thabo: `Ì was born in a settlement near Grahamstown. My schooldays were
spent looking for empty bottles to return to the cafe
and the bottle store. I
earned nearly R5 per week picking up discarded bottles. After I finished
school I started working as a hawker selling sweets, cigarettes and cold
drinks. I struggled for a long time and went bankrupt twice. But I persevered
and moved on to open a retail store in Mamelodi selling groceries, cold
drinks and cleaning materials. I am a self-made man and I used my own
savings to open my retail store. Today I provide work for 5 people.''
Musomi: ``My mother told me that I must study hard at school and that I
must look for a good job in the Civil Service here in Gauteng. I started
working for the Gauteng Education Department and today I am in charge of
the accounting section. I am responsible for all the expenditure by the
Gauteng Education Department. There are 20 people working under me. I
take a great financial risk, because if money is unaccounted for, I will get into
serious trouble and will lose my job.''
Sam: `Ì am unemployed; I am a Rastaman; and I hero-worship Che Guevara,
Fidel Castro and Joseph Stalin. You, Thabo and Musomi, are exploiters of the
working class! Government must give us all work and we must earn the
same salary.''
Robert: `Ì started a business buying second-hand cellphones. I borrowed
money from my uncle who helped me to set up the business. I work for
myself and currently don't employ anyone. I buy cellphones for an average
price of R50 and I resell the renovated phones for R150. I am innovative and
I am in charge of my own destiny. Someday I will be as rich as Patrice
Motsepe.''
27
How many of the four friends would you identify as being entrepreneurs?
a
How many people are employed by this/these entrepreneur(s)?

a
Below is a summary of the psychological traits of entrepreneurship that we have

identified in Thabo, Musomi, Sam and Robert. Which of these descriptions are
correct?
a
Thabo:
achievement motivation; locus of control; innovation and creativity;

risk-taking; commitment
Musomi: achievement motivation; locus of control; risk-taking; commitment
Sam:
Locus of control; high level of energy
Robert:
achievement motivation; locus of control; innovation and creativity;

risk-taking; commitment
How many of the four friends are running a small business?

a
4
Question 1
By way of elimination we see that Sam cannot be an entrepreneur, because he is not
working. Musomi is also not an entrepreneur because he is not involved in being
28
innovative; neither is he identifying new opportunities; he is definitely risk-averse

because he is working with government money, etc. Looking at the remaining two
friends we see that both fit the bill as being entrepreneurs. Let us take Thabo for
example, who early in his life identified an opportunity to make money by collecting
cool drink bottles. He saved money to open the retail store in Mamelodi, so he was able
to find resources; he furthermore took the financial risk of opening the store and he is
managing a small business employing five people. Robert also has some entrepreneurial characteristics: having innovative ideas, identifying a unique opportunity, financing
himself, etc. To summarise, the correct answer is that two of the friends are
entrepreneurs; so the correct answer is option c.
Question 2
Leading on from question 1 we can say that if Thabo and Robert are the only
entrepreneurs then they are employing five workers between them. The correct answer
is option c.
Question 3
The psychological variables that distinguish individuals as entrepreneurs are the
following for Thabo and Robert:
Thabo has achievement motivation. He wanted to succeed even after two business
failures. He has a strong locus of control because he thinks he is in control of his life.
Thabo is innovative in that he identified a need in the market by opening a retail store
in Mamelodi. Opening and running your own business certainly involves risk-taking.
Finally Thabo also shows he has commitment to succeed.
Robert has the same motivations: achievement motivation, locus of control, innovation
and creativity, risk-taking and commitment so the same as for Thabo. Options a and d
are correct.
Question 4
Only Thabo and Robert are running small businesses. The arguments used above
confirm that they are entrepreneurs and running small businesses. We see that these
two entrepreneurs employ a few employees, have relatively low turnover and there is
direct involvement by the owner manager so option c is correct.
References
1
2
3
Herrington, M, Kew, J, & Kew, P. 2008. Global Entrepreneurship Monitor (South African Report). UCT Graduate
School: Cape Town. p 2023.
http://www.saen.info/successful_entrepreneurs.htm
http://www.etu.org.za/toolbox/docs/government/sbd.html (accessed 23 February 2010)
29
Study unit 3
Establishing a business
Contents
Key concepts
Learning outcomes
Getting an overview
3.1 The importance of geographical location for the success of a business
3.2 The legal forms of ownership in South Africa
3.3 Developing the business plan for a new venture
3.4 Summary
Key concepts
legal personality
partnership
control
authority
ownership of a business
tax liability of a business
sole proprietorship
business location
close corporation
company
legal requirements
business plan
Learning outcomes
. identify the factors that influence the location of a business
. distinguish between the different forms of ownership that are found in South
Africa
. discuss the key considerations that are applicable when a form of business has to
be chosen
. describe the objectives of, importance of and need for a business plan
. describe the various components that compose the business plan
. write up a business plan
Getting an overview
Read through section 3.1 in the prescribed book.
30
Study unit 2 elaborated on the importance of entrepreneurial activity within society.

The entrepreneur needs to consider a number of things when establishing a new
business. This study unit will focus on the factors that influence the choice of location
for a new business, as well as different legal forms of ownership that are available to
the entrepreneur. Once you know what the available options are you can then put
everything together by drawing up the business plan for your new business.
3.1 The importance of geographical location for the success of

a business
Geographical location
The choice of geographical location for specific business premises is extremely
important to all kinds of businesses, although it may be even more important for some
than for others. For example, the success of most retail organisations depends on the
location of the business. Depending on the nature of the proposed product or service
to be offered, the entrepreneur should, for example, decide whether the business
needs to be located either near its market, or near its sources of raw materials; near to
other competitors, in the city centre, in the suburbs, in a rural area, in existing industrial
areas, or according to personal preference. Woolworths, for example, uses the
following criteria to select the premises of its stores:1
. The premises should be located in close proximity to other national retailers,
banking facilities and other amenities.
. The site should provide adequate security.
. There should be convenient parking facilities. The building must comply with
Woolworths' specifications regarding size, quality of finish, etc.
It is important to know that no two businesses are alike and that different factors might
therefore influence the choice of location, depending on the nature of the business.
Location factors
Study section 3.4.2 in your prescribed book.
Location factors can be described as those factors you need to consider when selecting
the geographical location of a new business. These factors include the following:
.
.
.
.
sources of raw material

availability of labour
proximity and access to the market
availability and costs of transport facilities
31
.
.
.
.
.
.
.
.
.
availability and costs of power and water

availability and costs of a site and buildings
availability of capital
attitudes, regulations and tariffs of local authorities
the existing business environment
the social environment
climate
central government policy
personal preferences
The example below illustrates how establishing the first Trendy Concepts store in the
right geographical location ensured its widespread success.
Trendy Concepts the importance of site selection when starting a business2
Selecting the right location when starting a new business venture can drastically influence the success
or failure of the business. Kathleen Fitzgerald, for example, decided to start her own business by
importing a variety of products from Germany to sell in South Africa. She borrowed money from her
husband and ordered her first container filled with products that ranged from clothing to kitchen
utensils. When the 10 m2 container arrived, she could not find a shop interested in selling her stock
and she had to sell the goods from the pavement near her home. Kathleen then decided to try to sell
her products in Dullstroom, a town in Mpumalanga that centres on trout fishing and other tourism
activities. Dullstroom is a popular tourist destination and people frequent the town to participate in
leisure activities and to shop in the many interesting retailing outlets centred around the main street.
Her intuition served her well and she established her first shop in Dullstroom three months later, and
within another two months she had opened her second shop. Kathleen now owns 17 Trendy Concept
shops countrywide and her business has a turnover of R7 million a year. The Trendy Concept stores are
sourced from a 400 m2 warehouse in Benoni that employs six full-time employees.
Activity 3.1
Identify the most important factors that you would have considered in selecting a
geographical location for Trendy Concepts' first store as well as its warehouse.
The factors discussed will now be evaluated in order to illustrate each factor's
importance with regard to the Trendy Concepts example. You will see that some of the
factors are more important than others. This is mainly because of the aim of the Trendy
Concepts store, which is to sell a variety of durable goods to upmarket customers.
32
Table 3.1:
The most important location factors
Location factor
Influence on geographical location
Sources of raw materials
This factor was very important in deciding to

locate the warehouse in Benoni. Seeing that
Kathleen Fitzgerald imports all her products from
Germany, it is ideal that the warehouse in Benoni
be situated near the Johannesburg international
airport (Oliver Tambo International). Once at the
warehouse, the products can easily be distributed
to the 17 shops countrywide.
Availability of labour
This factor was less important as Kathleen did not

at first need many employees.
Proximity and access to the market
Dullstroom is a very busy town and attracts many

upmarket consumers looking for something different. Dullstroom therefore provided Kathleen
with ideal access to her target market.
Availability and cost of transport facilities
Kathleen could easily and relatively inexpensively

transport her products from Johannesburg to
Dullstroom.
Availability and costs of power and water
Although small, Dullstroom had an established

infrastructure. So this factor was less important.
Availability and costs of a site and buildings
The cost of property in Dullstroom did not differ

significantly from that in Johannesburg.
Availability of capital
Kathleen's husband provided the necessary startup capital. The risk involved in opening a shop in
Sandton City could be higher.
The attitudes, regulations and tariffs of local Local authorities welcome entrepreneurs who
authorities
attract tourists to Dullstroom.
The existing business environment
The existing business environment provided the

ideal opportunities for Kathleen to open her first
shop.
The social environment
This factor was less important, as the first shop did

not need many employees in need of satisfactory
educational, medical, recreational and shopping
facilities.
Climate
This factor did not have a major influence on

Kathleen's decision.
Central government policy
This factor did not have a major influence on

Kathleen's decision.
Personal preferences
This factor played an important role in Kathleen's

choice to situate the shop in Dullstroom. She
clearly states that the decision was mostly based
on intuition. Opening the first two shops in
Dullstroom could also have been inconvenient
for Kathleen, especially if she had to operate the
shops from her home in Benoni.
The above discussion and examples explain the importance of selecting the right
geographical location for a new business as well as the different location factors that
33
need to be considered in the process. Another important consideration in the process

of establishing a new business is the legal form of ownership best suited to the new
business venture. We discuss this in more detail in what follows.
3.2 The legal forms of ownership in South Africa

When establishing a new business in South Africa, it is important to be able to
distinguish between the different forms of ownership. Note that the terms ``form of
ownership'' and ``form of business'' are used interchangeably. It is also important to be
aware of the key considerations that are applicable when a form of ownership has to be
chosen. Some of the considerations to be aware of when choosing a form of enterprise
are the following:
. the entity's legal or juristic personality
. the limited liability of owners or members when legal action is taken against the
business
. the degree of control that the management or entrepreneur will be able to exercise
. the potential for capital acquisition
. compliance with legal formalities and regulations
. taxation
. the ease with which the business or entrepreneur's interest can be transferred
The types of ownership covered in this section include the following:
.
.
.
.
.
.
.
the sole proprietorship

the partnership
the close corporation
the company
the business trust
co-operative society
joint ventures
When you study this section it is important to understand the key differences between
these forms of ownership. You should write down these differences and make sure you
understand them. The differences between the forms of ownership can be studied in
terms of the following:
.
.
.
.
.
.
.
.
.
.
number of owners/directors/members (shareholders)

legal personality
capital acquisition potential
subscription to shares
regulations regarding the name of the organisation
legal regulations/prescriptions
liability of members/shareholders
tax liability
distribution of the organisation's profits
transfer of ownership
34
. continuity of the organisation

It is very important that you are aware of the effect the Companies Act 71 of 2008 has
on all the forms of business ownership. This Act was promulgated in April 2009.
Note that a close corporation should not be confused with a co-operative society,
which is a form of business found mainly in the agricultural sector. A co-operative
society is a jointly owned business enterprise normally structured by farmers or
consumers. The co-operative society is formed and operated for the benefit of its
owners and normally produces and distributes goods and services.3 Some benefits for
the owners of a co-operative society include the following:4
. They are able to make use of economies of scale.
. Equity is generated (co-operative societies also play an important role in land reform
schemes).
. There are increased incentives for workers.
. The public good is encouraged on a higher level because the co-operative society
creates employment opportunities with a ripple effect of positive spin-offs for small
towns.
Table 3.2 and figure 3.1 below illustrate the total number of registered businesses in
South Africa for the period 2000 to January 2010.
Table 3.2:
Registered businesses in South Africa for 2000 to 31 January 20105
Total registered
entities per year
as at 31 January
Close
corporations
Public companies
Private companies
Non-profit
(section 21
company)
2000
77000
2009
2010
86396 107307 110721 128750 186078 228304 225065 264571 231146
2001
2002
2003
2004
2005
2006
2007
2008
12022
304
269
252
252
211
333
270
281
190
136
29595
27572
29580
29330
33754
41213
36152
32745
26562
21935
1406
987
1353
1652
1931
1760
2214
2113
2214
2098
2166
132
Have you noticed how skewed the statistics are in terms of close corporations and all
the other business entities? Also notice the sharp increase in the registration of CCs in
the last ten years, with a slight decrease in 2009 due to the change in legislation.
35
Figure 3.1:
Registered entities with CIPRO6
We can expect even further decreases in the registration of CCs in the future due to the
change in the Companies Act. Refer to the section in your prescribed textbook for
possible reasons for this.
Legal personality
One of the concepts that some students find difficult is that of legal personality. When a
business has a legal personality of its own (ie a company or a close corporation), it
means the business is just like a person in his or her own right. For example, if a
partnership purchases property, the property is registered in the partners' personal
names because a partnership does not have its own legal personality. In other words,
the property belongs to the partners personally and not to the partnership as a form of
business. If a company, however, purchases property, the property is registered in the
company's name, not in the owners' (shareholders') names. The property therefore
belongs to the company. Another example is that if creditors sue a sole proprietorship,
the claim will be against the owner of the sole proprietorship in his or her personal
capacity. This is because a sole proprietorship does not have a legal personality.
However, if creditors sue a company, the claim is against the company and not against
the shareholders or the directors personally. This is because the company is a legal
personality on its own.
South Africa has seen some legislative changes being made to the Companies Act.
Refer to the individual sections in your prescribed textbook which cover these changes.
After choosing the geographical location as well as deciding on the most relevant form
of ownership, it is very important to develop a business plan for the new business
venture.
36
Activity 3.2
Table 3.2 and figure 3.1 above show a decrease in the number of new companies
and close corporations registered between 2003 and 2004. What could be the main
reasons for the decline in registrations for these forms of business?
Some of the main reasons for the decrease in registrations are listed below:
.
.
.
Strict regulations surrounding the registration process as well as strict requirements

for disclosure may discourage people from registering their new organisations as
close corporations or companies.
Difficult economic times may also have been a reason for the decrease in
registrations.
An increase in the informal sector of South Africa in recent years may be another
reason.
3.3 Developing the business plan for a new venture

In this section we discuss the objectives of, importance of and need for the business
plan. We also examine the components and the development of the business plan for
the new organisation.
Objectives
3.3.1
The objectives and importance of the business plan
The business plan has three main and five additional objectives. The example below
illustrates the objectives of the business plan.
Alternative sources of energy7
The majority of the South African population relies on traditional forms of energy, such as coal, liquid
petroleum gas (LPG) and paraffin. These sources of energy often entail health and safety risks.
Notwithstanding the social costs of these forms of energy, there are also the issues of the increases in
the oil price and diminishing oil resources worldwide.
It is mainly due to the reasons mentioned above that alternative sources of energy are being explored.
Some of the alternatives to liquid fuels include biodiesel and ethanol. Ethanol is produced from sugar
cane, as well as from maize and soya beans. The ethanol is then used in the production of a gel that
burns effortlessly and which cannot spill as easily as paraffin. The use of gel might lead to a decrease in
the number of household fires, and other benefits include that it is a renewable form of energy and
that it is less harmful to the environment. The production of ethanol can also create many jobs as well
as provide business opportunities for South African entrepreneurs.
The main objectives of the business plan can be described as follows:

. It identifies the nature and context of the business opportunity. (Why does the
opportunity exist?) In the above example an opportunity exists because the South
37
African government is investigating new sources of energy for domestic

consumption. This is because oil prices are very high and traditional sources of
energy have health and social risks for the poorer segment of the population.
. It explains how the entrepreneur will develop this opportunity. The entrepreneur
can exploit the above business opportunity and start a business that sells gel as an
alternative source of energy in the townships. The business plan will, by means of its
components (general company description, products and services plan, marketing
plan, management plan, operating plan and financial plan), explain how the
entrepreneur will develop the above opportunity to its fullest potential.
. A third objective of the business plan is to attract investors or to convince a bank or
other institution or person who provides financial resources to lend the
entrepreneur the money needed to establish the new business. In the case of the
alternative sources of energy, the business plan will illustrate the viability of the
business idea to potential investors.
The following additional objectives that flow directly from the main objectives are
achieved:
. The new venture's chances of success in the market are evaluated systematically and
realistically. The planning that goes into developing a business plan might reveal that
gel is far more expensive than paraffin for example, and that the target market
(people in rural townships) are very price-sensitive.
. The key variables that will determine the success of the new venture, as well as the
primary risks that may lead to failure, are identified. A key variable might be that
government will subsidise the production and distribution of the gel and that it may
enforce the use of the gel above other sources of energy.
. The business plan describes how to manage the business successfully. The business
plan includes a management and operating plan.
. The business plan is a management instrument for comparing actual results against
targeted performance. The business plan can act as a framework against which the
performance of the business, once it is established, can be evaluated.
When drawing up your business plan, you may consider issues such as black economic
empowerment (BEE). BEE can be defined as `à strategy aimed at substantially
increasing black participation at all levels in the economy''.8
Black economic empowerment in South Africa
An example of a BEE initiative in South Africa is that of Masana Petroleum Solutions taking over the
commercial division of BP Southern Africa (BPSA). The deal was worth R265 million and aspires to
benefit more than 400 000 previously disadvantaged South Africans. Masana Petroleum Solutions will
supply energy and fuel management services and BP fuels and products to, among others, the mining,
manufacturing, industrial, transport, construction and public sectors. BP's existing commercial clients
have all already contracted with Masana, which provides the company with 7% of South Africa's
business-to-business market. BP still holds a 45% minority interest in Masana while the management
and staff of the company respectively hold 15% and 5%.9
3.3.2
The components of the business plan
The prescribed book sets out the content of the business plan in detail. Make sure you
understand it well.
38
Cover page and executive summary

Remember that it is very important to make a good impression on the cover page of
your business plan. Study tables 3.2 and 3.3 in the prescribed book which give an
overview of a business plan. Another very important part of the business plan is the
executive summary, because it holds together and unifies all the other components of
the plan.10
Investors or other stakeholders often only read the executive summary. So it should
provide an accurate overview of the rest of the plan and should be written last.
Content of the business plan

The entrepreneur must first give a brief but accurate description of the new venture.
After that follows the body of the business plan. The prescribed book has 15 very
useful questions to be answered in this section of the plan. Take note of them.
It is very important for entrepreneurs not to become infatuated with their product or
service and simply believe or hope that there is a market for it! Therefore the analysis of
the new venture's market and the development of a marketing strategy is a must.
Financial analysis
The financial analysis is another crucial component of the business plan. The
entrepreneur's projections of a new venture's profits, its required assets and its
financial requirements over the next one to five years should be supported by
substantiated assumptions and explanations of how the costs, profits and financial
requirements are determined. To make the necessary financial projections the
entrepreneur must first have a good understanding of financial statements and how
to interpret them.
So the following are key matters to understand in this section:
. how financial statements work
. how profitability is assessed
. how a venture's financial requirements are determined
Chapter 13 of the prescribed book deal in depth and detail with these matters and they
will be discussed in module 2 (MNB1601).
3.4 Summary
In this study unit the most important location factors were discussed as well as certain
factors regarding the different legal forms of business. We also discussed the
characteristics, advantages and disadvantages of the sole proprietorship, the close
corporation, the partnership and the company. The study unit also examined the
development of the business plan for the new venture.
No business functions in a vacuum. Businesses influence and are influenced by the
environment in which they function. In the next study unit we will take a closer look at
the business environment.
39
Study the following case study and then answer the questions:
Establishing a small information technology business in South Africa11
Steve has a small business of his own that was launched in October 2009.
When he started working on it in about June or July 2009 he was very
excited. After a fair-sized payment to his web developer he got it off the
ground and soon had his first subscribers. In the beginning he had grand
ideas about how the business should be run. His prices were half those of his
closest competitor and the website design was simple. Five months after
launching his website, he realised his target market did not want what he
offered. This really came asa surprise to him.
He also realised that his web developer did not share his vision for the site
and they parted ways. When he met with new developers he came to see
that, for his venture to work, he needed to look at the business from another
perspective. Steve decided the website needed a complete redevelopment
and that he needed money to do it properly. He needed to find lots of it too
(since the site wasn't producing much money and he was funding it himself).
Clearly he had to do more homework and had to find some start-up capital
to reinvent the website. There was no point putting up a mediocre site or
even a site that was just like the rest. One thing he had learnt thus far from
his extensive blogging career was that his site had to be distinguishable from
the rest and had to be dynamic if he hoped to attract people to it and keep
them coming back. A blog12 (also called a web log) is a `frequent,
chronological publication of personal thoughts and web links, according to
marketingterms.com. A blog is in the form of a journal and is a mix between
what is happening in a person's life and what is happening on the Web.
One of Steve's questions was how a small-business owner trying to establish
a new business goes about securing venture capital. Money tends to make
things happen far more quickly and effectively. To Steve, it had become the
oil that lubricates the many ideas that could become brilliant realities and
that could help him make his business really successful.
1
2
3
Explain to Steve how a businessplan would have helped him before he

launched his business.
What are the most important components that Steve should have included
in his business plan? Give reasons for your answer by referring to the case
study.
Identify the internal end external stakeholders in a business plan.
You may find it very interesting to put yourself in the shoes of an

entrepreneur and do the skills assessment on yourself. See table 3.1 in the
prescribed book. This assessment will show you whether you have the skills
to prepare a business plan.
40

Question 1
Drawing up a business plan is the first thing Steve should have done before starting his
business and investing a lot of money in it. A business plan gives you a framework
against which to launch, run and grow a new business venture. Without a business
plan, few investors will consider funding a business.
You should have discussed all the objectives and benefits of the business plan. We all
know that having objectives is very important, especially if you want to make a success
of something. By doing this activity you should have realised the importance of the
business plan. You now also see that the business plan may have more than one use,
because entrepreneurs can use their plans for different purposes.
The following are some of the things that a business plan can do for you as an
entrepreneur:
.
.
.
.
.
.
.
.
It helps you to organise your thoughts on paper and gives structure to your ideas
and thoughts, thus giving you insight into yourself.
It can help you to identify your objectives to show where you are heading and what
vision you have for the future.
It can help you to develop strategies to meet your objectives.
It helps to identify problems and suggests ways to solve or avoid problems.
It also points out gaps which you as an entrepreneur may not have thought of
when planning your business.
By defining activities and responsibilities it creates a structure for your business.
Another important aspect is that it helps you to obtain the necessary financing to
start your business.
It helps you to communicate your ideas to others and gives credibility to your ideas.
Question 2
Discuss the following components of the business plan and give examples of what
Steve should include under each heading:
.
.
.
.
.
.
.
.
executive summary
general description of the venture
products and services plan
marketing plan
management plan
operating plan
financial plan
supporting materials
The stakeholders are as follows:

Internal stakeholders
a
b
new venture management

employees
External stakeholders
a
b
c
customers
investors
banks
41
References
1 Woolworths. Franchise. Doing business with us. [Accessed 26 February 2010]. Available: http://www.woolworths.co.za/caissa.asp?Page=ITB4_RHContext&Post=FAT_Business_Int_Disclosure.
2 Naude, C. 2004. Taking a flyer. Finance Week (30 March).
3 World reference. Available: http://www.wordreference.com/definition/cooperative. [Accessed 8 June 2005].
Princeton University.
4 Roth, M. 2003. Best institutional arrangements for farm worker equity share schemes in South Africa. Durban:
University of Natal.
5 Companies and intellectual property registration office. 2010. Registration statistics. Available:
http://www.cipro.co.za/about_us/registration_stats_asp. [Accessed 26 February 2010].
6 Companies and intellectual property registration office. 2010. Registration statistics. Available:
http://www.cipro.co.za/about_us/registration_stats_asp. [Accessed 26 February 2010].
7 Inggs, M. 2005. SA seeks alternatives to supplement liquid fuels. Business Report. Available: www.businessreport.co.za [Accessed: 2 June 2005].
8 Clark, S & Drimie S. 2002. Energy sustainability for South Africa's poor: weighing up the alternatives. Eldis.
Available: http://www.brain.org/static/DOC12952.htm [Accessed: 2 June 2005].
9 SABC News. April 29, 2005. New BEE fuel and energy management firm. Available:
www.sabcnews.com/Article/PrintWholeStory/0,2160,103255,00.html. [Accessed: 9 May 2005].
10 Chait, G. 2005. Charm investors with your business plan. Business Report. Available: http://www.busrep.co.za
[Accessed: 13 June 2005].
11 http://wiredgecko.typepad.com/neuvo/2005/04/growing_a_small.htm [Accessed: 18 May 2005].
12 http://www.marketingterms.com/dictionary/blog
42
Study unit 4
The business environment
Contents
Key concepts
Learning outcomes
Getting an overview
4.1
The organisation and environmental change
4.2
The composition of the business environment
4.3
The micro-environment
4.4
The market or task environment
4.5
The macro-environment
4.6
Environmental scanning
4.7
Summary
Self-assessment question
Key concepts
business environment
micro-environment
market environment
environmental change
macro-environment
composition of the business
environmental scanning
environmental SWOT analysis
Learning outcomes
.
.
.
.
.
explain the meaning of environmental change

explain the nature and composition of the business environment
discuss each of the components of the environmental model
explain how each of the environmental variables can impact on an industry or an
individual business
describe some ways in which management should respond to the influences of
the environment
43
Getting an overview
The South African business environment is dynamic and changes from day to day. A
company exporting products to or importing products from the European Union (EU)
or the United States experiences constant fluctuations in the economic environment.
An example is the daily change in the official exchange rate of the rand against the euro
and the US dollar. Another variable that impacts on organisations and customers alike
is the dramatic changes in the price of petrol. Petrol, a basic commodity, currently costs
close to R10 a litre and this has a negative effect on the inflation rate, and ultimately
on economic activity. Climate changes in South Africa may also have a negative effect
on businesses and the individual customer alike. Prices of basic foodstuffs like
vegetables are influenced by periods of drought, cold spells and wet spells. This study
unit introduces you to the environment in which the business organisation functions,
and explains how the environment impacts on business.
4.1 The organisation and environmental change

The effect of change

Change can be described as an alteration to the status quo implying in a business
sense that there are alterations in the business environment which the business must
take note of. Some years ago in his book, Future shock, Alvin Toffler predicted that the
rate of change in society would increase dramatically, and that most people would have
great difficulty just keeping up. Practical examples of the increase in the rate of change
are to be found in the convergence of different elements of telecommunications.
Today's cellphone is a mini-computer giving you access to your e-mail, for example a
function that was previously only possible on your computer. More and more we are
seeing that changes in technology are occurring at a faster rate. The long-playing vinyl
records of the 1960s were replaced by compact disks (CDs), which were then replaced
by DVDs and MP3 equipment. Older people are usually more affected by these rapid
changes than younger people. In the business world we also see older business people
struggling to keep track of changes in technology and its impact on the business.
Section 4.2 of the prescribed book describes some of these changes and the effect they
may have on a business. You do not need to memorise the details of these changes,
but you do need to understand how important it is for management to continuously
monitor changes in the environment that will affect the business. Also look at the
example below which shows how South African clothing manufacturers were
negatively influenced by a dramatic change in the business environment, namely the
strong export drive by China which has resulted in cheap clothing entering the market.
44
The impact of international competition on the business environment of

South African clothing manufacturers1
South Africa is fighting back to protect its textile industry against Chinese competition. The influx of
cheap Chinese clothing into South Africa has caused hefty job losses and the closure of textile
manufacturers throughout South Africa.
The South African clothing industry has shed more than 4 000 jobs since January 2005, when global
trade quotas on textiles were scrapped.
The latest casualty in the clothing crisisis at Rex Trueform, which is based in Salt River in the Western
Cape, where the imminent closure is threatening some 1 000 jobs. Rex Trueform faces liquidation after
it accumulated debts of more than R70 million.
Manufacturers are considering asking government to take up the matter with the World Trade
Organization (WTO).
Under the terms of China's accession to the WTO, its trade partners can take action to limit Chinese
textile imports during a transition period running until 2008 if they can prove that the imports are
disrupting the markets.
4.2 The composition of the business environment

Defining the business environment

It has been stated that the business environment is dynamic and that the business must
adapt to changes in the environment. The business environment in which the business
operates can be defined as the sum of all those variables which may influence the
successful existence ofthe organisation.
The three sub-environments of the business environment

The functioning of the business environment can be explained by subdividing the
business environment into three sub-environments: the micro-environment, the
market environment and the macro-environment.
The micro-environment refers to the business itself the workers and managers, and
the functional areas into which a business is divided, such as the financial section and
the marketing section. The main characteristic of the micro-environment is that
management has almost complete control over things that happen in this
environment. Management can, for instance, decide on the price that it will charge
for the product it sells, or how it is going to market the product to the customer.
The market environment refers to the immediate external sub-environment that has
a direct influence on the business. For most businesses, this environment comprises
consumers (also called customers), competitors and suppliers. It may also include
middlemen (or distributors). For example, Ford Motor Corporation manufactures and
markets automobiles in South Africa. The actual selling of the vehicles, however, is
45
done through a network of independent dealers (ie the intermediaries). Management

can exert some control over this environment, but certainly not as much as it can over
the micro-environment.
The macro-environment refers to the greater external environment that will
influence the business to a greater or lesser extent. Take the impact of an economic
recession for example. A recession may have a tremendous impact on future expansion
plans, on production volumes, purchases and labour employment for the business.
Management probably has the least control over what happens in the macroenvironment. The effect of an increase in the interest rate by the Reserve Bank must be
accepted by the business and it must live with the consequences of this increase.
Characteristics of the business environment

Section 4.3.2 of the prescribed book sets out some important characteristics of the
business environment:
. The variables are mutually related that is changes in one variable will often bring
about changes in another. To illustrate this point, let us look at the following
scenario: a shortage of crude oil and a resultant increase in the international oil price
will have negatively affected (by increasing) the inflation rate in South Africa. The oil
supply forms part of the international environment and the inflation rate forms part
of the economic environment. For some businesses the oil supply can also be seen
as part of the market environment that is, the suppliers!
. There is evidence of increasing instability in the sense that nothing stays the same
for very long. Look for instance at the daily fluctuations in the rand US dollar
exchange rate.
. There is growing uncertainty about the future even the immediate future is
difficult to predict because of a lack of information or the unreliability of information.
Who knows what the rand US dollar exchange rate will be next year!
. It is a complex environment because of the many variables that may cause and
influence change. Various components in the three sub-environments may change
at the same time. There could be a strike at the business, which would affect the
output and profitability of the business; at the same time the retailers who are
stocking the product may be demanding increased supplies, while the Chinese
exporters may be exporting more competitive products to South Africa. We see
here that variables in the micro-environment, the market environment and the
macro-environment are simultaneously at play and are influencing this business.
Activity 4.1
Identify the three sub-environments of the business environment for an organisation
such as Shoprite and briefly describe the influence of each of these subenvironments on this business.
Shoprite is the largest supermarket chain in Africa and one of the ten largest in the
world. As such Shoprite is exposed to all the variables that were mentioned as part of
the business environment above. Let us take a look at the influence of the three subenvironments on Shoprite's operations:
46
. Micro-environment
In this sub-environment we see that essentially Shoprite has complete control internally
over the running of the business. It can formulate its vision and objectives, determine
its objectives and set up an organisational structure that makes it easier to manage this
vast business which is represented in a major number of African countries. It also has
control over resources such as capital and human resources. One of its major problems
is the scourge of HIV/Aids and how this impacts on its most valuable resource, namely
its employees. Because of the size of the organisation, it has a limited influence on the
market environment as it sells a major share of grocery products in the countries in
which it operates.
. Market environment
The market environment consists of the customers, and the suppliers of grocery
products such as the manufacturers of the range of McCain frozen vegetables.
Intermediaries are also involved, such as the transporters of the groceries from the
manufacturer to Shoprite's warehouses. There are also the competitors in this
environment such as Pick n Pay and the Spar chain of supermarkets. They are all
competing for the money in the customer's pocket. The market environment has an
influence on Shoprite's micro-environment through especially the intensity of the
competition and the changing needs of the customer.
. Macro-environment
This is the sub-environment in which matters such as an increase in taxation or a
lowering of the interest rate influence the market environment, for example putting
more or less money into the customer's hands. These changes in the macroenvironment will thus have an indirect influence on the profitability of the Shoprite
group.
Visit the website of the Shoprite group (http//www.shoprite.co.za) for more
information on this group.
4.3 The micro-environment

Components of the micro-environment

This sub-environment has the following three components:
4.3.1
The mission and objectives of the business
The Pick n Pay retailing group has the following group mission statement2 which says a
lot about the organisation: ``We Serve with our Hearts we create a Great Place to be
47
with our Minds we create an excellent Place to shop.'' In its mission statement Pick n
Pay indicates its intention to serve its customers while striving to make its organisation
the preferred place where customers do their shopping. The objectives of this retailing
group are usually measured in terms of market share, of profits to be realised, and even
of worker empowerment. These objectives are usually a confidential matter and are
not divulged to the public because they could land up in the hands of the competition.
4.3.2
Organisational functions
Among other things organisational functions refer to the purchasing of the necessary
supplies and the logistics of getting the supplies to the right place; the marketing
efforts needed to meet the needs and wants of the organisation; and the financial
expertise needed to ensure that the profits are calculated correctly and that the taxes
paid to the South African Revenue Service are correct and paid over on time.
4.3.3
Human resources
The human resources of the business form an important asset that must be carefully
nurtured and developed to make a business successful without the necessary skilled
and enthusiastic personnel, many a business has been forced to close its doors. One of
the major problems facing South African businesses is the impact of HIV/Aids on the
workplace and on employees. Although the HIV/Aids problem can be seen as part of
the macro-environment, and more specifically as part of the social environment,
managers must note its implications for the specific business that they are managing. It
is a fact that South African businesses cannot afford to lose highly skilled workers to
this debilitating illness. Businesses vary in their approaches to managing HIV/Aids in
the workplace. Business practices that contribute to mitigating the effects of the illness
and preventing its spread include the following:3
. Gathering information from partnerships and collaborations. Partnerships or
collaborations with external experts, local and international NGOs, academic
institutions, government bodies, multilateral institutions, labour unions or employee
associations are critical to the development and implementation of an HIV/Aids
programme.
. Creating an HIV/Aids policy. A written statement by the organisation describes its
policy on HIV/Aids; if possible people living with HIV/Aids should be involved in
drawing up this statement. Businesses where employees are at risk of workplace
exposure to HIV should spell out training requirements, safety procedures and
equipment, and have a plan for responding to workplace exposure to the virus.
. Involving multiple stakeholders in policy and programme development. The
organisation should seek feedback from local and international NGOs, academics,
health experts, unions and employees to make sure that a policy is thorough, fair
and just, and that it addresses the concerns and questions of workers. During
programme development, the Ford Motor Corporation of Southern Africa held a
series of round-table discussions with stakeholders to gain the support of the
community and feedback on its HIV/Aids policy.
. Approaching HIV/Aids as any other debilitating disease. From a policy perspective,
approaching HIV/Aidsas any other progressive disease will help remove its stigma
and make employees living with HIV/Aids less likely to suffer discrimination, and so
encourage them to come forward for treatment.
48
Designing workplace HIV/Aids programmes to fit local cultures. The organisation

should develop policies and programmes to deal with the circumstances
surrounding HIV/Aids prevalence, the primary mode of transmission, the level
of work force education, and cultural norms and it should take account of local
cultures and conditions.
Ensuring that the HIV/Aids policy is a living document.The organisation should
ensure that the policy is driven at all levels and by all units within the organisation,
so that it is not viewed as only a human resource policy.
Using a comprehensive approach. It is important to follow an approach that
focuses on prevention, education and treatment. A programme that focuses only
on providing access to drugs while ignoring behaviours will ultimately not have a
significant impact on workers' behaviours and attitudes.
Intervening early. Early intervention is one of the most important strategies of any
HIV/Aids programme. Organisations such as Eskom, with education programmes
dating back to the late 1980s, claim to have lower prevalence rates in their work
force than other businesses in their community because they made HIV/Aids a
business priority early on.
Getting support from the organisation's leadership. Clear support from leadership
is critical, particularly with respect to obtaining resources for comprehensive
programmes.
Providing ongoing education and training. The organisation should reinforce and
expand the organisation's HIV/Aids policy by providing education and training for
all employees, starting with the orientation of new employees. Include information
on the illness, how to prevent HIV infection, appropriate workplace conduct, and
legal issues that may arise; and provide guidance for managers and supervisors on
complying with laws and regulations, managing benefits, accommodating
employees with HIV/Aids, and helping employees who ask for counselling.
Ensuring legal compliance. The organisation should gain a full understanding of
the laws and regulations governing workplace practices with respect to HIV/Aids
and be certain to learn about new legal developments as they arise.
Supporting employees with HIV/Aids. Employees with HIV/Aids should be helped
to balance their job demands and stresses associated with illness-related issues
through support groups, flexible work scheduling, telecommuting and extra time
off. Nutrition and exercise programmes have proven particularly effective in
improving lifestyle and maintaining productivity.
Giving employees opportunities to support the fight against HIV/Aids. Where
culturally appropriate, employees should get regular opportunities to make a
positive contribution through the creation of fundraising ventures and volunteer
opportunities with local HIV/Aids support groups and be given time off to
participate in these activities.
Helping to build local capacity. The organisation should work with local
governments, NGOs and healthcare providers to strengthen local infrastructure
and capacity with a view to creating sustainable healthcare access for employees
and the broader community.
It is clear from the above that management can to a large extent determine the success
of the business. When things do go wrong for the business, one of the most common
reasons can be traced back to poor management practices.
49
Activity 4.2
Why is it necessary for South African businesses to get actively involved in tackling
HIV/Aids in the workplace?
There are various reasons why South African businesses must get involved with the
management of HIV/Aids in the workplace. Some of these reasons are the following:
.
.
.
Better opportunities for growth in markets. Signs of long-term, negative economic

effects of HIV/Aids suggest that business opportunities for growth in South Africa
may be constrained if steps to counteract the pandemic are not taken. Businesssponsored HIV/Aids prevention programmes in workplaces and local communities
help to reduce the accumulated costs and extent of the pandemic.
Increased productivity. There are varying estimates about the loss of productivity
each year due to the absence of individuals with HIV/Aids from the work force.
Productivity is negatively affected by increased absenteeism, the loss of skilled
employees, the need to invest in training replacements and declining morale.
Decreased costs of healthcare and other employee benefits. The healthcare and
related costs sustained by companies having employees with HIV/Aids can be a
significant burden. A Harvard University survey of companies in Durban, South
Africa, concluded that companies may need to set aside as much as 7,5% of their
annual payroll to fund losses incurred by the disease. Company-generated HIV/
Aids training and education for employees can contribute to the reduced
prevalence of HIV and to reducing long-term healthcosts. Studies of South African
firms indicate that cost savings due to investment in prevention and education
programmes are as high as 3,5 to 7,5 times the cost of intervention.
Reduced employer liability. South African businesses can reduce their risk of legal
liability by implementing a formal HIV/Aids policy that prohibits discriminatory
behaviour, providing training and education to reinforce this policy, and taking steps
to ensure accommodation for employees with HIV/Aids.
Continued work force diversity. Rates of HIV infection worldwide are highest
among the youth and women. Women now account for half of all Aids cases, and
in Africa it is estimated that 60% of all HIV-infected persons are women.
Businesses that place special emphasis on HIV/Aids education and support for
employees in these particularly at-risk populations will benefit from being able to
maintain a work force that represents multiple perspectives, talents and skills, as
well as being more reflective of the general population.
Lower rates of employee turnover. Company efforts to prevent HIV infection and to
support employees with HIV/Aids will reduce the numbers of employees lost to this
disease.
Improved employee morale. The most immediate reported benefit of workplace
HIV/Aids education is improved morale. In addition to providing information that
allays fears and offers guidance on preventing infection, support programmes are a
sign that employers are knowledgeable about the issues and care about their
employees. Formal policies on HIV/Aids also raise morale by clarifying
responsibilities and expectations.
4.4 The market or task environment

50
Description of the market environment

The more common term used in management terminology is ``the market
environment'' because it refers to the immediate consumer market, the supplier
market and the intermediary market in which competitors also operate. However,
because the profitable development of this market is often seen as management's
most important task, it is sometimes referred to as the task environment.
Components of the market environment

As stated above the market environment consists of the following components:
. The consumer (also called the customer) is the main reason why the business is in
operation. Without a consumer to buy the product or service of the business, that
business will eventually fail. So the business must understand the wants and needs
of the customer. Information about the customer is therefore needed and the
organisation must ensure that it keeps track of changes in this market.
. Suppliers are categorised as supplying material, capital and labour to the businesses
in South Africa. ``Material'' is a broad term referring to the raw material required, the
manufacturers of products and the suppliers of energy, which are used by most
businesses. Capital is supplied to business through various alternative sources of
which the banks (eg Absa, Nedbank, Standard Bank and First National Bank) are the
most important. Labour is supplied to businesses through organised labour which,
especially in South Africa, has an important say in what the workers are paid and
what the conditions of service will be.
. Intermediaries are those institutions used to bridge the gaps between the
manufacturer and the customer. Some of the most important intermediaries are
the wholesalers who sell grocery products to small businesses such as the spaza
shops in the townships. Agents who sell real estate are another form of
intermediary that bridges the gap between the buyer and seller of a property.
. Competitors are rival businesses competing for the custom of the consumer. The
most direct competitors of a Checkers supermarket situated in Edenvale, Gauteng,
are usually the nearest Pick n Pay supermarket and Spar supermarket. More indirect
competition may be the Woolworths store or the convenience store at the nearest
petrol station.
Opportunities and threats in the market environment

The market environment has a direct influence on the business, because this is where
competitors compete, where the customer is found and where the suppliers and
intermediaries operate. So crucial business transactions take place in this environment.
Therefore most of a business's opportunities or threats are found here. For example, a
strong competitor could be a very serious threat to the existing businesses operating in
the same market. At the same time, if a business finds it difficult to compete with a
strong competitor, it may identify other needs that it can satisfy in the community
and in so doing exploit (or utilise) an opportunity in that market. Cell C was a late
entrant to the cellular phone marketplace and from the start was under threat because
it was competing against two established competitors (Vodacom and MTN). Cell C
identified a need for a different and cheaper structured usage for cellphone users,
51
providing substantial savings for prepaid as well as contract customers. Today Cell C is
a niche player in the market and has carved out a viable target market against fierce
competition.
Activity 4.3
Telkom SA is at present the only fixed-line telephone operator in South Africa. Over
the past few years, serious allegations have been made about the high costs of
communication in South Africa. Consumers are up in arms about the high cost of
making phone calls while businesses also complain about the cost of using the
internet, which up until now has been dominated by Telkom. Government has finally
allowed a second fixed-line operator, Neotel, to start activities in competition with
Telkom. What are some of the opportunities and threats for this new fixed-line
operator in South Africa?
One of the opportunities for the second operator will be the thousands of dissatisfied
Telkom customers who have been waiting for an extended period to cancel their
contracts with Telkom. Although Telkom has been trying to improve on its customer
service in the past year, numerous customers are waiting for an alternative supplier.
Coupled to this are the high prices being charged for Telkom services most South
African consumers are extremely price-sensitive and a newcomer entering the market
with lower prices will be inundated with new customers.
One of the threats for the new operator will be the entrenched markets and practices
that Telkom has had for years. Telkom ring-fenced some of its prime customers into
long-term contracts in reaction to the threat of the new operator. There is also the
threat of price retaliation by Telkom when the new operator starts cutting prices on
telephone usage.
4.5 The macro-environment

The variables of the macro-environment

The wider macro-environment consists of variables that influence the business in a
direct and indirect manner. The changes in the macro-environment are called
megatrends because they influence all businesses in all the countries of the world.
There are six variables in the macro-environment:
. Technological environment. Technology is one of the main drivers of change in the
world. Old technology is replaced by new, which creates opportunities and threats
for businesses. One example is the old telegraph service delivered by the post office
this service was replaced by new technologies such as faxes and e-mails, creating
new opportunities for businesses as well as making what was a viable service of the
South African Post Office obsolete.
. Economic environment. This environment has a direct influence on other variables
52
in the micro-environment, the market environment and the macro-environment.

For example, a dramatic increase in bank interest rates may have a negative impact
on the disposable income of consumers who are borrowing money from banks. This
may then impact negatively on the social structure of the country when fewer
people are able to buy necessities such as food, which may result in social unrest.
. Social environment. This environment is influenced to a great extent by the
technological and economic environment. For example we are all aware of growing
urbanisation with more people moving to cities because of increased unemployment in the rural areas and the belief that better-paying jobs are available in the
major cities of South Africa. This has resulted in the rapid growth of informal
settlements with resultant demands on the infrastructure of the cities and the
development of new retailing outlets in the form of spaza shops and shebeens. HIV/
Aids is another social problem and one that has massive social and economic
implications for South African businesses.
The social and economic implications of HIV/AIDS4
The spread of HIV/AIDS worldwide, and the growing number of people affected, makes it very likely
that few, if any, businesses will escape its impact. As the pandemic progresses, the disease is touching
an ever-wider sphere of business operations. Although Africa and Asia have been the hardest hit, every
continent has seen significant consequences of HIV/Aids. Estimates by the World Bank suggest that
the macroeconomic impact of HIV/Aids may reduce the growth of national income by up to a third in
countries where the prevalence among adults is 10 percent. Additionally, rates of HIV infection
worldwide are highest for the young and for women, who are major contributors to the work force.
For all of these reasons, businesses are looking for more aggressive ways to address the impact of the
disease on their work force and operations. Forward-thinking organisations are also taking proactive
steps to address HIV/Aids issues before the impact on their work force increases.
When HIV/Aids emerged as a significant workplace issue in the 1980s, businesses responded by
developing policies and programmes designed to educate employees about HIV/Aids, prevent
discriminatory behaviour, support ill employees, and contribute to the general fight against the disease.
Social considerations were originally the principal motivating force for business response to HIV/Aids,
but economic factors are now driving efforts to address the pandemic.
Eskom's fight against HIV/Aids

Eskom, the state-owned electricity utility company, commissioned a series of studies in 1995 and 1996
to determine the business cost of HIV/Aids. Some of the direct costs that were considered in the costbenefit analysis included: (1) cost of non-treatment, (2) cost of benefits, (3) cost of training, retraining,
and recruitment, and (4) cost of an HIV/Aids programme. Some of the indirect costs considered
included: (1) absenteeism, (2) loss of productivity, (3) management burden (training individuals as lay
counsellors), (4) systemic costs such as loss of work/life experience, (5) impact on labour market, and
(6) impact on team cohesion or morale. Eskom then proceeded to enlist the services of an external
consultant on HIV/Aids to determine where it should focus its efforts. To have a greater impact on
curbing the disease, the consultant advised Eskom to extend its reach beyond the work force and into
the lives of the sexual partners of employees who worked in isolated areas. These factors led to the
company's dismantling of its policy on pre-employment testing and its movement toward the
development of a more comprehensive and coordinated effort beyond condom distribution,
awareness and education. Eskom has seen prevalence rates in its work force drop, and its early and
comprehensive intervention is a useful model forworkplace programmes.
. Physical environment. This environment focuses on the physical resources that

businesses and we as consumers use. Important aspects of the physical environment
are the scarcere sources that we must manage in South Africa. South Africa is a
semi-arid country and there is speculation that we will not be able to meet the
53
minimum needs of the population by the middle of this century. Business must take
this into consideration, as the primary manufacturing businesses are some of the
major users of water.
. Institutional-governmental environment. The South African government has a
major influence on the landscape of business, for instance labour legislation on
employment and minimum wages.
. International environment. This environment also has a major influence on the other
variables in the macro-environment, the market environment and the microenvironment. One example of the influence of the international environment on
South African businesses is the changing price of crude oil and the impact on the
price of fuel and the inflation rate. We have seen dramatic increases in the fuel price
and the knock-on effect on the prices of food and other commodities.
Activity 4.4
How would you classify the following developments? Of which six subenvironments of the macro-environment do they form part?
.
.
.
.
.
.
The government announces the date of the general election.

Inflation is on the rise.
Unemployment figures are on the rise.
More women are going out to work.
A wonder cure for influenza has been found.
There is an increase in oil spills on the South African coastline.
.
.
.
Government forms part of the political sub-environment.

Inflation is part of the economic environment.
Unemployment is part of the economic sub-environment but also influences the
social environment.
Working women are part of the social environment.
A cure for influenza refers to technology thus part of the technological
environment.
Pollution is one of the problems encountered in the physical environment.
.
.
.
4.6 Environmental scanning

Description of environmental scanning

Environmental scanning is described as the process of measurement, projection and
evaluation of change in the different sub-environments. It can therefore be used to
keep abreast of external social, economic, technological and political developments
which may be difficult to observe or predict, but which management dare not ignore. It
entails the identification and monitoring of every opportunity or threat, and may range
from a simple information system to a formal environmental scanning division or unit
whose sole task is to monitor external environmental factors.
54
Because of dynamic changes in the business environment, the organisation must scan
its environment on a continuous basis. As stated previously the scanning process may
differ from business to business.
Activity 4.5
Is environmental scanning the same for all types of businesses?
Although the process of environmental scanning covers the same aspects of the
business environment, some unique requirements need to be considered when you do
an environmental scan for a particular business. Remember that the different
environments affect businesses differently. A computer manufacturer, for example, will
be affected far more by the technological environment than will, say, a bakery. A public
organisation will be influenced more by the political environment than a bicycle repair
shop. A farming business will be far more influenced by the physical environment (ie the
climate) than a firm of accountants. What may be a factor in the macro-environment
for one business could be a significant factor in the market environment of another
business. The gold price (international economic environment) will be part of a gold
mine's market environment, but part of a shoe factory's macro-environment.
4.7 Summary
You now have a basic insight into the business organisation and the business
environment. In topic 2 we will study the general management principles needed to
manage a business.
You are the CEO of the Chicken Spice fast-food franchise with 20 companyowned stores in South Africa and 50 franchisees operating Chicken Spice
stores under licence. You are preparing for a meeting with the board of
directors of the business and have drawn up a SWOT analysis of the business
environment in which the company is operating. Write down the key points
that you will cover at the board meeting regarding the SWOT analysis. Use
the current business environment in South Africa as your point of departure.
The South African fast-food business is a vibrant sector with numerous success stories,
like Nandos, Kentucky Fried Chicken and Chicken Lickin, to name a few. With this as
background let us take a look at the strengths, weaknesses, opportunities and threats
of this company (do a SWOT analysis).
Strengths of the company may be the following:
.
.
a good product
good relationships with customers good management team
55
Weaknesses may be the following:

.
.
.
small operation with limited reach other fast-food franchises with more than 100
outlets, making it difficult to compete
because of small operations, no economies of scale regarding aspects such as bulk
buying and reaping the benefits of cheaper prices
regular cash flow problems
Opportunities may be:

.
.
.
rapidly growing new middle class with the money to buy chicken products at fastfood stores
changing tastes of consumers and recognition in the market that chicken is a
healthier alternative than red meat products, such as hamburgers
diversifying in a number of product lines, such as low-fat French fries, salads and
low-fat ice cream
Threats may be:

.
.
.
.
growing competition from rivals in this sector

slow down in the economy, reducing demand from consumers
negative publicity from the Minister of Health on the consumption of fast-food
products containing chicken
increase in Aids-related deaths in the middle-income market, reducing the number
of households able to buy chicken fast-food products
References
1
2
3
4
Published on the Web by Business Report on May 20, 2005.

Pick n Pay. Annual Report 2009 [online]. [Accessed 26 February 2010]. Available URL: http://picknpay-ir.co.za/
financials/annual_reports/2009/group_mission.htm
Taken from: Business for Social Responsibility. BSR Issue Briefs.http://www.bsr.org/Print/PrintThis Page.cfm.
[Accessed 25 May 2005].
Taken from: Business for Social Responsibility. BSR Issue Briefs. http://www.bsr.org/Print/PrintThis Page.cfm.
[Accessed 25 May 2005].
56
Study unit 5
Corporate social responsibility
Contents
Key concepts
Learning outcomes
Getting an overview
5.1 Introducing corporate social responsibility (CSR)
5.2 Terms and trends
5.3 The citizenship imperative
5.4 The business case for corporate social responsibility
5.5 Corporate governance
5.6 Stakeholders and stakeholder engagement
5.7 Sustainable development
5.8 The link: How does CSR relate to the various business functions?
5.9 Summary
Key concepts
corporate social responsibility
corporate citizenship
triple bottom line
citizenship imperative
stakeholder mapping
stakeholder engagement
corporate governance
business case for implementing corporate social responsibility
sustainable development
Learning outcomes
. distinguish between the different terms and concepts in the field of corporate
social responsibility
. discuss the imperatives for good corporate social responsibility in South Africa
. draw up a stakeholder map for an organisation, indicating the different
categories of stakeholders
. explain the business case for corporate social responsibility as it relates to the
various business functions
57
Getting an overview
Corporate social responsibility is also known as corporate citizenship, and presents
many challenges. This is an immensely important field that is characterised by various
tensions and uncertainties. Businesses operate in a wider social environment, and have
both positive and negative impacts on the communities and the environment around
them. They therefore have a responsibility towards these communities and the
environment, and as a result need to become involved in solving the problems society
faces, such as poverty, unemployment and pollution. Please note that for the purposes
of this study unit and the prescribed book, we use the term ``corporate social
responsibility''; however the terms ``corporate social responsibility'' and ``corporate
citizenship'' can be used interchangeably.
5.1 Introducing corporate social responsibility (CSR)

What is corporate social responsibility? How do different companies implement its
principles? Generally speaking, corporate social responsibility is about proactive efforts
on the part of companies to make a positive contribution to society. There are a
number of reasons why companies implement corporate social responsibility
programmes, and these are influenced by certain social, governmental, market and
ethical drivers. Refer to the following extracts from an article by Simon Zadek entitled
``Global players can't get away with business as usual'' (Business Report, 18 October
2004). Zadek states that there are five universal reasons, which apply across the globe,
for why companies need to make an effort to become better corporate citizens.
Reasons for corporate social responsibility1
First, the global fish bowl makes it impossible to do in one place what you do not want to be known
elsewhere. Try making a mess of the environment in Mongolia perhaps, and see how long it takes
before your investors in South Africa and customers in Europe find out and take their revenge. Second,
the financial markets are waking up to the liabilities of irresponsible behaviour. As a senior executive
from Swiss Re, one of the world's largest reinsurers, commented: ``We do not really want customers
who do not understand the business implications of climate change.''
The terms of access to capital are changing rapidly, and those companies that will be needing
internationally mobile capital for their expansion had better understand the writing on the wall.
Third is about what it takes to operate in dozens of different countries, each of which has its own
dynamic and volatile market conditions, and its own way of understanding business responsibility.
Those companies that do not engage with the communities in which they operate will find themselves
blind-sighted by their lack of connectedness.
Being successful globally is not about being in international markets, an abstract idea if ever I heard
one, but about being in local communities that you understand and who want you there.
Fourth is about the peculiar reality that intense global competition increasingly means co-operation
with other businesses. Know thy partner because you will be judged by the company that you keep, as
the evergreen BP discovered when it sought to do a deal with the very ungreen China Oil Corporation.
Fifth, a tricky one, is about how you approach public policy issues. When Nike's chief executive, Phil
Knight, publicly declared his support for globally applicable, mandatory social audit and reporting
standards, he was trying to level the playing field by forcing his competitors to invest, as had Nike in
dealing with labour standards.
58
The era of the traditional anti-government, anti-regulatory lobbyist is, thankfully, coming to an end, as
global companies increasingly promote strong government and rules in enabling responsible
competitiveness.
For the hard-bitten business reader, please understand this is not a moral request, but a simple
observation about business strategy: if you want to be a successful global business over a sustained
period of time, responsible practices are not an option but a must.
5.1.1
Citizens and citizenship what's the link?
We are all citizens of some or other country, in this case mostly of South Africa. And
being a citizen brings with it certain rights and responsibilities. For instance, we have
the right to vote, to associate with whomever we please; we enjoy freedom of religion
and political orientation, and so forth.
At the same time, we must observe a few basic rules our responsibilities. We must
obey law and order, we must respect other people's privacy and possessions, and we
must not interfere with the rights of other citizens, etc.
In the corporate sector, the same basic principles apply. Corporates just like ordinary
citizens have particular rights and responsibilities.
Abiding by the laws of a country is an important component of corporate social
responsibility. But corporate social responsibility goes beyond legal compliance. Being a
citizen means being part of a community. As a good citizen, you want to contribute to
the welfare of people in your community, because you realise that your life will be
better if people around you are having better lives. Within the business context,
corporate social responsibility is a concept that recognises that (i) companies are
responsible for their impact on society and the natural environment; (ii) companies are
responsible for the behaviour of others with whom they do business; and (iii)
companies need to manage their relationships with the wider society.
Nowadays companies/businesses consider corporate social responsibility to be a
fundamental part of their business plan, affecting its bottom line, share price and longterm viability; and companies that don't have a strong corporate responsibility strategy
find themselves at a disadvantage. Vodafone is a leading mobile network operator in
the UK and its commitment to corporate social responsibility and the community
around it is an integral part of its core values. The case study below highlights
Vodafone's activities and how it focuses on corporate social responsibility.
Vodafone recycling and reuse initiatives2
Vodafone is a mobile network operator headquartered in Newbury, Berkshire. Vodafone's goal is to be
the UK's communications leader. Leadership is not just about selling more products than do rivals. It
involves ensuring the brand is reliable and trustworthy. Vodafone achieves this by giving high priority to
corporate responsibility. Corporate responsibility involves being aware of the issues facing a business
and acting responsibly in all areas of its activity. Vodafone's commitment to corporate responsibility is
set out in its vision statement which describes the kind of company it is. The vision statement links
closely with its mission statement.
Vodafone's vision is:
``to be the world's mobile communication leader. Corporate Responsibility (CR) helps us to achieve this
by reducing business risk and supporting our reputation with customers, employees, government and
other important stakeholders This commitment is about making money in a way that minimizes our
negative impacts and maximizes the positive benefits of our business on people and the planet.''
59
Vodafone promotes the recycling of old phones when businesses and individuals buy new phones.
Older phones contain potentially dangerous materials which could pose a threat to the environment if
not recycled responsibly. Vodafone has been running recycling initiatives in its UK stores since 2002.
The aim is to reduce the impacts of its products by promoting the benefits of delaying upgrades to
phones, as well as recycling and reusing old phones. By participating in these schemes, consumers
know that they are making a positive difference to the environment.
Vodafone has also partnered with Global Cool Foundation UK. This is a registered charity, which has a
mission to save a million tonnes of carbon dioxide in the UK. Today climate change is one of the most
pressing global issues on which everyone has to act. The money generated by the recycled phones
supports two worthwhile global-reaching initiatives Solar Aid, and The Million Superheroes
Campaign.
Solar Aid operates in the sunny but poor African country of Zambia. It helps small enterprises sell solar
technology devices to people on the poverty line. One third of Zambia's income is spent on energy. By
using solar power, people in Zambia have reduced their energy costs. This gives them more income to
spend on other things.
Leading companies such as Vodafone seek to work with their customers to behave responsibly and do
the right thing. In a fast-changing world of innovation, old mobile phones quickly become outdated.
Vodafone has taken steps to make a positive difference, by supporting recycling campaigns.
By focusing on corporate responsibility, Vodafone is able to create a `win-win-win' situation for
shareholders, employees and the environment. This improves relationships between stakeholders and
helps to ensure Vodafone's future growth.
From the case study above, identify three actions that show Vodafone is acting in a
responsible way.
5.2 Terms and trends

A number of terms are applied to corporate social responsibility, and the differences
and overlaps can become quite confusing! Let us have a look at some of the more
common terms and what they refer to:
. While a company's bottom line traditionally refers to its financial profit or loss, the
triple bottom line refers to the need to consider the social and environmental
impacts as well. What effect do the operations of the company have on the people it
comes into contact with (the social side) and on the physical environment in which it
operates?
This approach is known as the triple bottom line: it measures the financial, social and
environmental impacts of business. All are equal and all are interconnected.
. The overarching aspiration and framework for corporate social responsibility is
sustainable development. Sustainable development3 refers to the need to
improve the lives of poor people and to protect the natural environment.
. The term ``corporate social responsibility'' can be considered to be synonymous
with ``corporate citizenship''. However, the emphasis on ``social'' may be misleading,
as it emphasises the one element of the triple bottom line above the others.
. Don't confuse corporate social responsibility with corporate social investment
(CSI). CSI is primarily a South African term that refers to companies' philanthropic
initiatives, such as sponsorships for students or support to health clinics in areas
surrounding a company's factory. CSI is only one component of corporate social
responsibility; corporate social responsibility is much more than that. One way to
60
describe this is that CSI is about spending a small part of your profits (such as 1% of
pre-tax profit) on good causes, while corporate social responsibility is about how
you make your profits in the first place.
. Sustainability reporting refers to the increasing expectations for companies to
publicly report not just on financial matters, but also on social and environmental
issues.
. Corporate governance refers to how a company's objectives, and strategy and
decision making structures, are developed, implemented and monitored. It also
relates to the extent to which, and way in which, a company is accountable to its
shareholders, as well as its other stakeholders. Good corporate governance is an
important aspect of corporate social responsibility.
. Sustainable development refers to development that meets the needs of the
present without compromising the ability of future generations to meet their own
needs.
Activity 5.1
Write a paragraph in which you explain what you understand by the concept of
corporate social responsibility and what the key elements of this concept are.
There is no one correct answer to this activity. You could have referred to the various
definitions mentioned above, but you should have stated in your own words what you
understand by corporate social responsibility. You should have included the following
elements in your definition:
.
.
.
.
.
.
.
responsibility
stakeholders
laws
social impact
environmental impact
economic impact
society
Next we discuss another approach to illustrate the elements of corporate social

responsibility and how it relates to the three elements of the triple bottom line. This
approach considers corporate social responsibility in the context of an organisation's
upstream relationships (supply chain), internal business practices, downstream
relationships (customers and products) and wider societal and environmental impacts.
Supply chain
Workplace
Marketplace
Society
Environment . Supply chain

impact
. Impact of
operations
. Impact of
products
. impact of operations and

products
Economic
. Company
control
. Enterprise
support
. Product access
. Economic value
. Enterprise
support
. Social investment
. Enterprise
support
. Preferential
procurement
61
Social
Supply chain
Workplace
. Supply chain
compliance
. Employees'
workplace
. Equity
. Skills and
training
. Health and
safety
. HIV/Aids
Marketplace
Society
. Product stew- . Social impact

ardship
of operations
. HIV/Aids
Source: The good corporate citizen (2004:34)
5.3 The citizenship imperative

In this section we look at the South African and global drivers for corporate social
responsibility, and the reasons why organisations need to embrace corporate social
responsibility.
5.3.1
Global drivers
Over the past 10 years, the pressure on companies to demonstrate good social
corporate responsibility practices has increased dramatically. Initiatives such as the
AA1000 Framework (www.accountability.org.uk), the Dow Jones Sustainability Index
(www.sustainability-indexes.com), the United Nations Global Compact (www.
unglobalcompact.org) and the Kyoto Protocol (http://unfccc.int/2860.php) constitute
a global shift towards greater accountability of businesses to a wider range of
stakeholders on issues relating to the environment, social justice, human rights, labour
rights and climate change.
Let's look at a number of initiatives that play a role at an international level.
5.3.1.1
The United Nations Global Compact
The United Nations Global Compact was first proposed by the then UN SecretaryGeneral Kofi Annan in early 1999 in an address to the World Economic Forum, which is
a meeting of some of the world's most important economic leaders.
The ten principles of the United Nations Global Compact4
The United Nations Global Compact asks companies to embrace, support and enact, within their
sphere of influence, a set of core values in the areas of human rights, labour standards, the
environment, and anti-corruption:
Human rights
. Principle 1: Businesses should support and respect the protection of internationally proclaimed
human rights; and
. Principle 2: make sure that they are not complicit in human rights abuses.
Labour standards
. Principle 3: Businesses should uphold the freedom of association and the effective recognition of the
right to collective bargaining;
62
. Principle 4: the elimination of all forms of forced and compulsory labour;

. Principle 5: the effective abolition of child labour; and
. Principle 6: the elimination of discrimination in respect of employment and occupation.
Environment
. Principle 7: Businesses should support a precautionary approach to environmental challenges;
. Principle 8: undertake initiatives to promote greater environmental responsibility; and
. Principle 9: encourage the development and diffusion of environmentally friendly technologies.
Anti-corruption
. Principle 10: Businesses should work against all forms of corruption, including extortion and bribery.
Today, hundreds of companies from all regions of the world, international labour
organisations and civil society organisations are engaged in the United Nations Global
Compact. As far as South African companies are concerned, the following are included
(note that this is not a comprehensive list):
.
.
.
.
.
.
.
Bell Product
Eskom
Health Management Institute
PG Group
Sasol
Tru-Lite
Waymark Infotech
Sasol Ltd undertook the following actions to address issues relating to the
United Nations Global Compact:5
In February 2002, Sasol adopted a new integrated policy on safety, health and the environment (SH&E)
to replace the previous Environmental Policy. This was with the aim of operationalising the important
aspects of sustainable development throughout the group. The new policy reaffirms our commitment
to sustainable development and responsible care, and underlines the importance of partnering and
engaging with all of our stakeholders. The policy was adopted following an extensive process of
consultation and policy rollout throughout the group. The policy is supplemented by the Sasol SH&E
policy guidelines that were adopted in March 2002, and that provides guidance on policy
implementation. These are adjusted from time to time to ensure that the company's main challenges
are properly identified and managed responsibly.
The outcome of the actions
All Sasol businesses globally are guided by the policy on setting company objectives on SH&E. Group
indicators of performance have been established which commit the company to the achievement of
specific targets by the year 2005/6. These group targets represent our first attempt at systematically
identifying and elevating the company's major threats to group level. The group targets commit to the
achievement, among others, of an annual average recordable case rate of not more than 0.5; and a
reduction in the number of significant process safety incidents (fires, explosions, and releases) by at
least 50% on the 2000/01 baseline. Operations report progress regularly to divisional boards, to the
Sasol SH&E Corporate Governance Committee and to the Sasol Board in terms of aspecially designed
template.
5.3.1.2
The Global Reporting Initiative (GRI)
The Global Reporting Initiative (GRI) was launched in 1997. Its aim is to provide a set
of reporting guidelines and indicators that cover all the key issues of concern regarding
63
corporate citizenship. By developing these guidelines, the GRI wants to encourage

companies to be more systematic and comprehensive in their approach to
sustainability reporting (seewww.globalreporting.org).
Example of a social performance indicator as part of theGRI reporting framework
LABOUR PRACTICES AND DECENT WORK
CORE INDICATORS
ADDITIONAL INDICATORS
Employment
LA1. Breakdown of work force, where
possible, by region/country, status (employee/non-employee), employment type (fulltime/part-time), and employment contract
(indefinite or permanent/fixed term or
temporary)
LA2. Net employment creation and average

turnover segmented by region/country
(eg contributions to health care, disability,
maternity, education and retirement)
Also identify work force retained in conjunction with other employers (temporary
agency workers or workers in co-employment relationships), segmented by region/
country.
LA12. Employee benefits beyond those
legally mandated
Source: www.globalreporting.org/guidelines/2002/c52.asp
5.3.1.3
AA1000 Framework
The AA1000 Framework was launched in 1999 by AccountAbility, a UK-based

membership organisation advising and advocating on corporate citizenship issues. The
purpose of the framework is to help users ``to establish a systematic stakeholder
engagement process that generates the indicators, targets, and reporting systems
needed to ensure its effectiveness in overall organisational performance'' (see
www.accountability.org.uk). It does not describe what should be reported on, so its
guidance is considered complementary to that of the GRI Reporting Guidelines.
5.3.1.4
A number of other relevant initiatives
. ISO 14000 series. This is a series of standards issued by the International

Organization for Standardization; it focuses on corporate environmental management systems.
. Organisation for Economic Co-operation and Development (OECD) Guidelines on
Multinational Enterprises. The work of this organisation concerns the disclosure of
information, employment relations, environmental management, bribery, competition, consumer interests, andscience and technology diffusion.
. SA 8000. This standard focuses on labour conditions and was developed by Social
Accountability International.
. South African initiatives and imperatives. We will discuss these next.
64
5.3.2
5.3.2.1
South African initiatives and imperatives

Legislation
The basis of corporate citizenship is compliance with all relevant national legislation.
The following list includes some of the laws that relate to corporate citizenship in South
Africa. Note that this is only a small selection; the total number of relevant laws is
much higher.
In section 5.6 of this study unit we will look at the practical relevance of some of these
Acts.
. Companies Act 61 of 1973 and Close Corporations Act 69 of 1984
. The Constitution of the Republic of South Africa, 1996
. Labour Relations Act 66 of 1995 and Basic Conditions of Employment Act 75 of
1997
. Employment Equity Act 55 of 1998
. Preferential Procurement Policy Framework Act 5 of 2000
. Mineral and Petroleum Resources Development Act 8 of 2002
. National Environmental Management Act 107 of 1998
. Promotion of Access to Information Act 2 of 2000
. Basic Conditions of Employment Act 75 of 1997
. Occupational Health and Safety Act 85 of 1993
. Broad-based Black Economic Empowerment Act 53 of 2003
5.3.2.2
King Code on Corporate Governance in South Africa
The third King Report on corporate governance for South Africa, better known as the
King III Report, was launched by the Institute of Directors on 1 September 2009. The
King III Report is very important for corporate social responsibility in South African
companies, and is internationally recognised as being a progressive document. The
report provides organisations with guidance on good corporate governance practices
and explicitly defines and substantiates concepts such as ``corporate citizenship'', ``social
responsibility'', ``triple bottom line performance'', ``stakeholder engagement'' and
``sustainability reporting''. The King III Report differs from the previous two reports
(King I and King II) as it applies to all entities regardless of the manner and form of
incorporation or establishment. (www.pwc.com/za/en/king3/index.jhtml#)
5.3.2.3
JSE Socially Responsible Investment Index
A further recent development in South Africa, which also impacts on other African
countries, relates to the role of investors in corporate citizenship and the emerging
requirements of investors and civil society for companies to demonstrate more socially
responsible behaviour. The JSE Socially Responsible Investment Index was launched in
2004. This index comprises criteria to measure the triple bottom line performance of
those companies in the FTSE/JSE All Share Index who choose to participate. The
criteria are provided in terms of the triple bottom line categories of environmental,
economic and social impacts, as well as a separate category for corporate governance.
65
5.3.2.4
Industry charters
Over the past few years, a number of sector-specific charters have been adopted to
promote socioeconomic transformation and establish an equitable economic playing
field. For example:
. Charter of Empowerment and Transformation in the Tourism Industry
. Financial Sector Charter
. BEE Charter for the South African Mining Industry
Ensuring operational legitimacy or a ``licence to operate'' requires more than simply a
business licence. Non-compliance with these codes and guidelines will have a serious
impact on the future position of business in local and global markets, and every
organisation has to take note of the specific relevance of these imperatives to their
business.
Activity 5.2
List three international and three local imperatives that promote the implementation of corporate social responsibility in organisations. Briefly explain the significance
of each factor.
The answer to this activity can be found in section 5.3 above. You could have discussed
any of the following elements:
International elements
South African elements
United Nations Global Compact

Global Reporting Initiative
AA 1000 Framework
Dow Jones Sustainability Index
Kyoto Protocol
Organisation for Economic Co-operation and Development (OECD) Guidelines on Multinational Enterprises
ISO 14000
SA 8000
JSE SRI Index

King III Report
Legislation
Industry charters
5.4 The business case for corporate social responsibility

Corporate social responsibility is not about `being nice'. The potential to limit
expenditure, maintain or improve employee and community relations, control risk and
promote reputation means that applying corporate social responsibility strategies quite
simply makes good business sense. (www.lse.ac.uk/Depts/global/Yearbook)
The business case for corporate social responsibility refers to the argument that being a
good corporate citizen can contribute to a company's profitability.
The business case, therefore, argues that incorporating good corporate social
responsibility practices will, at the end of the day, have positive implications for the
financial bottom line. These benefits can come in a variety of forms:
66
. For example, a company that uses energy-saving technology will save money on its
monthly electricity bill. This benefit is often referred to as cost savings.
. Being a good corporate citizen can also have positive implications for a company's
reputation. This reputational gain can also have positive financial benefits through
customer loyalty, attracting higher-quality employees or improving relationships
with investors.
. Eco-efficiency can save a company costs by, for example, using recycled materials in
building design, employing solar panel technology to generate energy and using
fuel-efficient technologies in vehicles.
. Competitive advantage and value creation. A company that ignores ethical,
environmental or social issues may actively destroy value through inadequate
management of risks, but may also limit value through missing opportunities. While
focusing on the risks will protect existing business interests, and thus conserve value,
such a purely defensive approach will not open up new opportunities to create
value.
By performing a simple SWOT analysis of the strengths, weaknesses, opportunities and
threats facing an organisation, management can identify areas where risks should be
managed (threats) and areas where there is the potential to create value
(opportunities).
The table below identifies the key strategic opportunities and threats in the
environmental and social field:
Threats
Opportunities
Labour shortages
Access to new pools of labour from education and training programmes and community involvement
Low productivity and quality because of

poor labour practices and skill levels
Higher productivity levels because of better

trained staff and higher standards
Missing new market opportunities, and the

erosion of traditional markets
New markets through an improved understanding of consumer needs
Product obsolescence through low levels of

innovation and inappropriate technology
New products and markets through the

application of new technologies
Failure to anticipate new social and regulatory requirements
First mover advantage by anticipating the

impacts of social pressures
Vulnerability because of low investor confidence
Lower cost of capital because of greater

investor confidence in a company's ability to
manage change
Higher cost levels from increased regulation

of old technology
Lower compliance costs by being ahead of

regulations
Recruitment and customer retention problems through poor reputation
Enhanced reputation leading to greater staff,

customer and investor loyalty
Some aspects of corporate social responsibility may not have any economic benefit for
companies. This is why the business case for corporate social responsibility cannot be
the only reason why companies should be good corporate citizens national laws and
ethics also play an important role. In the South African environment in particular,
67
companies have a huge role to play in making socio-economic progress, and

compliance with these rules, regulations and codes will go a long way to ensuring that
companies retain their licence to operate.
Activity 5.3
What do you think are the perceived threats and opportunities for South African
businesses with regard to each of the following pertinent social, economic and
environmental factors?
Threats
Opportunities
BEE legislation
Lower competitiveness
through lower skilled appointments
Less investor confidence
Empowerment of disadvantaged individuals

Increased competitiveness
in terms of government
business (ie tender, etc)
Investor confidence in
company's ability to manage change and retain
profits
HIV/Aids
Lower productivity
Increased medical costs
Lack of continuity
Higher training costs
Positive contribution to
staff wellness and education on health matters,
which slows down infection
rates and leads to higher
productivity
Developing partnerships
with government and
NGOs
Minimum wages
Higher operating costs be- Improvement in employcause of salary/wage bill

ees' standards of living,
which leads to higher employee morale, productivity
and retention
Regulatory requirements
(ie charters)
More formalities, paperwork, etc

Costs of compliance
68
Attracting of foreign investment
5.5 CORPORATE GOVERNANCE

Corporate governance refers to the way in which an organisation makes decisions and
decides how to manage its affairs. The King III Report on Corporate Governance was
published on 25 February 2009 and includes the following important principles:
. Good governance is about effective leadership.
. Sustainability is the primary moral and economic imperative for the 21st century.
. Innovation, fairness and collaboration are important factors regarding sustainability.
Integrated sustainability and social transformation will give rise to greater
opportunities for the company and society.
. Sustainability reporting is a key facet of good corporate governance.
There have been many cases internationally as well as in South Africa of corporate
catastrophes and mistreatment of corporate governance. Some of the most famous
examples of corporate catastrophes include prominent companies such as Enron,
WorldCom and One.Tel. This has resulted in increasing pressure and attention on
companies to improve their corporate governance. The case study below describes the
efforts and methods introduced by the City of Ekurhuleni in an effort to change and
improve its corporate governance.
Ekurhuleni: changes in corporate governance policies6
The City of Ekurhuleni has made major changes to its corporate governance and the results thus far
show a promising resolution to the problems of governance which plague many of the municipalities in
South Africa.
Corporate governance in the City of Ekurhuleni was in a chaotic state. Thousands of documents were
either misplaced or reached responsible people too late; comments from stakeholders were not
obtained or were insufficient; and there was no monitoring of the implementation and execution of
decisions. A new approach established for the City of Ekurhuleni encourages accountability, visibility
and clean audits. The new method is divided into two processes which are subdivided further into 11
tasks.
The first process has nine tasks which include writing a document and entering it into a system called
Collaborator, checking the document's content to determine if it complies with set standards, and
scrutinising of the document by all relevant stakeholders until a final decision is made. The process
consists of two tasks which are a plan of action and identification of the person responsible for
implementation.
This method ensures that documents are discussed thoroughly, that there is record of the document
and feedback on the system, that there is input from all relevant stakeholders before a decision is
made, and that there is a record of all the steps in the processes. Most importantly, there is
accountability in that the person who is ultimately responsible for implementation is clearly identified.
5.6 Stakeholders and stakeholder engagement

Study section 5.4 and table 5.1 in the prescribed book.
69
Stakeholders are those people or groups who are affected by or who can have an effect
on a company.
Business is about people. Stakeholders can be found either inside the organisation
(called internal stakeholders, such as executive board members, management, other
employees) or outside the organisation (external stakeholders here we are thinking
about shareholders, the consumer, the public, customers/clients, suppliers and the
wider community in the area where the business operates, etc). Primary stakeholders
are those whose ongoing support of the company is vital to the company's survival.
These stakeholders commonly have some contractual or financial relationship with the
company, in other words with shareholders and employees. A company cannot survive
if shareholders or employees withdraw their support of the company.
Often government is also a primary stakeholder. Local communities can also be a
primary stakeholder, especially if they own the land that a company needs. For instance,
local community opposition or sabotage may make it impossible for a mine to operate.
Secondary stakeholders have a less direct impact on the company, and include
environmental NGOs or the media. A secondary stakeholder can become a primary
stakeholder if the conditions change. For instance, a local group that is small and
powerless probably has little impact on a company, but if it gets more local support or
if it has a convincing legal argument, it may quickly become a primary stakeholder.
Stakeholder engagement is at the heart of good corporate social responsibility. The
stakeholder engagement process allows stakeholders to determine what they want
from the company and what they consider to be the issues and culture of the company.
The stakeholder engagement process consists of the following six basic steps:
1
prepare
plan
design
engage
evaluate
apply
A company wishing to embark on a stakeholder engagement process should start by

mapping all external and internal stakeholders, defining their role in and impact on the
organization, and determining the most appropriate methods to engage with each
stakeholder group. The methods can include the use of questionnaires, focus group
meetings, surveys, market research, personal visits, joining existing networks, and so
on. Refer to section 5.4.4 in the prescribed book for a detailed explanation of the six
steps of the engagement process. It is also important that you learn the principles that
guide and govern the entire stakeholder engagement process.
Activity 5.4
A newspaper article about a mining project on the South African coastline follows.
70
Read through the article and make a list of all the stakeholders listed in the
article and indicate in each case whether a particular group can be classified as
a primary/secondary and internal/external stakeholder.
Explain the significance of each of these stakeholders to the company in one

sentence.
Indicate what you think the most appropriate methods would be for engaging
with these stakeholders.
Mineral Commodities to apply to mine along Eastern Cape coast7

By Samantha Enslin
Durban Australian company Mineral Commodities, which has completed prospecting
along a portion of the Eastern Cape coastline, will submit its application to mine this
deposit next March. Alan Luscombe, the chief executive of Mineral Commodities, said this
week he expected the government to take a year to make a decision. ``The biggest
challenge facing the project is getting government approval,'' he said.
Mineral Commodities is also exploring opportunities 400 km north of Cape Town at the
Tormin zircon deposit, and in Walvis Bay. Prospecting at Xolobeni has identified a potential
resource of 16 million tonnes of heavy minerals and 8 million tonnes of ilmenite.
Luscombe said this site was among the 10 largest mineral sand deposits in the world.
An empowerment company, Xolco, which represents community interests, has an option
to take a 15 percent stake in Mineral Commodities' local subsidiary, Transworld Energy &
Minerals Resources (TEM), for $10 million. Luscombe said that once `à bankable feasibility
study has been completed, there should be no difficulty in both Xolco and TEM raising
funds in South Africa''. TEM was considering listing on the JSE Securities Exchange as a
means of raising funds.
The project to mine coastal dunes, which is opposed by environmentalists and local
ecotourism operators, has enjoyed mixed support from the approximately 2 000-strong
Xolobeni community. Xolco said the community had been fully briefed on the implications
of mining in the area but there was concern that people might not fully understand it.
Madayisa Dimane, a councillor for ward two in the OR Tambo district municipality, said: `Ì
am not sure if people are aware of all the implications. There are people supporting the
mine but not the whole community.'' Concerns were raised about damage to the area and
fears that the dunes would not be adequately rehabilitated after mining, as well as about
the long-term sustainable development of the area.
Of the 326 ha site, 94 ha are already denuded of vegetation. Luscombe was confident the
company would be able to rehabilitate all the dunes. Dimane said: `Ìn the long term,
tourism will generate more jobs. The local government is supporting tourism.'' Luscombe
said mining and ecotourism could coexist.
Current ecotourism activities are limited to horse trails along the coastal dunes. Luscombe
conceded that while people on the horse trails might not see the mining, they would be
able to hear it if they were right on the coast.
Phillip Ndovela of ecotourism outfit Amadiba Adventures said that to illustrate the longterm sustainability of tourism, ``we need to deliver more''. The land where the mining is
proposed is state land, meaning any community objections might hold little weight.
Max Boqwana, a director of Xolco, said the aim of Xolco was to ensure that mining
contributed to sustainable development in the area. Xolco's social development plan
includes a focus on youth, literacy, agricultural programmes, HIV/Aids, women, and chiefs
and headmen. The mining project will generate 100 jobs on site and 170 jobs at the
smelter. Luscombe said additional jobs would be created through the outsourcing of,
among other things, transport, catering, construction and the rehabilitation of dunes.
71
You should have mentioned the following relevant stakeholders:

.
.
.
.
.
.
.
national government primary

local government secondary
local communities these can be further split up into groups such as traditional
leaders, women, the youth, the elderly, people with disabilities or illnesses, and the
unemployed
local businesses secondary
company shareholders primary
company employees and trade unions primary
national and international NGOs secondary
The relevance to the project of each group is clear from the case study, and you could
have mentioned any of the following engagement methods, as long as you gave a
sound reason for your particular answer:
.
.
.
.
.
.
focus groups questionnaires, surveys

market research
personal visits
meetings
road shows
interviews
5.7 Sustainable development

In 1987 the Brundtland Report emphasised the importance of sustainable development and defined it as ``... development that meets the needs of the present without
compromising the ability of future generations to meet their own needs''. Some of the
most important meetings and agreements that have brought sustainable development
to the mainstream include:
.
.
.
.
The
The
The
The
Rio Earth Summit 1992

United Nations Global Compact
Millennium Development Goals (MDGs) 2000
World Summit on Sustainable Development (WSSD) 2002
Read through the case study below about Coca-Cola and its sustainable approach to
doing business across Africa.
Advancing new solutions for economic development: Coca-Cola8
Coca-Cola's innovative approach to distribution is proving to be both good for the company and good
for development as demonstrated in a recent report published by the company along with the CSR
Initiative at the Harvard Kennedy School and the International Finance Corporation. According to the
study, the company has, to date, created over 2 500 manual distribution centres (MDCs) in Africa,
generating over 12 000 jobs and more than US$ 500 million in annual revenues.
Coca-Cola's approach to distributing its products in hard-to-reach urban and peri-urban areas in Africa
identifies and engages independent entrepreneurs that distribute and sell its beverages in small,
72
specific geographical areas. MDCs are typically located in areas where a lack of stable roads and
infrastructure makes it difficult for delivery trucks to travel, which helps the company secure hard-toreach markets while creating wealth and job growth in those communities. Those who set up MDCs
employ others in the area, who then sell and distribute beverage products to retailers, often by bicycle
or pushcart. The MDCs account for over 80% of the company's sales in East Africa.
Entitled ``Developing Inclusive Business Models'', the study reviewed the MDC model in Dar es Salaam,
Tanzania and Addis Ababa, Ethiopia as a way to discover new opportunities for scaling up the MDC
model and fulfilling the company's commitment to the Business Call to Action, an initiative that
mobilises large companies to help reach the Millennium Development Goals by harnessing core
business competencies.
Clinton, 42nd President of the United States and Founding Chairman of Clinton Global Initiative, and
Pat Woertz, Chairman of the Board of Directors, CEO and President of Archer Daniels Midland
Company, discussed ways business can play a role in creating value for both shareholders and society
during a panel discussion at the Brookings Institution on 13 May.
``For Coca-Cola, the MDCs are a wonderful example of the way business can focus on meeting its
consumers' and customers' needs while supporting the sustainability of communities,'' said Muhtar
Kent. `Ìt has long been our philosophy to look at our business system holistically and determine where
we can have the greatest impact on advancing initiatives that are critical to the communities and
stakeholders that we rely on.''
According to Jane Nelson of the Harvard Kennedy School, ``There is a growing recognition in the
corporate and international development communities that the most sustainable contribution
companies can make to poverty alleviation is to carry out their core business activities in a profitable,
responsible and inclusive manner.'' And IFC Director Toshiya Masuoka argues that the study
``demonstrates the potential of large corporations to build economically viable business linkages with
small enterprises in their value chains, which can also have development benefits''. Coca-Cola is
currently in discussion with potential development partners to assist in pursuing some of these
opportunities to further strengthen the model.
5.8 The link: how does CSR relate to the various business
functions?
If we look at the various business functions in more detail, it becomes clear that
corporate social responsibility touches on every single business terrain and management function. In this section, we will refer briefly to some of the areas of impact of
corporate social responsibility on the different business functions.
5.8.1
CEO/Top management
The CEO and the top management team are responsible for managing issues that
pertain to the whole corporation, such as strategy, financial performance, mergers and
acquisitions, and governance. In addition, they oversee all the functional areas.
Accordingly, the CEO and the top management team will be concerned both with the
issues presented above, and also with specific ways in which more corporate social
responsibility practices can be helpful, for instance in improving stock price, financial
performance, corporate reputation, and risk management. These elements will be
discussed in more detail below.
73
5.8.2
Operations
Operating managers are responsible for ensuring that their corporations can produce
products and services in a timely, cost-effective way and can beat their competitors on
price, innovation and quality.
Innovation through sustainability9
Many argue that improved ethical, environmental and social performance can result in a number of
operational benefits. These include an improved ability to innovate and develop alternative products
and services, improved resource and material efficiencies, and improved investor confidence.
Volkswagen reports a link between high standards of environmental performance and overall business
performance in several areas, including `àttractive conditions offered by banks and insurers, buoyant
share prices and positive customer perception of the company''. The company also emphasises that `à
well-functioning environmental management system minimizes the financial risks resulting from
environmental incidents, contamination problems and possible statutory fines. In addition, energy,
water and waste disposal costs are reduced and an innovative approach to products and facilities is
promoted.''
Preem Petroleum (formerly OK Petroleum) developed a reformulated gasoline in the early 1990s. It
then lobbied the Swedish government to increase taxes on less environmentally acceptable fuels. This
not only rewarded Preem's own capabilities, but also created a source of competitive advantage as
regulations toughen in other European markets.
Good corporate social responsibility practices can create market opportunities and
increase competitiveness of companies that use innovation to develop products or
services based on sustainability criteria. Recognising and responding to emerging niche
markets allows companies to translate good corporate social responsibility into
corporate social opportunity. Organic coffee, ecotourism, sweatshop-free clothing (eg
Nike) and fuel cell technologies are but a few examples of product innovations that
have successfully penetrated new markets. These products have successfully responded
to changing consumer preferences.
Total quality management (TQM) forms an integral part of the operations function
and focuses on the development and delivery of quality products by involving the entire
company. Total quality should be defined not only with reference to financial
considerations, but should also include products' social and environmental characteristics. Similarly, priorities for continuous improvement should be determined with
reference to not only the preferences of clients/customers and the activities of
competitors, but also to constant monitoring of the product's impact on society and
the environment.
Enhancing competitiveness by keeping up with changes in the environment10
Consider the product development of the Toyota Prius and note how Toyota positions this product:
Our society depends almost entirely on fossil fuels for energy. We consume coal, oil and petrol in vast
quantities, while simultaneously discharging carbon dioxide into the atmosphere. If we carry on in this
way, we will face a shortage in the latter half of the century. It is therefore imperative that we make our
cars more fuel-efficient and use the planet's reserves more wisely. We must also develop cars that run
on fuels other than petroleum as fast as we can. At Toyota, we are dedicated to this cause.
The Prius is the result of 30 years of research and development towards Toyota's ultimate goal the
totally emission-free vehicle. Paving the way to that objective, the Prius is the most eco-friendly, massproduced car on the planet with a string of accolades and ``firsts'' to its name.
This is not an idea that's ahead of its time this is an idea that cannot wait.
The award-winning and revolutionary Toyota Prius hybrid eco-car recently launched in South Africa is
already shifting the paradigms of the South African motoring fraternity. It's time to go green.
74
Activity 5.5
Think about the following:
1
What role did changing consumer preferences play in Toyota's decision to

launch the Prius?
How does Toyota use this car to differentiate itself in the market?
What will be the impact of this initiative on Toyota's stakeholders?
Question 1
Here you could have mentioned factors such as increased emphasis on environmentally
friendly technology, resistance against high fuel prices, adherence to the Kyoto Protocol
and more efficient use of natural resources. Did you think of any other factors?
Question 2
Toyota is the first motor manufacturer to launch a totally emission-free vehicle; it
positions itself as environmentally responsible, eco-friendly, etc.
Question 3
First list all the stakeholders as in the activity above. These stakeholders include the
environment, the public, shareholders, government, society, consumers, fuel companies,
etc. Then indicate in each case what the impact on each group will be. Think of
advantages and disadvantages, that is in the case of the physical environment, the
preservation of natural resources (positive) but, for fuel companies, lower dependency
on fossil fuels (negative).
5.8.3
Finance
Companies must ensure that their traditional focus on corporate profits and
shareholder value is accompanied by equal concern for the needs of society and the
environment (www.bmw.co.za).
Generally speaking, the financial director is a very powerful individual and has
significant influence in an organisation. This implies he or she will also indirectly
exercise a strong moral influence on behaviour of employees in the workplace.
Strategic priorities (profit maximisation, expanding market share, cutting costs, etc) can
also be very strong influences on morality. Traditionally, the finance manager is the
most difficult to convince of the advantages of implementing good corporate
citizenship in an organisation since not all benefits can be converted into rands and
cents.
When it comes to the role of the finance function with regard to the investment
decision, one must acknowledge that access to capital is critical for any company
wanting to invest and grow. Good corporate social responsibility practices particularly
corporate governance structures and risk management systems provide important
opportunities to unlock capital. Investors, financial institutions and multilateral lenders
will invest in and lend to companies that have a good reputation. This reputation is built
75
up not only through sound financial performance but also through demonstrated
transparency, disclosure, integrity with regard to shareholder rights, strong stakeholder
relations and sound risk management practices.
For example, the International Finance Corporation (IFC), which is the private sector
arm of the World Bank Group, has stringent lending criteria in place. Prior to lending
money to companies for large projects, the IFC insists that an adequate impact
assessment be undertaken. Projects must be environmentally and socially sound,
satisfying IFC environmental and social standards as well as those of the host country.
Promoting environmental and social development through the Equator
Principles11
The Equator Principles seek to ensure that the project is developed and financed in a manner that is
socially responsible and reflects sound environmental management practices. They were developed by
the International Finance Corporation (IFC) in conjunction with ten of the world's largest banks,
including ABN AMRO, Barclays and CitiGroup, to set down a consistent industry approach to
managing environmental and social risk in project financing.
Activity 5.6
Write down detailed arguments that you will use to convince the head of your
finance department that the implementation of CSR will have financial benefits for
your organisation.
You could have referred to things like the following:
5.8.4
increased competitiveness
investor confidence, access to capital
revenue growth and market access cost savings and productivity
risk management and licence to operate
human capital: attraction and retention
brand value and reputation
Procurement
A group of external stakeholders that has a very close relationship with the business is
that of suppliers. Unfortunately the attitude of corporations when dealing with
suppliers is all too often: ``We tell them what we need, we pay them, and that's about
it.''
How can a company maximise its positive impact through its suppliers?
Consider, for instance: How does the organisation first of all choose its suppliers?
Do the selection criteria provide for more than just the best price. What is the right or
ethical thing to do, and how can the organisation maximise its impact through its
suppliers?
Here we are talking about something as simple as complying with legislation:
. The Preferential Procurement Act 5 of 2000 stipulates that a preferential point
system must be followed to promote sustainable black economic empowerment.
. Black economic empowerment through the supply chain has seen many individuals
and communities become financially independent for the first time in their lives. BEE
charters, such as those for the finance sector, mining sector and the tourism sector,
impose specific requirements on the respective industries.
76
But it's also about more than just adhering to the letter of the law. Does the business
know how its suppliers are running their businesses: where and how do they obtain the
products that they provide to the enterprise, and are the values of the organisation
aligned with those of its suppliers?
After all, by buying from them, the organisation is keeping its suppliers in business and
adding its vote of confidence to its suppliers' business practices!
Some relevant legislation:
.
.
.
.
Preferential Procurement Policy Framework Act 5 of 2000

Broad-based Black Economic Empowerment Act 53 of 2003
Companies Act 61 of 1973 and Close Corporations Act 69 of 1984
Constitution of the Republic of South Africa, 1996
Table 5.1:
JSE impact classification table
High impact
Medium impact
Low impact
Aerospace and defence
General retailers
Banks
Automobiles and parts
Health
Insurance
Chemicals
Household goods and

textiles
Investment companies
Construction and building

materials
Information technology and

hardware
Investment entities
Electricity
Leisure, entertainment and

hotels
Life assurance
Food and drug retailers
Media and photography
Speciality and other finance
Forestry and paper
Real estate
Mining
Software and computer

services
Oil and gas
Telecommunications
services
Tobacco
Water
Activity 5.7
It is not only companies such as mining, petroleum and forestry (the `ùsual
suspects'') that have an impact through their suppliers. Above is an extract from the
impact classification table used by the JSE SRI Index, setting out the levels of impact
on the environment. For the complete list, see www.jse.co.za/sri/#criteria.
Note that financial institutions are classified as low-impact companies. What effect
do you think banks as suppliers of finance can have on the triple bottom line?
77
Financial institutions can enhance the impact of their triple bottom line through for
instance the following:
.
.
.
.
responsible lending practices, for example by defining purposes for which money is
lent
promoting access to finance to disadvantaged individuals and organisations
servicing the `ùnbankable'' sector
following socially responsible investment practices, etc
You probably thought of many other examples.
5.8.5
Human resources
The real value of a company lies in its people without sound HR practices, any
organisation, however big or small, will sooner or later find itself in big trouble. CSR can
help to increase employee satisfaction and loyalty, improve recruitment and retention,
and build the long-term pipeline of employees.
Employees form the internal stakeholder group of an organisation. How does the
business treat this stakeholder group? Do they have proper policies and procedures in
place that meet the real needs of its employees? This goes beyond service contracts
and normal benefits such as leave, maximum working hours and overtime: it includes
factors such as training opportunities, disciplinary practices and non-discrimination.
Does management promote sound health and safety measures in the workplace? Does
the employer encourage its staff to take part in organised employee actions, such as
unions? And how does it deal with the unions: is there regular, honest consultation, and
do these unions have an input in decision making?
On the other hand, how do employees treat their employers? Do they adhere to a code
of conduct? Is there a corporate culture of anti-corruption and bribery, and are
employees participating in initiatives beyond their call of duty, for instance volunteer
programmes within the community in which they operate?
For Nedbank, employee involvement is a two-way street12
How our employees give back
Employee participation and developmental work is part of the Nedbank Group's culture. Indeed, much
of the work of the Nedbank Foundation would not be possible without active and voluntary employee
involvement. There are a number of ways in which this employee participation is encouraged.
Community involvement awards
The ongoing involvement by Nedbank Group employees in the upliftment of communities across
South Africa was recognised through the following awards in 2004:
. The Mail & Guardian Investing in the Future Awards. Team Challenge was a finalist in the Corporate
Employee Programme category.
. The Loerie Awards. The Local Hero Programme received a Bronze Award.
Staff involvement in corporate social responsibility should not be a separate or optional

aspect of an entity, but the assessment of the social and environmental impact of
employees' activities should form an integral part of their key performance areas
(KPAs) and performance evaluation.
78

.
.
.
.
.
Labour Relations Act 66 of 1995

Employment Equity Act 55 of 1998
Basic Conditions of Employment Act 75 of 1997
Occupational Health and Safety Act 85 of 1993
Broad-based Black Economic Empowerment Act 53 of 2003
5.8.6
Risk management
The management of organisational risk has become more difficult for several reasons:
. Globalisation of risks. Companies are competing in a global environment, with risks
coming at them from multiple sources and multiple geographies. It is more difficult
to keep abreast of potential risks, and to know how to respond if they occur.
. Heightened surveillance. Companies are being watched by more groups, with more
diverse agendas, than ever before. These groups are linked across the globe by the
internet, allowing for instant transmission of fact (and falsehood) to millions of
consumers.
. Increased demands for transparency. Consumers, labour, and communities have
moved from a ``trust me'' to a ``show me'' stance, demanding to know more about
what a company is doing, and how it affects them.
Anglo Gold Ashanti: it's a risky business...13
Just say no
What do you do when some overtly dangerous looking person (say he or she is carrying an AK47 and
is accompanied by a couple of friends kitted out in the same way) comes to where you're working and
says something along the lines of: ``How about giving me $8 000 ...you've got a couple of hours [or
this interaction we're having could go pear-shaped quickly]''? Say you just happen to have that cash
lying around, it belongs to the company you work for, but you're at work and your co-workers are
looking to you to fix this mess. What do you do? Do you say: ``No, that breaches the principles of this
company''?
Yeah right.
You carry the money out to the vehicle that your new friends have arrived in and wish them well as
they drive off. The former is how the Human Rights Watch would have you react as detailed in its
report, The Curse of Gold. Yesterday Anglo Gold Ashanti was skinned alive in a Human Rights Watch
report for wishing its friends well as they crested the hill and disappeared.
They paid some dangerous, torturing, scary people to go away.
This kind of unexercised menace may also explain how, if it's true, the company found itself giving
rebels flips on air charters, letting them use its off-road vehicles and turning a blind eye to their use of
company housing on the concession in the Democratic Republic of Congo.
While sympathy and even empathy is easy, it does raise important questions, which the company
concedes need to be asked and answered in a considered way. When do you go back and invest in a
country that is trying to pull itself out of its war-torn hell of a past? What do you tell your staff posted
there to do if bullies come to the door asking for things with a gun? Should these employees ever have
been placed in this position?
Social and environmental factors pose an increasing risk to the environment in which
79
organisations operate. Here we are talking about factors such as unemployment,

crime, the use of non-renewable resources, poverty and ill health. Of course, HIV/Aids
is currently the most significant health challenge facing South Africa.
. South Africa has the highest number of HIV/Aids infections in the world.
. The productivity of workers with HIV/Aids declines by 25%.
. The construction industry will have to train 130 000 new workers by the end of
this year to replace employees who died of Aids. At what cost will this be to the
company?
. By 2010 South Africa's gross domestic product (GDP) will be 17% lower and the
GDP per capita will be 8% lower because of Aids than it would otherwise have
been.
. These reductions in total production of goods and services are partly due to a
smaller population (due to HIV/Aids-related deaths) and lower productivity of
HIV-infected workers due to absenteeism and physical weakness (the provision
of medication to infected persons may, however, change these predictions).
HIV/Aids is but one social risk factor that can have an enormous impact on the financial
bottom line of companies: shouldn't companies seriously rethink their risk management focus?
Activity 5.8
Make a list of the social and environmental factors that pose a potential financial risk
to organisations, and indicate the potential impact of each of these factors on a
company.
You could have mentioned factors such as emigration, crime, unemployment, HIV/Aids,
pollution-related diseases (asthma, etc). These could lead to, for instance, skills
shortages, lower productivity, higher operating costs due to increased security, soaring
training and education costs and many more ... What else did you think of ?
5.8.7
Marketing and public relations
Marketing deals mainly with the effective development and delivery of a satisfactory
product offering to the market in such a way that it meets the needs of the
organisation, the consumer and the community.
How should organisations then use their marketing function in a responsible and
ethical manner to ensure maximum benefit to everyone involved: the business,
customers/clients, employees and the wider community?
We all know that marketing is about much more than advertising; but advertising is a
good example of a visible marketing initiative that is directed at consumers. How
responsible are the advertising practices of companies? An example that most of you
might be familiar with is the TV ad of a certain cellphone manufacturer, where the
boyfriend uses cellphone technology to deceive his girlfriend's father. It might make
you smile, but what message does it send out about the values associated with that
product? Does this constitute responsible advertising?
80
An example of an advertisement where a product is associated with a good cause is

the Isuzu ad where the KB280D small truck is used to rescue a beached whale.
However, we do not know what business practices actually underlie this claim to
corporate social responsibility and that is where the real impact will be found.
Responsible marketing is also about how the organisation positions its brand. For
instance:
. Is the product properly labelled?
. Does the brand through its marketing actively promote social and environmental
wellbeing?
An interesting new development, which is gaining huge popularity worldwide, is that of
brand citizenship and cause-related marketing. Broadly speaking, this is where business
and charities form a partnership to market an image, product or brand for mutual
benefit using the power of the brand to make a difference in society.
Consider the following examples:
. Woolworths think of the My School card: Woolworths benefits, and so do many
schools in less fortunate environments.
. Avon house of beauty products donates a part of its profits to the fight against
breast cancer, especially through the proceeds on its pens that are sold specifically
for this purpose.
. Coca Cola sponsors the Coke Football Stars Tournament.
. Tiger Brands and its Unite against Hunger campaign is a classic example of business,
government and charities working together for mutual benefit.
Of course, corporate social responsibility is much more than public relations (PR). If a
company chooses to put a marketing spin on flaunting the company's good corporate
social responsibility practices, it should always be underpinned by demonstrated triple
bottom line benefits. CSR can very easily be misused and turned into a pure PR
initiative without any substance.
. Promotion of Access to Information Act 2 of 2000
. Competition Act 96 of 1979
Activity 5.9
Consider the example of the Nedbank Affinity Card (www.nedbank.co.za). Where
do you think the primary value of this initiative lies? Are there any demonstrated
benefits to society or the environment?
81
There is no one correct answer to this activity. You could see the primary value as the
benefit to either the environment, the arts, sport or children, or just to Nedbank itself.
As for the demonstrated benefits: this is a rather controversial topic and one that
Nedbank could ideally tackle in greater detail in its Sustainability Report. What is your
view do you think society and the environment really benefit, or is this simply a clever
public relations exercise?
5.9 SUMMARY
You now have a basic understanding of the concepts underlying corporate social
responsibility. We have examined the imperatives for implementing corporate social
responsibility in organisations and discussed why and how stakeholder engagement is
key to the process. Finally the concepts of corporate governance and sustainable
development were defined and we have highlighted the link between corporate social
responsibility and the various business functions. When you revisit the study units in
this study guide, always be aware of how corporate social responsibility relates to the
other key business management concepts. The next study unit deals with the first
management task of the management process, namely planning.
Consider the following case study: A public relations (PR) exercise or a true
corporate social responsibility (CSR) benefit?
But does it need to be `èither/or''?
Food security and crisis food relief is a cornerstone of Tiger Brands' corporate
social investment strategy. The company has been providing immediate hunger
relief to almost 50 000 starving South Africans monthly.
Responding to the call
Major corporations, individuals and community organisations have responded to
the Tiger Brands call to Unite Against Hunger. These include Vodacom, Deloitte
& Touche, Boland Wine Kelders, Southern Sun, SAA, Smollen Holdings and the
Independent Newspaper Group. Barloworld has donated two vehicles to deliver
food to crisis areas in Natal and the Eastern Cape while Nedcor contributed
R300 000 to the Tiger Brands World Cooks Tour.
Rotary International has mobilised its members throughout South Africa to
operate collection points for food and money donations. Leading personalities
have participated to raise awareness of the campaign. South African vocalist,
Vicky Sampson, composed a song entitled `Ùnite Against Hunger'' which is being
used in radio and TV commercials.
Hunger is a crisis in our nation. Approximately 2,5 million children will not eat
today. This crisis can only be addressed through the joint efforts of government,
and religious and community organisations and corporations. Hence our call to
`Ùnite Against Hunger'', which was echoed by Nick Dennis at the Barloworld
presentation of the two vehicles.
82
Many companies (notably listed companies for whom sustainability reporting is

becoming an increasingly important requirement) are publishing not only an annual
report, but also a sustainability report, which focuses specifically on the social and
environmental aspects of their business. Although the information in such a report
should always be honest and truthful, reflecting the real impact of the company's
business dealings on the triple bottom line, the very fact of issuing such a report is good
PR in itself, in that it positions the company as a ``good corporate citizen'' in the eyes of
its stakeholders.
You can find some very good examples of sustainability reports at

www.nedbankgroup.co .za, www. sab.co .za,
www.angloplatinum.com and www.mtn.co.za.
Reference
1 Zadek, S. Business Report, 18 October 2004.
2 The Times website. Information accessed at www.thetimes100.co.uk
3 The United Nations Website. Information accessed at http://www.un.org/esa/sustdev.documents/agenda21/
index.htm
4 The United Nations Website. Information accessed at www.unglobalcompact.org/
5 The United Nations Website. Information accessed at http://www.unglobalcompact.org/
6 Kgafela, N. 2010. Newsletter 53 Best practice case study: Ekurhuleni, 8 January 2010.
7 Enslin, S. Business Report, 10 December 2003.
8 WBCSO, 2009.
9 World Wildlife Fund. 2003. To whose profit? Building a business case for sustainability.
10. The Toyota Website. Information accessed at www.toyota.co.za
11 Legalcity website. Information accessed at http://www.legalcity.net
12 The Nedbank Website. Information accessed at www.nedbankgroup.co.za
13 De Ionne, P. Business Report, 2 June 2005
14 Adapted from the website: www.tigerbrands.co.za
83
Topic 2
The management process
AIM
Our aim in this topic is to describe the role of management in the business organisation
and examine the four fundamental management tasks of the management process,
namely planning, organising, leading and control. We also explain the different levels
and kinds of management in the business and give an overview of the development of
management theory.
Learning outcomes
After working through topic 2, you should be able to
.
.
.
.
.
provide an overview of the role of management in a business, by defining

management and supplying reasons why management is essential to any
organisation
analyse planning as a management task relevant to all management levels
describe organising as a management task, including modern structuring and
design
analyse leading as a management task, by focusing on culture, motivation and
communication
discuss control as a management task aimed at continuously improving the
organisation's performance
Overview of the topic

Topic 2 comprises the following study units:
Topic 2
Study unit 6
Study unit 7
Study unit 8
Study unit 9
Planning
Organising
Leading
Controlling the
management
process
85
Study unit 6
Planning
Contents
Key concepts
Learning outcomes
Getting an overview
6.1 Why planning is needed
6.2 Managerial goals and plans
6.3 The planning process
6.4 Setting organisational goals and developing plans
6.5 Summary
Key concepts
goal
top management, middle management and lower management
goal-setting by management
planning process
strategic goals
functional (tactical) goals
operational goals
hierarchical approach
development of plans
management by objectives (MBO)
Learning outcomes
. explain why planning is needed in the organisation
. explain what a goal is
. discuss the steps in the planning process
. compare the different organisational goals as used by top, middle and lower
management
. discuss the requirements that must be met when setting goals
. compare the different plans that can be used by the organisation
. differentiate between strategic, functional and operational planning
86
Getting an overview
Planning is the starting point of the management process and entails a systematic and
intelligent description of the direction a business organisation must take to accomplish
the goals determined. Successful managers anticipate change in the environment and
plan accordingly. One such business is SABMiller, which was able to deliver good
results in 2009 despite the worldwide recession. This was attributed to good planning
and a clear consistent strategy, and as a result SAB Miller was able to produce positive
results in a challenging business environment. In this study unit we will first look at the
reasons why planning is needed and define what the term ``planning'' means.
Thereafter we will discuss the planning process. Finally, we will discuss the process of
setting goals and the development of plans to attain these set goals.
6.1 Why planning is needed

`Ìf you are failing to plan, you are planning to fail'' (Tariq Siddique).
LEADERSHIP
ORGANISING
PLANNING
The above quotation says a lot about why planning is needed. Planning is the starting
point in any management process and has two components: the activities involved in
determining the organisation's goals and showing the way forward (the plan), and how
to achieve these goals. It is only for the purpose of studying the work of a manager that
we distinguish between the different tasks of the manager (planning, organising,
leadership and control). The tasks of a manager can be depicted graphically as follows:
CONTROL
In practice the CEO of a company may set some goals for the organisation to attain, for
instance to manufacture 1 000 000 units of a product, or to reduce the costs incurred
by the organisation by 10% in the next financial year. These are goals that the CEO and
the organisation set for themselves. Goals can therefore be seen as the desired future
state that the organisation sets for itself over a fixed period of time usually a financial
year or sometimes a longer period such as three or five years.
Getting to the second part of the planning activity we see that a plan must be
developed to show how we are going to achieve the set goals. The plan can therefore
be described as the design indicating how much money (capital) must be borrowed to
87
manufacture 1 000 000 units of the product, how many workers must be appointed,
what training they will need and how much raw material must be bought to
manufacture these products.
Today's environment is characterised by constant change and the more turbulent the
environment, the greater the need for planning. Even though managers are not able to
predict the future, they need to be able to anticipate change in the environment and
adjust their goals and plans accordingly. Below are some of the main reasons why we
need to do planning as part of the management process.
. Planning gives direction to the organisation in the form of goals and plans. It
provides the road map telling the organisation where to go and how to get there.
. Planning helps to get the different functional areas to work together. It provides
information to the production people on how many units to manufacture, it informs
the marketing section about their job (ie to create a demand for the product and to
facilitate the process of selling the product) and it gives the financial section a better
idea about capital needs and cash flow required to run the business properly. So we
can say that planning helps with the coordination, cohesion and stability of the
organisation.
. Planning forces the organisation to take a hard look at what the future holds for the
organisation. Many managers get so involved in the day-to-day running of the
business that they tend to forget about the future. There is an old saying that
nothing in the future will be the same as it is today! This holds true for any business.
One of the most dramatic changes that we see in the business world is of course the
rise in technology. Technological changes are happening rapidly and the
organisation must look to the future, anticipate changes and reflect on how they
will influence the business.
Activity 6.1
Read through the following excerpt from the case study:1
After 25 years of mining with an open cast zinc mine, a deep level mine was
built to further exploit the ore body. This resulted in huge challenges due to the
different mining practices required to mine a deep level mine, and projected
production targets were never met. Management realised that a significant
intervention was required to unlock the potential of the mine in terms of
production, costs and skills.
Management decided that they needed to reduce direct costs by 15%, increase
production by 20% to achieve projected output and improve asset utilisation by
10%. A management operating system was developed and implemented to focus
on corrective preventative decisions and activities. Management also decided to
redesign the engineering function to ensure effective preventative and breakdown
maintenance. Management further trained and coached 75 managers and supervisors in accountability for key performance areas centred on the three core
elements of production, safety and cost management. By the end of the 35 weeks
of implementing the new system and activities, management was able to reduce
annualised direct costs by 18%, increase production by 22% and improve asset
utilisation by 15%.
Evaluate what is said in this excerpt and test whether management is fulfilling the
basic tenets of planning as we have discussed in this section.
88
We can see that management has set goals because they want to reduce direct costs
by 15%, increase production by 20%, achieve projected output figures and improve
asset utilisation by 10%. So the first part of the planning requirement was met (ie that
there must be a specific goal). Regarding the second part of the requirement it was
stated that planning includes the plans that were made to attain the set goal. The
excerpt states various plans that were implemented in order to attain the set of goals,
such as developing and implementing a new management operating system,
redesigning the engineering function, and further training and coaching of 75
managers in accountability for key performance areas.
So it seems both requirements of planning were met.
6.2 Managerial goals and plans

Every business needs to set goals to determine in which direction it is headed. To
accomplish or reach these goals, businesses need a plan which will direct them
towards these goals. Managers therefore need to ask two questions: firstly where do
we want this organisation to be at a specific future date (setting specific goals)?
Secondly how will the organisation achieve these goals (formulating a plan)?
Different goals are set by the different managerial levels and range from strategic goals
formulated by top-level managers, to operational goals formulated by lower-level
managers. It is important that managers formulate goals that are specific, measurable,
attainable, relevant and time-bound.
When setting goals, management must consider the following general guidelines. First,
it is important to recognise that goals provide guidance to the organisation; they must
be the road map used by every worker in the organisation. Second, goals must be
measurable; if they are not quantifiable then they cannot be controlled. Third, the
responsibility for attaining goals must be assigned to specific people in the
organisation. Fourth, goals must be set consistently so that the different functional
areas work together. Finally, there must be buy-in of the goals set, meaning that every
worker must be informed and motivated to attain the set goals. This further means
that the remuneration system must be set in such a manner that there is an incentive
for workers to reach these goals.
Management by objectives (MBO) is a goal-setting technique whereby managers
and employees jointly define goals for the business. The most obvious advantage of
this approach is that employees have a say in setting goals, which also improves worker
motivation, as they have been part of the process. Below is an excerpt from a
conference paper by Dr Ed Lawler III, a very well-respected management guru from the
University of Southern California. He remarked that organisations in which people
were linked to strategy, structure, processes and rewards had a strong competitive
advantage:
`Ìn the high-performing organizations, employees know what to do, why they
89
do it, and they are motivated to do it. A business requires [a] significant amount
of power, business information, knowledge, performance-based rewards at all
levels of the organization.''
Through his research, Dr Lawler has found goal-setting in the high-performance
organisation to be directly connected to the overall business strategy of the
organisation. The research shows that performance goals, jointly set and driven by
business strategy, are the most effective.
Source: http://www.nceo.org/main/column.php/id/299
While goals are seen as the road map telling the organisation where to go and how to
get there, a plan is the `blueprint' for achieving the goals and will indicate how the
business should use its resources and time to reach these goals. The planning process
will now be discussed in more detail.
6.3 The planning process

Study figure 6.1 and the components of the planning process in section 6.4.2
of the prescribed book.
It is important to understand that planning does not happen in isolation and as a onceoff activity. It is an ongoing process. Below are the main steps of the planning process:
!
GOAL-SETTING
Reactive planning
DEVELOPING PLANS
IMPLEMENTATION
As can be seen from the figure above, the planning process consists of various
activities: goal-setting which takes into consideration the mission of the organisation,
the development of plans based on the information obtained from the environmental
scan, and the implementation of the plan by means of the other management
90
functions (organising, allocation of resources, leading and exercising control). There is

obviously the feedback loop, which starts the whole process again, and which is
described as the reactive planning stage. Managers also refer to it as ``learning from
your mistakes''!
It is important to remember that:
. planning is not a static process, but a dynamic one. This means it is a process that
never stands still; nor can it remain the same. Plans should be reviewed at regular
intervals and then adjusted (if necessary) to adapt to changing needs and
circumstances (the feedback loop).
. Planning is the foundation on which the other management tasks rest. It is
important for you to understand how planning is interlinked with the other
management tasks. If planning is not done properly, it will have a detrimental effect
on how the organising, leading and control tasks are performed.
Activity 6.2
Let us take the planning process to a more personal level to clarify the differences
between goal-setting, developing plans and implementing the plan.
Unisa lecturers live very sedentary lives with long hours sitting in front of a
computer and at a desk marking assignments and doing research. The medical
scheme they belong to has done research and identified that they must become
more active to live more productive lives. After all, both government and Unisa have
invested thousands of rands in training them.
The medical scheme develops a mission statement in which it states that its
members should be healthy and feeling well in themselves. The goal that the
medical scheme set to realise this mission statement was that obese lecturers must
lose weight, which will also be good for their blood pressure. To this end the medical
scheme took the following action:
. evaluated research that was published and information obtained from its own
database
. sent out a questionnaire to all lecturers about their current weight and physical
exercise regime
. compared the information obtained from the questionnaire with their own
records regarding the medical history of these lecturers
. identified the high-risk cases and invited these lecturers to join the High
Performance Training Centre in Pretoria to undergo further tests so that a
personal trainer could be assigned to them
The medical scheme decided to measure the success of this programme after one
year with a requirement that at least 30% of the obese lecturers would have a
normal body-fat ratio and that 40% of these lecturers would have a normal blood
pressure reading.
You are asked to classify the above actions into the three activities of the planning
process (ie goal-setting, developing plans and implementation) completed by the
medical scheme.
91
The goal-setting phase refers to the mission statement, which states that the medical
scheme wants its members to be healthy and to feel well. The formulation of goals set
by the scheme includes that of reducing the weight of obese lecturers and lowering
their blood pressure.
The second phase entails developing plans to attain the set goals. The plans are:
.
.
.
to evaluate secondary sources of research and mine their own database

to send out a questionnaire to all lecturers about their current weight and physical
exercise regime
to compare the information obtained from the questionnaire with their own
records
The third phase, the implementation phase, entails appointing personal trainers and
using the facilities at the High Performance Training Centre to start a programme of
physical exercise under controlled supervision. Also, the measurements obtained, using
the specific quantifiable guidelines (30% of lecturers having a normal body-fat ratio
and 40% of them with a normal blood pressure rate), must be completed within one
year.
6.4 Setting organisational goals and developing plans

Study sections 6.4.1 and 6.4.3 in the prescribed book.
An organisational goal is defined as a specific achievement to be attained at a specific
future date. It is important to understand that goals are not set in isolation. Goals are
influenced by the mission of the organisation, the business environment in
which the organisation operates, the values held by management and the
experience gained by management.
. The mission of the organisation refers to the purpose as set out by the
management of the organisation. For example, remember the mission statement
of Pick n Pay:2 ``We serve With our hearts we create a great place to be With our
minds we create an excellent place to shop.'' The first part, ``we serve'', refers to the
customer orientation of the organisation. The second part of the statement refers to
the dream of the organisation that it will create a wonderful place for their
employees to work, and the last part refers to the fact that they want to create a
wonderful place for their customers to shop.
. The business environment has been discussed previously and we will not go into
detail about the dynamic environment in which organisations operate. Obviously
management must consider the environment in which the organisation operates
when determining the goals of the organisation. It is very difficult for management
to keep track of all the changes in the dynamic business environment. Peter Drucker,
the world-renowned management thinker, said the following about predicting the
future: ``Trying to predict the future is like trying to drive down a country road at
night with no lights while looking out the back window.''
. Management's values also influence the goals. Taking Pick n Pay as an example
again, we see that they articulated the following values in their financial year report:3
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``We are passionate about our customers and will fight for their rights; we care for
and respect each other; we foster personal growth and opportunity; we nurture
leadership and vision and reward innovation; we live by honesty and integrity; we
support and participate in our communities; we take individual responsibility and we
are all accountable.''
. The experience of management also plays a role in the determination of
organisational goals. Sean Summers, the previous CEO of Pick n Pay, was involved in
opening the first Pick n Pay Hypermarket outside South Africa, in Brisbane,
Australia, in 1986 (later sold off on account of South Africa's political pariah status
at the time). He acknowledged the fact that this was a tough time and that he had
learnt from it.4 The following excerpt summarises the value of experience in a
business environment.
The value of experience
Recently, I was asked if I was going to fire an employee who made a mistake that cost the company
$600,000. ``No,'' I replied, `Ì just spent $600,000 training him. Why would I want somebody to hire his
experience?'' (TJ Watson)
Different organisational goals must be set by different levels of management. Basically

we see that the organisation has its goals while the people working for the
organisation have their separate goals, which are subservient to the goals of the
organisation. As stated previously the mission provides the guiding light for the
organisation in setting its goals. We distinguish between three types of goals:
. The strategic or long-term goals. These goals and plans to achieve them are set
by top management and are future-oriented with a timeframe of three to ten
years. The plans to achieve these goals focus on the organisation as a whole. Various
long-term plans can be developed by top management, among other things market
development such as done by Telkom, which has set the goal of giving thousands of
individuals access to telephones in rural communities across South Africa.
. The tactical or functional goals. These goals are determined by middle
management and cover a period ranging from one to three years. Using the
Telkom example again, we see that it is promoting ASDL internet connections by
means of an intensive marketing campaign over a period of more than a year.
. The operational or short-term goals. These are set by lower-level management and cover a maximum period of one year. Using the Telkom analogy again,
we see use of promotional pamphlets included in the monthly telephone bill for the
ASDL service as an example of a short-term plan to increase the uptake of this
service.
93
At GE5 the buzzword is ``What doesn't get measured doesn't get managed''
`Ì love you, and I know you can do better. But I'm going to take you out if you can't get it fixed.'' That
was Jack Welch's stern warning to Jeff Immelt, the present CEO of GE at a company retreat in early
1995 when he was heading GE's plastics division. Rising costs had made plastics miss its 1994 earnings
target by $50 million. This anecdote from Welch's memoir, Jack: Straight from the Gut, illustrates that
at GE you don't get to be a CEO by missing your targets. Immelt got it fixed. That's how GE works.
Targets are set, initially at a three-year planning meeting every summer known as ``session one'', and
then refined for the coming year at ``session two'' in November or December. Some adjustments are
made for economic conditions and industry-specific difficulties, but the true GE heroes are those who
meet their targets even when times are tough. And if you're able to help out with something extra to
let the company meet its overall goals when other divisions are struggling, well that's even better. Like
the last year when GE's ``short-cycle'' businesses like appliances and light bulbs weren't going to meet
their targets because of the weak economy; ``long-cycle'' businesses (power systems, medical systems)
were asked to ``do better''. ``Do better'' meant they sold more CT scanners, they sold more turbines,
they cut costs harder, they had the opportunity to grow faster in China.
And if one were to go by Welsh's favourite line, ``We don't manage earnings, we manage businesses'',
it is no wonder that GE has been declared the most admired company consecutively for the fifth year in
a row, by Fortune magazine. Not without reason because GE has a 120-year history of thriving through
economic adversity. GE also has an enviable record of pleasing Wall Street quarter after quarter, year
after year.
Activity 6.3
In discussions by the top three retailers' CEOs in South African trade journals, the
following general planning activities were mentioned:
. All three CEOs stated that they wanted to grow their organisations
internationally so that they could earn at least 30% of their total revenue
outside South Africa.
. They also wanted to increase the number of consumers buying on the internet
by 20%. They furthermore wanted to cap costs to grow at a rate lower than
inflation.
. They wanted to raise their brand awareness inside South Africa in the next six
months by at least 10%.
Which of these are strategic goals, functional goals and operational goals?
.
.
.
Growing their business outside South Africa by at least 30% is a strategic objective,
because it will take them some time to attain this.
Increasing internet buying is a functional goal (part of the marketing management
domain), while managing the cost at a rate lower than the inflation rate is also a
functional goal (financial management objective).
Raising brand awareness by 10% in six months is a short-term (operational) goal.
6.5 Summary
By now you should have a clear understanding of the process of planning and how it
interlinks with the various management activities (namely organising, leading and
control). We saw that planning is the first step in the management process that is done
once top management determines the mission and goals of the organisation.
94
Remember that planning is an ongoing process and that goals and plans need to be
adjusted and reviewed continuously within a changing environment; and should there
be a deviation from the plan, reactive planning needs to take place.
The next step is to look at organising, which involves setting up a structure through
which activities can be performed to attain the set objectives. Also needed in the
process are the necessary resources which must be assigned to certain individuals.
These matters will be discussed in the next study unit.
Let us test your understanding of the business terminology that you have been exposed
to in this study unit. Match the sentence in group A with the most likely explanation in
group B.
Group A
Group B
1 The process of goal-setting, develop- a Top management

ing of plans and implementation
2 The broad plan of how the organisa- b Operational plan
tion is going to compete in its
industry
3 The managers who have middle c The planning process
managers as subordinates
4 The process whereby management d Strategic planning
and employees jointly set goals and
whereby they progress towards the
attainment of these goals is periodically assessed
5 A specific achievement to be attained e Planning
at a future date
6 The process of formulating shorter- f Lower management
term plans for implementation in an
organisation's strategic plan
7 The process of setting goals and g Goal
deciding how to achieve them
8 The managers who do not have h Management by objectives
managers for subordinates
Question 1
The process of goal-setting, developing of plans and implementation is called the
planning process. (1 = c)
Question 2
The broad plan of how the organisation is going to compete in its industry is named
strategic planning. (2 = d)
95
Question 3
The managers who have middle managers as subordinates are called top management. (3 = a)
Question 4
The process whereby management and employees jointly set goals and where the
progress towards the attainment of these goals is periodically assessed is called
management by objectives. (4 = h)
Question 5
A specific achievement to be attained at a future date is called a goal. (5 = g)
Question 6
The process of formulating shorter-term plans for implementation in an organisation's
strategic plan is called an operational plan. (6 = b)
Question 7
The process of setting goals and deciding how to achieve them is called planning.(7 =
e)
Question 8
The managers who do not have managers for subordinates are lower management.
(8 = f)
References
1
2
3
4
5
GBE. Mining Case Study 2. Available from: www.gbeconsult.com/docs/miningsc2.pdf

[Accessed on 2 January 2010]
Pick n Pay, Annual Report 2004, p 1.
Pick n Pay, Annual Report 2004, p 1.
Gilmour, C. Financial Mail, 25 November 2005, p 23.
Murali, K. Financial Express. Date accessed 1 December 2005.
96
Study unit 7
Organising
Contents
Key concepts
Learning outcomes
Getting an overview
7.1 Introduction to organising
7.2 The importance of organising
7.3 The fundamentals of organising
7.4 Factors that influence organising and how organisations are designed
7.5 Summary
Key concepts
importance of organising
mechanisms
structure
fundamentals of organising
specialisation
departmentalisation
responsibility and authority
centralised and decentralised
authority relations
span of control
informal organisation
Learning outcomes
.
.
.
.
.
.
analyse organising as a management task, including contemporary structures

and design, demonstrating how this serves as a framework for the activities of
the organisation
explain the concepts of organising and organisational structure
describe the importance of organising
discuss the fundamentals of organising
explain how an organisation evolves from a single entrepreneur organisation
into a large organisation
identify and explain the factors that influence organisational design
97
Getting an overview
In study unit 6, we discussed planning as the first important element of the
management process. The structured grouping and combining of people and other
resources, and coordinating them in order to achieve organisational goals, constitute
the second important element of management, namely organising, which we will now
discuss.
7.1 Introduction to organising

Structure
Organising refers to the establishment of a structure within which the organisation's
activities can be carried out. It includes the subdivision of the organisation into specific
divisions and departments. It also involves the allocation of tasks to various positions in
each department.
How the resources and activities of a business are organised will differ from
organisation to organisation, depending on a number of factors such as the size,
strategies and culture of the business. Take a simple example: compare the
organisational structure of an entrepreneurial business like a small catering company
with that of a multinational like Sasol.
The catering company might consist of an entrepreneur, a chef and some casual staff
(waiters/waitresses). The entrepreneur (owner) will probably assume the role of
general manager, responsible for marketing, costing and pricing, planning, scheduling
and supervising daily activities. The chef will be responsible for purchasing fresh
produce and preparing party platters and other meals, while the casual staff will be
responsible for preparing venues, serving guests and cleaning up after functions.
Although done very simply, we have applied the management task of organising to the
catering company by dividing up and allocating the total workload for the company to
different individuals. Each person knows what is expected of him or her and what tasks
to complete.
In a very large organisation such as Sasol or Edcon (see case study in section 7.2 of your
prescribed book) the organising task is much more complex, with the total workload
of the organisation distributed over various departments, functional and product areas
and even geographical regions.
7.2 The importance of organising

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Importance
It is imperative that you understand what is meant by `òrganising'' and why it is
important to an organisation. To illustrate the importance of organising read through
the case study below and then complete activity 7.1.
Kalk Bay Fisheries
Kleinjan Jantjies works as a first-line manager at the I&J fish factory in Kalk Bay. He has been a
recreational fisherman all his life. Each December vacation he and his two best friends, Thabo and
Lukas, fish up the west coast from Kalk Bay to Saldanha, catching mostly snoek and kabeljou and if
they are really lucky the occasional yellowtail. They usually spend the last few days of their vacation
preparing their fish as pickled fish, smoked snoek, snoek pate
and whole frozen line fish for the
occasional braai.
For the three friends, fishing has always been just a social activity; however, following a particularly
successful fishing season this December, Kleinjan suggests to his two friends that they start a business
from their hobby. Kleinjan would own 50% of the shares as they would use his boat, and Thabo and
Lukas would own 25% each. After a couple of days of careful planning, the three friends agreed on
what they wanted to achieve and established their small business. Before establishing the business,
Thabo worked as an accountant and Lukas was in marketing.
A month after starting Kalk Bay Fisheries things are not going too well. In terms of the actual fishing,
things are going great. The three friends are catching a lot of fish and having a good time and their
freezers are filling up fast. However, in terms of making a profit and a success of the business, they are
way behind in their plans. Their over-eagerness to fish and enjoy the ``good'' side of the business
means several things have not happened, such as processing, packaging and distributing their catch,
marketing their products, and managing expenses and income (though there is of course no income
yet).
Another problem is that the friends have started bickering among themselves about who should do
what and who is actually in charge. A case of too many chiefs and too few Indians, as the proverb
goes ...
Clearly the business lacks structure and organisation, which is having a negative impact on the fledgling
enterprise. If things are not sorted out soon, Kalk Bay Fisheries might find itself stranded out at sea
with no life raft back to profitability.
Activity 7.1
As a management consultant to Kleinjan and his friends, explain the importance of
organising their business activities.
The following are reasons why organising is important to a business:
.
Organising results in the systematisation of tasks, resources, methods and

procedures. In the case of Kalk Bay Fisheries, this will help Kleinjan and his friends
identify what needs to be done, how exactly activities such as the processing and
packaging of fish should be carried out, and how the resources such as capital and
equipment can be allocated to the various business activities.
Organising allows the total workload to be spread evenly and according to ability
among the various employees. In the case of Kalk Bay Fisheries, all three of the
friends currently spend most of their time fishing, because this is what they enjoy
most. But, in the interests of the business, things cannot continue like this. It would
make sense for Kleinjan to take charge of the processing and packaging of the fish
as he has experience in this from I&J; similarly, Lukas should be actively marketing
the business's products as he is skilled in this function.
99
Organising results in the productive application and utilisation of resources.

Presently all of Kalk Bay's resources, both human and capital, are being utilised for
fishing activities and are not being allocated to other important functions such as
marketing and finance, let alone daily administration.
Organising allows individuals to concentrate on their field of expertise. This is
definitely not the case at Kalk Bay Fisheries, with all three friends focusing on what
they enjoy doing rather than what they are really experienced at. As a team the
three friends are not making use of their complementary skills and knowledge.
Organising results in the coordination of activities within the organisation. A
business should run harmoniously with the various business functions working
together in a coordinated manner. With reference to the Kalk Bay Fisheries case
study, the marketing function should be informing the processing (production)
function of whether there is a greater demand for snoek or for yellowtail, or
whether customers prefer pa
te or pickled fish. At present the three friends are just
catching as many fish as they can with little regard for how this might impact on
other sections of their business.
7.3 The fundamentals of organising

With an understanding of why organising is important, our attention now shifts to the
fundamentals of organising. This is a very important section for you to study. How an
organisation is structured has an extremely powerful influence on the success of the
business. (The study of how organisations are structured and designed is covered in
great detail in the Unisa honours course on organisational change and renewal.)
Building an organisational structure revolves around five building blocks or the
fundamentals of organising, namely:
. designing jobs for employees (sec 7.3.1)
. grouping employees into teams or departments based on what they have in
common (sec 7.3.2)
. establishing reporting lines (sec 7.3.3)
. establishing authority relationships (sec 7.3.4)
. establishing coordinating mechanisms (sec 7.3.5)
First you need to know the benefits and limitations of specialisation (see table 7.1 in
the prescribed book). Then you need to know the various forms of departmentalisation. Finally you need to understand the different authority relationships that exist
within an organisation.
7.3.1
Specialisation
The need for specialisation always stems from growth in the business. Specialisation
can lead to greater efficiency on the part of the worker. Specialisation, or the division of
labour, can be seen in the example of the small catering business. The business might
have been started by a housewife who made small party platters for friends and
functions at her husband's place of work. As the popularity of her party platters
increased, the total workload became too much for her to handle on her own and she
100
acquired the services of a chef, so that she could focus on the marketing and
management aspects of the business. In so doing the total workload was broken down
into smaller, more specialised, tasks.
While specialisation may result in a number of benefits for the organisation, research
has shown that when an individual does a specialised task and can no longer see the
whole picture, it may lead to boredom and demotivation. This is particularly true of
assembly line workers who do the same repetitive task over and over again. To
mitigate these negative effects, managers can apply the principles of job enrichment,
job enlargement and job rotation.
Activity 7.2
Refer back to the Kalk Bay Fisheries case study. Given the three friends' different
skills and experience that they bring with them from their previous jobs, divide the
total workload among them using the principle of specialisation. Record this division
of labour in the three columns below. As you reflect on your work, keep in mind the
following question: Have I linked tasks/activities to specialised skills or knowledge?
Kleinjan
Thabo
Lukas
The total workload at Kalk Bay Fisheries could be divided among the three friends as
follows.
101
Kleinjan
Thabo
. Fishing
. Cleaning and preparing
fish
. Producing pickled fish,
snoek pate
and smoked
snoek
. Boat and tackle maintenance
.
.
.
.
Lukas
Fishing (in rotation)

. Fishing (in rotation)
Bookkeeping
. Personal sales through
Cash flow management
``cold calling'' at butchProcurement of coners, fish shops and
sumable materials
home markets
. Development of marketing material such as
brochures and flyers
. Market research into
preferences for different fish products
By dividing the total workload among the three friends, clarity is obtained as to who
should be doing what. The tasks allocated to each of them are linked to their skills and
past experience. The principle of job rotation has also been applied to Thabo's and
Lukas's fishing activity. Although they cannot spend all of their time fishing, they could
possibly rotate on a weekly basis so they don't get bored with some of their more
routine tasks.
7.3.2
Departmentalisation
Study section 7.3.2 in the prescribed book.
There is often a great deal of confusion about departmentalisation. When we talk

about how a business is departmentalised, we always refer to the first management
level just below the chief executive. Note in figure 7.2 of your prescribed book the
example of a business departmentalised according to product, because the first two
primary divisions are product divisions (ie consumer goods and industrial goods).
However, the next level of management has been departmentalised according to
function (ie marketing, human resources, financial, etc). So clearly an organisation with
more than two levels of management will usually be departmentalised in more than
one way. Our main concern, however, is primary departmentalisation.
An organisation can be designed according to the following:
.
.
.
.
business function (figure 7.1)

product (figure 7.2 as discussed above)
location (figure 7.3)
customer (figure 7.4)
Sometimes none of these configurations may meet all the needs of a particular
business. To overcome this, the matrix organisational structure has been created to
incorporate the advantages of both the structures discussed earlier. Pay attention to
this (figure 7.5).
102
Activity 7.3
Refer back to the Kalk Bay Fisheries case study and the feedback from activity 7.2.
Given the manner in which the total workload has been divided in activity 7.2, what
would be the most appropriate way to departmentalise the business?
Although departmentalisation is not really required given the current size of the
business, how the total workload has been divided would suggest that functional
departmentalisation would be the best way to design the organisation at this stage.
Three functional departments can be identified: (1) production/operations, (2) finance,
and (3) marketing and sales.
However should the business grow considerably it would be possible to structure the
business on a second tier according to product departmentalisation, where there would
be a division for the fresh fish side of the business and a separate division for the
processed fish side of the business.
Activity 7.4
The purpose of this activity is to illustrate how an organisation can be
departmentalised differently at different levels in the organisation.
Shoprite Holdings (Ltd) is one of the largest supermarket retailers in Africa with over
1181 outlets in more than 17 African and other international countries and
employing almost 69 000 employees. Given that Shoprite is such a large,
geographically dispersed, organisation, how do you think Shoprite is departmentalised at the first level of management, just below the CEO? Try depicting this
configuration graphically.
If you thought that the Shoprite group is departmentalised according to geographical
region then unfortunately you thought wrong! A quick look at the group's
management structure, either on the organisation's website (www.shoprite.co.za) or
in the 2007 annual report, reveals that at the first level of management the group is
departmentalised according to the functional areas of the business. The management
structure is depicted in figure 7.1 below.
Figure 7.1:
Shoprite management structure (functional departmentalisation)

CEO
GM:
Group Finances
GM:
Information
Technology
GM:
Supply Chain
GM:
Human
Resources
GM:
Properties
GM:
Marketing
Although Shoprite is departmentalised according to functional areas at the topmost

level of management, this does not mean that the organisation cannot be
103
departmentalised according to product, geographical area or customer groupings

lower down in the organisational structure. Figure 7.2 illustrates a possible example in
this regard.
Figure 7.2:
Shoprite management structure (geographic departmentalisation)

CEO
GM:
Group Finances
GM:
Information
Technology
GM:
Supply Chain
Manager:
Human Resources
Africa
7.3.3
GM:
Human
Resources
GM:
Properties
Manager:
Human Resources
South Africa
GM:
Marketing
Manager:
Human Resources
India
Span of management
Another concept that you must understand in this section is span of management.
Span of management refers to the number of subordinates who report directly to a
manager. If you refer back to figures 7.1 and 7.2 above you will see that Shoprite's CEO
has a span of management of six subordinates, while the general manager only has
three subordinates reporting directly to him or her. In the Shoprite example we can
state that the CEO has a broader span of management than the general manager for
HR. See figure 7.6 in your prescribed book on how different spans of management can
result in very tall or very flat organisational structures. For example an organisation
such as Unisa has quite a tall organisational structure with over nine levels of
management. You should also take time to familiarise yourself with some of the
management implications of having either a too narrow or a too flat span of
management. Read through the case study below to see how restructuring can
influence the span of management.
Cadbury case study: how does the restructuring influence the span of
management?3
Cadbury Plc. decided to restructure its management layer which resulted in a smaller span of
management. Originally there were four regional managers together with the standard managerial
positions that directly responded to the CEO. Directly below each of those four managers were several
divisions like Sales, PR, Accounting and Marketing, but also divisions such as Chocolate, Candy, Gum,
Cadbury Brand, Trident Brand, Halls Brand.
Cadbury decided to divide the already existing regions into seven regions, which resulted in fewer
numbers of people reporting to their respective manager. The following regional managers were
appointed during the restructure: President Europe, President Pacific, President Britain and Ireland,
President North America, President South America, President Asia, President Middle East and Africa.
104
Together with these new regional management positions Cadbury introduced two new management
positions directly underneath the CEO: Director Global Gum & Candy and Director Global Chocolate.
This restructure can become really successful and effective for the company because now the experts
needed on these regional management positions are more specified and focus can be placed on the
regions most needing it. The largest markets for Cadbury are the UK and the USA, which both got
assigned an own regional manager. This will result in more efficient decision making.
7.3.4
Responsibility and authority

When you study authority relations it is important first to understand the difference
between responsibility and authority. These two concepts should always go hand in
hand. Unfortunately, in many South African organisations, people are given
responsibility (obligation to carry out a task) without the corresponding authority
(right to give instructions and deploy resources) to carry out that responsibility and this
can lead to a great deal of frustration on the part of the subordinate who has been
tasked with carrying out certain activities.
Authority relations
In the discussion of authority, the terms ``line authority'' and ``staff authority'' require
some clarification (see explanations given under section 7.3.4 and figure 7.7 in the
prescribed book).
Although the prescribed book describes only the two authority relations, namely line
authority and staff authority, some managers also have functional authority. This has
to do with direct authority relating to one's own function in another department. The
human resource manager, for example, can instruct the production manager to abide
by certain human resource policies in the factory. In so doing, he or she would be
exercising functional authority. Think of line authority as the right to issue instructions
down the line, that is to immediate subordinates. You might ask yourself where line
authority is indicated on an organisational chart. Quite simply line authority is indicated
by the vertical lines connecting the various levels of an organisational chart. Line
authority nearly always flows in a top-down manner from the most senior positions in
the organisation to the lower levels of management. Staff authority has to do with
giving advice, without having the authority to compel people to follow it. Staff
authority does not necessarily flow only down the organisational structure but can flow
upwards and horizontally as well. This type of authority is generally derived from what
is known as expert power. The different types of power are discussed in study unit 8.
Centralised and decentralised authority

Note also the difference between centralised authority and decentralised authority.
This has to do with the level at which decisions are made. The more people at the
lower levels are allowed to make decisions, the more decentralised decision-making is
within an organisation, and vice versa.
105
7.3.5
Coordination
In simple terms coordination is the ``glue'' that keeps the various departments within
an organisation together and deals with the interrelatedness of tasks and activities.
Without coordination people lose sight of the organisation's overall goals and their
part in its efforts. An organisation with a high level of coordination will ensure that the
goals and objectives of the various departments are congruent with one another and
are not contradictory.
For example, what would happen if research conducted by the marketing department
at BMW showed a greater market demand for the BMW 3 Series and very little
demand for the BMW 5 Series, while at the same time the production ratio at the
BMW plant in Pretoria was 80% for 5 Series vehicles and 20% for 3 Series vehicles?
This would lead to a shortage of the BMW 3 Series and a surplus of the BMW 5 Series.
Similarly in the case of Kalk Bay Fisheries a lack of coordination between Lukas and
Kleinjan could result in customers being promised fresh kabeljou by Lukas (marketing)
when all Kleinjan is catching is snoek.
Activity 7.5
It is important to realise that each of the management tasks of planning, organising,
leading and control have a direct impact on the success or failure of the business.
Can you think of some of the negative implications that the lack of coordination in
the BMW example might have on the business? When answering this question
remember that the different functions within a business are inextricably linked to
one another.
Some of the negative implications of the lack of coordination between the production
and marketing departments at BMW could include the following:
.
.
.
.
.
.
Dissatisfied customers have to endure long waiting periods for vehicles and out-ofstock situations at dealers. The brunt of this dissatisfaction will be borne by the
BMW dealers because they have direct contact with BMW's clients.
Bad publicity may impact negatively on sales of other models in the BMW range.
A lack of demand for the BMW 5 Series will result in high inventory holding costs
for this model, ultimately impacting on profitability.
A breakdown in trust could develop between the production department and the
marketing department because of the lack of coordination between the two
departments.
The sustainability of smaller BMW dealers across the country could be threatened
because of cash flow problems brought about by a lack of sales, as they might not
have the cash reserves to cushion out-of-stock situations.
Sales might be lost to competitors such as Audi and Mercedes as impatient and
frustrated customers take their business elsewhere.
7.4 Factors that influence organising and how organisations are

designed
106
How organisations are structured is a function of a number of different factors. The

main factors include the following:
. The stability of the business environment (sec 7.5.1). Both the level of stability
and the rate of environmental change will influence how organisations are
structured and what form of departmentalisation the organisation adopts. One
good example of environmental instability in South Africa has been in the higher
education environment over the past five years, where the entire public higher
education system has been reconfigured through a series of mergers and
rationalisation initiatives. The merger between the old Unisa and former Technikon
South Africa has had a significant impact on how the new Unisa is structured, in
terms of its functional, product and customer departmentalisation. This need to
restructure the University was brought about by external environmental change and
instability.
. The strategy of a business (sec 7.5.2). As the old adage or saying goes, ``structure
follows strategy''. This is indeed true since an organisation's strategy has a direct
impact on how the business is structured. A renewed focus on technology might
result in a significantly greater allocation of resources to a business's IT department.
Similarly a business such as General Electric (GE) with a focus on product
development and innovation will allocate significant resources to its research and
development department.
. The size of the business (sec 7.5.3). If you read the Kalk Bay Fisheries case study at
the beginning of this study unit and completed activity 7.4 it should be clear to you
that the size of an organisation has a definite impact on how it is structured. Small
businesses are not organised in the same way as large, complex organisations such
as the Shoprite group. Historically, large businesses are often characterised by many
levels of management, a high degree of specialisation and extensive departmentalisation; however in recent years there has been a shift towards flatter and leaner
organisational structures. In this regard see the Jack Welch extract at the end of this
study unit.
. The competence of employees (sec 7.5.4). How organisations are structured is
not only a function of the competence of staff but also of the attitudes and beliefs of
top management.
. The organisational culture (sec 7.5.5). The beliefs and values shared by the people
in a business influence how the organisation is structured. In this regard it will not
make sense for a business to be structured in a very tall bureaucratic manner when
the culture is characterised by innovativeness, teamwork and few rules and
regulations.
Make sure that you understand how each of these factors will influence the
organisation structure.
7.5 Summary
By discussing the development of a structure or framework within which the tasks to
be performed for the accomplishment of goals, and the resources necessary for this,
are allocated to particular individuals and departments, we were explaining the concept
of organising. In this study unit we have also looked at the importance and the
fundamentals of organising. Finally, the factors which influence how organisations are
structured were discussed.
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From here a manager has to take the lead to set the activities involved in planning,
organising and control in motion and see that plans are translated into action. We deal
with the third fundamental element of management, namely leadership, in study unit
8.
1
Read through the extract below from Jack Welch's second book Winning and then
answer the questions that follow.
In 2004, Clayton, Dublier & Rice purchased Culligan International, the water
treatment and supply business with about $700 million in annual sales and about five
thousand employees spread across 13 countries. One of CD&R's partners, George
Tamke, the former co-CEO of Emerson Electric, was named chairman. George was
well aware that Culligan had been through ten owners in the previous fifteen years,
but he could not believe the organisational disarray that hit him when he walked in
through the door. George found that many employees simply didn't know where they
fit in whom they report to, who reported to them, and what results each person was
responsible for.
Similarly I just recently spoke with Dara Khosrowshahi, the new CEO at the online
travel company Expedia. Dara also walked into an organisational chart quagmire
when he arrived on the job at the end of 2004. Expedia, less than ten years old and
highly entrepreneurial, had been growing so fast, and no one had taken the time to
clarify reporting roles and responsibilities. As his first priority Dara set out to fix that.
If you want to manage people effectively, help them by making sure that the
organisational chart leaves as little as possible to the imagination. It should paint a
crystal-clear picture of reporting relationships and make it patently obvious who is
responsible for what results. More importantly it should be flat!2
1
In both the CD&R and Expedia examples, what key principles of organising have
the organisations failed to apply successfully?
Do you agree with Jack Welch's statement that organisational structures should
be as flat as possible? Why do you agree, or why do you not agree?
Which one of the following statements is wrong?

a
b
c
d
Responsibility and accountability are closely connected.

Authority is granted to a manager by the enterprise.
When a task is delegated, accountability is delegated simultaneously.
According to the acceptance theory of authority, authority originates from
the lower levels.
The human resource manager of an enterprise instructs one of his personnel

officers to perform a particular task. In the process he is exercising ... authority.
a
b
c
d
functional
organisational
staff
line
Question 1
It seems both organisations have completely forgotten about authority relations in the
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organisation and establishing responsibility and authority to each post in the

organisational structure. Staff members are unclear about which activities they are
responsible for and whom they should take orders from and give orders to. This can
lead to great confusion and result in work not being carried out. It is also clear that
organisational charts, indicating line and staff authority, have not been developed for
the two organisations.
The `òrganisational structure quagmire'' described by Jack Welch could also be as a
result of a lack of coordination between individuals and departments in the
organisation.
Question 2
Although not covered in a great amount of detail in this module, Jack Welch's comment
that organisational structures should be flat alludes to the many contemporary
approaches to structuring organisations. Flatter organisational structures are indeed
becoming more prominent, as are matrix, team-based and virtual organisational
structures. Flat organisational structures are often a business's response to the
frustrations inherent in highly bureaucratic structures, which include slow centralised
decision-making, an obsessive concern with rules and a lack of innovativeness.3
Question 3
Contemporary organisational structures are covered in more detail in the second-year
module General Management (MNG2016). Option c is incorrect because a manager,
in the act of delegation, can transfer both his or her authority and responsibility to a
subordinate but never his or her accountability. This is the golden rule of delegation:
whoever delegates a task remains accountable for that task. See page 166 in your
prescribed book for a further explanation of authority and responsibility.
Question 4
Option d is correct. Line authority is the authority delegated down through the line of
command, in this case from the human resource manager down to a personnel officer.
References
1
2
3
Shoprite Website. Information accessed at www.shoprite.co.za on 3 March 2008.

Welch, J. 2005. Winning. London: Harper Collins.
Luijf, T. 2008. Cadbury case study, confectioner restructuring. Information accessed at http://www.tnijsluijf.nl/
attachments/013_Cadbury%20casestudy.pdf
109
Study unit 8
Leading
Contents
Key concepts
Learning outcomes
Overview
8.1 Introduction
8.2 The nature of leadership
8.3 Leadership theories
8.4 Motivation
8.5 Groups and teams
8.6 Communication
8.7 Summary
Key concepts
nature of leadership
leader characteristics
leadership
authority
leadership models
Maslow's theory
components of the leadership task

factors influencing power
motivation
kinds of groups
communicationn
Learning outcomes
. analyse leadership as a management task, by (1) explaining the meaning of
concepts such as leadership, authority, power, influence, delegation, responsibility and motivation, and (2) differentiating between leadership and management
. discuss basic leadership models, by referring to the factors influencing effective
leadership
. demonstrate an understanding of motivation as a key role of a leader by
describing the fundamental model of motivation
. describe a simple communication model
. discuss groups in the organisation, by referring to (1) the reasons why groups
are formed, (2) the kinds of groups, and (3) the characteristics of groups
. differentiate between groups and teams in the organisation
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Overview
In study unit 7, we discussed the second important element of management, namely
organising. The third complex element of management is called leadership. Leadership
is that element of management which sets activities and people in motion with a view
to ensuring that goals are accomplished. In other words, leadership refers to the ability
to inspire others to achieve an organisation's goals. This study unit deals with the
relationship between leaders and followers as well as the difference between managers
and leaders. This study unit then discusses the different components of the leading
function and highlights the importance of communication within a business.
8.1 Introduction
Activity 8.1
Read through the entire chapter 8 as well as section 1.3.1 in chapter 1 and section
11.7.2.2 in chapter 11 in your prescribed book. Based on the partly completed
framework of the following mind map, complete the rest of the map in the same
way. Note that Maslow's hierarchy of needs is not covered in detail in chapter 8 of
your prescribed book; however it is very important and you should therefore refer
to chapter 1 and chapter 11 for additional reading. Maslow's hierarchy of needs will
be covered in the examination.
111
POWER
LEADERSHIP
MODELS
.
.
.
.
.
.
.
.
LEADERSHIP (8.2)
. Managers
. leaders
MASLOW'S
THEORY
GROUPS
COMMUNICATION
.
.
.
.
.
This study unit deals with the third management task, namely leadership. The purpose
of this activity was to illustrate the main elements of the leadership task from the outset
of the study unit. This is important because many people often confuse management
with leadership and use the two terms interchangeably, rather than viewing leadership
as one of the four main tasks of any manager. The mind map should also serve to
establish a simple structure for studying the main elements of the leadership task. To
this end, the study unit discusses the following:
.
.
.
.
.
.
.
the nature of leadership

leadership and management
matters such as authority, power, influence, delegation and responsibility
leadership theories
a model of motivation, Maslow's theory
groups and teams
communication
You can make use of similar mind maps for all of the other study units covered. This will
help you extract the main elements of the theory from your prescribed book, and in so
doing allow you to focus on the most important theory for the examination.
8.2 The nature of leadership

Leadership
It is important that you familiarise yourself with the definition of leadership and show
that you understand this definition very clearly:
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Leadership is defined as the influencing and directing of the behaviour of

subordinates in such a way that they willingly strive to accomplish the goals or
objectives of the business.
There are a number of important terms in this definition, but two particularly
important ones are the words `ìnfluence'' and ``willingly''. The word `ìnfluence'' is used
in a very wide context here. For example, giving instructions to a subordinate would fall
under the definition of `ìnfluencing'' but so too would threatening a subordinate with
dismissal if his or her performance does not improve (although not the best example of
good leadership).
Leadership is clearly a process of social influence directed at stimulating action towards
achieving the goals of the business.
The second important term in the definition of leadership is the word ``willingly''. This
attribute of leadership is evident in the following two very famous statements by
former American president Dwight D Eisenhower: ``You don't lead people by
hitting them over the head, that's assault not leadership''; and ``Leadership is
the art of getting someone else to do what you want done, because he wants
to do it''. Richard Branson (the founder of the Virgin Group) remarks that there are
many ways to get your point across and make your business successful without being
aggressive: `Àlways remember that you love what you do and your role is to persuade
others to love your business too, therefore to want to work with you.'' All of these
statements refer to influencing the behaviour of employees to pursue the goals of the
business willingly and not under coercion or through the use of power and formal
authority.
Leader
The word ``leader'' can be used in two ways. Sometimes the word is used to refer to
someone who ``takes the lead''. We speak of someone being `à leader in a specific
industry''. A person like Sol Kerzner (of Sun International and founder of Sun City), for
example, would be considered a leader in the hotel industry similarly Raymond
Ackerman (of Pick n Pay) is a leader in the retail industry. However, a more accurate
way to describe these people would be to say that they are entrepreneurs.
The second use of the word ``leader'' refers to the management of subordinates. This is
the meaning of the word that applies to the management task of leadership. It is very
important that you note this distinction. It is not uncommon for someone to be a very
successful entrepreneur (ie a leader in business or a pioneer in a specific industry) and
yet be a poor leader of people, in the sense that he or she finds it difficult to motivate
staff, delegate responsibility, inspire them to greater achievement, develop their skills,
and so on.
Characteristics
Your prescribed book states under section 8.2.1 that a good manager is not necessarily
a good leader, and vice versa. Much has been written in management literature about
the differences between managers and leaders. In this context, your prescribed book, in
section 8.2.1 defines a manager broadly as being a good administrator. This is
particularly true in a bureaucratic organisation, where a manager may be extremely
113
good at carrying out procedures, having everything in place, always meeting deadlines,
and so on, and yet not be very good at inspiring and motivating his or her subordinates.
It is also possible to be an outstanding leader but a poor manager because you do not
plan very effectively, or exercise sound control yet you may get tremendous support
and commitment from subordinates for your ideas and vision.
Activity 8.2
1
Having read the above sections on the nature of leadership and what we
understand a leader to be, would you consider yourself to be more of a leader
or a manager? Give reasons for your answer. Consider reading section 8.2.1
again before answering this introspective question.
Do you think that you can be both a leader and a manager?
This activity relates to the first outcome for this study unit. Some of the differences
between what can be considered leadership and management are highlighted in the
table below. Use this table to judge for yourself whether you conform more to a
leadership role than to a management role. Note, however, that the distinction
between leaders and managers is not clear-cut and has been shown to be quite
controversial in management literature. The table below is therefore merely a summary
of some of the differences.
Leaders
Managers
Lead and direct
Plan, organise and control
Create and articulate vision and change
Implement vision, change and policy
Innovate
Administer
Develop
Maintain
Inspire
Control
Do the right things
Do things right
The above table raises the question of whether the same person can act as both a
leader and a manager. The answer to this question is ``Yes!''. To improve the
performance of any organisation, it is desirable that all managers also display attributes
of good leaders. This is why more and more organisations are embarking on leadership
development initiatives to develop strong managers into strong leaders. Turning
managers into leaders so that they become better managers is the underlying principle
behind the study of leadership. Figure 8.1 in your prescribed book also illustrates how
one can go about developing managers into leaders.
8.2.1
The components of the leading function
Now that we have clearly defined leadership and leaders in the business context, we
can shift our focus to identifying a few of the main components of leadership, namely:
.
.
.
.
.
authority
power
responsibility
delegation
accountability
114
8.2.1.1
Authority
From the discussion above it should be clear to you that regardless of which level of
management they belong to, leaders are also managers, responsible for ensuring that
subordinates work together to achieve the organisation's goals. With a position of
management comes formal authority. If you refer back to the previous study unit you
will see that we defined authority as the formal right to give instructions, allocate
resources and demand action from subordinates. Formal authority is closely related to
leadership and is granted to a leader by the organisation through delegation.
However, it is important to remember that we defined leadership as the ability to
influence subordinates to pursue goals willingly. A leader who merely exercises his or
her formal authority to bring about a result will be acting more as a manager than as a
true leader, because subordinates are obliged to carry out a manager's instructions. In
order to influence the behaviour of others a leader must also gain the respect of his or
her subordinates.
8.2.1.2
Power
Power (sec 8.2.2.2 in your prescribed book) is one of the key elements associated with
leadership and comes in five main forms. These different forms of power often
determine whether a leader is effective or ineffective in influencing subordinates and
securing their commitment to organisational goals and the leader's vision. It is very
important that you understand the different kinds of power that a leader can use, and
how this affects subordinates' performance.
Line authority is always linked to a particular position in the organisation. For example,
the marketing manager has the authority to decide on a sales strategy, as well as give
instructions to the sales, advertising and marketing research teams. He/she also has the
authority to allocate the marketing budget accordingly. Because this authority is
position-specific, the marketing manager cannot give instructions to staff in the finance
or production departments or decide on purchasing strategy for the business.
Power, on the other hand, is linked to both the person and (sometimes) the position
and refers to the influence that leaders exert over their subordinates. Table 8.1 in your
prescribed book is a useful perspective on how different forms of power may result in
differing levels of commitment and compliance by subordinates. The five types of
power identified in your prescribed book include:
.
.
.
.
.
legitimate power
power of reward
coercive power
referent power
expert power
Looking at the definitions of the five types of power we very quickly see that power can
be either positional or personal. The first three types of power are clearly related to a
manager's position in the organisation and can be likened to formal authority. The last
two types of power are both forms of personal power and are not derived from a
manager's position within the organisation. Make sure you understand these different
115
forms of power and how using different forms of power can result in differing levels of
commitment from followers. This is a very important section of the study unit for you
to master.
8.2.1.3
Follower commitment
Successful leadership depends on follower commitment and compliance. Here

managers depend on their subordinates, giving the subordinates a certain level of
indirect `àuthority''. Effective managers must use their command of power in such a
way that there is a healthy balance between their own power and that of subordinates
(see figure 8.3 in your prescribed book for a further explanation).
Activity 8.3
Start by asking yourself the following question:
In fulfilling the leadership task of management, should a manager make use of
formal line authority associated with the specific position or rather the personal
power he/she possesses?
Having thought about the above question, now consider the well-known business
and political leaders listed below. Can you identify the type of power they possess,
be it personal or positional, as well as the source of their personal power? Use the
template below to complete the activity. You might not be familiar with some of the
leaders listed below. If this is the case it would be a good idea to read up about their
achievements, either on the internet or in the library resources available to you.
Tip: Remember that leaders very seldom possess only one form of power and more
often than not they influence their subordinates through the use of a combination of
power sources.
Leader
Type of power
Source
Your own boss or line

manager
President Jacob Zuma
Nelson Mandela (former
South African President)
Bill Gates (founder and
CEO of Microsoft)
Oprah Winfrey (owner of
HARPO Productions and
host of the Oprah Winfrey
show)
Jack Welch (former CEO of
General Electric)
Should you need to read more about these prominent leaders you can find more
information at the following websites:
116
www.hbs.edu/leadership/database
http://www.southafrica.info/doing_business/trends/women/
businesswomen.htm
This activity relates to the first learning outcome of the study unit. To answer the first
question you can consult table 8.1. This table gives a good idea of the outcomes of a
manager drawing on different sources of power; it illustrates that commitment from
subordinates is more likely when a leader draws on personal forms of power such as
referent and expert power. Positional power is most effective in ensuring compliance
with requests or instructions.
The second part of the learning activity dealt with the types of power used by
prominent leaders. It is quite possible that your answers to this activity will differ from
the feedback below, because the views of subordinates regarding the power held by a
leader can differ.
Leader
Type of power
Your own boss or line manager
Legitimate +
Your line manager or boss will
whatever you may always have a degree of legithave included
imate power to give you instructions and to allocate resources.
This type of power is derived
from formal authority delegated
to the line manager. Your line
manager or boss may also be in a
position to give or withhold
rewards.
President Jacob Zuma
Legitimate power
Nelson Mandela (former South Referent power

African President)
Source
The president of a country possesses a great deal of positional

power as the head of the nation.
Mr Mandela no longer possesses
the legitimate power that he
once enjoyed as President; however many people still follow him
as a leader and role model, and
identify with his values and morals. Mr Mandela is a good example of a leader with extensive
referent power.
Bill Gates (founder and CEO of Legitimate power + As CEO, Bill Gates has a lot of
Microsoft)
expert power
legitimate power; however in his
early days with Microsoft his
leadership was based largely on
his technical excellence and
knowledge.
Oprah Winfrey (owner of HAR- Legitimate power + Although Oprah Winfrey has
been described as a meticulous
PO Productions and host of the referent power
Oprah Winfrey show)
businesswoman, her true power
base is drawn from referent
power. Her caring approach and
involvement in people's lives has
resulted in her becoming one of
the most influential women in
the United States.
117
Leader
Type of power
Source
Jack Welch (former CEO of Gen- Legitimate power + Although considered one of the
eral Electric)
power of reward + top businessmen of the 20th
coercive power
century, Jack Welch's approach
to management came in for
some criticism. A recent management publication quoted Jack
Welch as saying ``Business success is a matter of reward and
punish''. This approach was very
evident at GE in the days of Jack
Welch where the top 20% of
employees were richly rewarded
while the worst-performing 10%
were fired.
8.3 Leadership theories

The above table in activity 8.3 identified a number of prominent leaders. Apart from
the types of power they possess, you might have asked yourself the question: ``But
what makes them great?'' If you did you are not alone. Researchers have been asking
similar questions for many years now and in so doing have tested a number of models.
In this study unit we discuss three important theories of leadership, namely:
. the trait (characteristics) theory of leadership
. the behavioural theory of leadership
. the contingency (situational) theory of leadership
Activity 8.4
Before reading section 8.3 in your prescribed book try describing the characteristics
of your ideal leader. Sketch the person in your mind and write down all of the
characteristics or traits that the person exhibits.
Trait theory of leadership

What does the person you described look like (eg male or female; tall or short)? What
kind of personality does he/she have? Did you describe this person as imaginative,
intelligent, honest, visionary, courageous? If you had difficulty making a comprehensive
list of traits, or found yourself with an endless list, then you are once again in a similar
position to those academics who first sought, as early as the 1930s, to define leaders
according to a set of characteristics or traits.
This first leadership model, known as the trait theory of leadership, suggests that
certain leadership characteristics are common to all successful leaders, and that if we
can identify those characteristics, we can place people with such characteristics in
positions of leadership. The problem with this theory is that over half-a-century's worth
of research has failed to provide a universal set of characteristics for successful leaders.
Successful leaders in history have displayed very different traits. Compare for example
the leadership traits of the leaders identified in activity 8.3. While all could be described
as good leaders, their personal characteristics might differ greatly.
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Behavioural theory of leadership

Following researchers' attempts to identify a single set of characteristics, the next
model of leadership that began to emerge is known as the behavioural theory of
leadership. This leadership model was based on the assumption that good leaders are
determined by how they behave and that successful leaders behave differently to
unsuccessful leaders. This behaviour is commonly referred to as a ``leadership style''. In
other words, a leader who treats subordinates in a certain manner will be seen as a
successful leader. Your prescribed book, in section 8.3 highlights four major research
studies with regard to the behavioural theory of leadership; make sure you familiarise
yourself with these.
A good contemporary example of different leadership styles would be to compare
Donald Trump (billionaire real estate developer) and Sir Richard Branson (CEO of
Virgin). Donald Trump has been widely described as autocratic and ruthless in his
leadership style and exhibits many of the behaviours associated with a task-oriented
leader. Sir Richard Branson is quite different in his leadership approach, and is described
as the most flamboyant business leader in modern times, with a clear focus on people
leadership. Branson's leadership style is more characteristic of a relationship-oriented
leader.
It is important that you familiarise yourself with the four main studies into the
behavioural theory of leadership, namely:
.
.
.
.
The University of Iowa study, which identified three basic leadership styles, namely
autocratic, democratic and laissez-faire;
The Ohio State University study which identified two leadership styles, namely
initiating structure and consideration;
The University of Michigan study which distinguished between production-oriented
leaders and employee-orientated leaders; and lastly
The Blake and Mouton study which developed the Managerial Grid.
Contingency or situational theories of leadership

The third leadership model to emerge opposes the view that there is `òne right way to
lead'' and rather attempts to determine the best leadership style for a given situation
depending on various factors, namely the type of objectives that have to be reached,
the type of subordinates at the leader's disposal, and so on hence the name situational
leadership.
Again, it is very important that you familiarise yourself with the two main situational
leadership theories, namely:
.
.
Fiedler's contingency theory of leadership

Hersey and Blanchard's situational leadership model
8.4 Motivation
Study section 8.4 as well as sections 11.7.2.1 and 11.7.2.2 in the prescribed
book.
Every person, whether employed in an organisation, a full-time student, a housewife or
an entrepreneur, has personal goals that he/she strives for, and to some extent will be
119
driven intrinsically (internally) to achieve these goals. At the same time it is important
that employees are also motivated to achieve the goals of the organisation. Other than
the decisions that employees make on their own about liking their work, the manager
in his/her role as a leader is the most influential factor in ensuring employee motivation
and morale, and ultimately pursuit of organisational goals. Read through the case study
about Siemens to see how they motivated their employees within a creative
environment.
Siemens: Motivation within a creative environment2
Siemens is the engineering group that is behind many of the products and services people take for
granted in their daily lives. The list of products designed and manufactured by Siemens is almost
endless, from traffic lights to gas turbines to domestic appliances like kettle and fridges.
Engineers use scientific principles to develop products or systems to solve real-life problems. Much of
engineering is about innovation rather than invention. This means that engineers transform creative
ideas into improved products, services, technologies or processes. A career within the field of
engineering is exciting and varied as the work is constantly changing. Becoming an engineer at
Siemens is about using energy, ideas and passion. It requires a range of skills and abilities that are
needed across the whole business.
Siemens provides opportunities for young people at all levels to enter the world of engineering.
Siemens also recruits undergraduates and graduates into professional engineering jobs. It goes beyond
the standard approaches to attracting good people because its employees enable it to be competitive.
This approach has led to Siemens becoming an open culture with opportunities for employees at all
levels. However, regardless of entry level Siemens employees enjoy wide-ranging opportunities for
further education and training. By following an engineering career, Siemens people have the
opportunity to move into other disciplines. For instance, they may go into areas such as research,
manufacturing, sales and marketing, finance, or project management.
Motivation stimulates people and encourages them to willingly put more effort into doing something.
Well-motivated employees will feel fulfilled and happy in the workplace. Additionally, they are likely to
be more productive and produce work of a higher quality. Motivated individuals are influenced by a
number of different factors. Initially, everybody has basic needs, such as for food or accommodation,
which pay can provide. However, there are many other different factors that motivate individuals. A
creative environment, such as that provided by engineering, can be very stimulating.
The structure of Siemens motivates individuals by empowering them to improve processes. Siemens
provides the sort of environment where workers can learn new things and are given the opportunity to
progress within the business. Some staff at Siemens thrive on the problem-solving aspect of their roles
and respond to challenges. Other employees find the varied nature of the work motivating having
the opportunity to try different roles. Siemens employees also value the fact that they are allowed to
be imaginative and can influence their own work. This culture demonstrates that Siemens values its
employees and helps to recruit the next generation of engineers.
If you want to be a successful manager in this task you must understand how
individuals are motivated and what motivates them (motives). In so doing you will be in
a position to influence the behaviour of subordinates.
Many theories have been developed that deal with the motivation of employees. In this
study unit we introduce you to the basic model of motivation as well as to Maslow's
hierarchy of needs as addressed in section 11.7.2.2 of the prescribed book. It is very
important that you understand this hierarchy and its application as well as how the
hierarchy is illustrated diagrammatically in figure 11.3 of your prescribed book.
Maslow's theory suggests that although all motives are present in every adult (babies/
toddlers acquire them over time), not all motives influence an individual. We may
spend a great deal of effort satisfying our needs for esteem, but when there is a sudden
120
earthquake, the only motive that will influence our behaviour is the need to survive. In
the same way we may eat a meal regularly, but we would not be motivated to change
jobs and join a company that gives its employees free meals. In other words, we still
take steps to satisfy certain needs, but we are driven by those needs that are basically
unfulfilled. According to Maslow, different people experience different levels of need
fulfilment. Put differently, some people may be striving to satisfy their social needs,
while others are mostly driven by their esteem needs. Some may even be at a level
where their main concern in life is to satisfy their physiological needs.
The basic model of motivation is depicted in the figure below and described briefly
under section 8.4 of the prescribed book. Make sure that you understand this model
and how it can be applied in the organisational context. An example of the application
of this model is given in the activity that follows.
BASIC MODEL OF MOTIVATION
(1)
INTERNAL NEEDS,
MOTIVES OR DRIVES
(2)
" BEHAVIOUR OR ACTION
!
(5)
REINFORCEMENT
3
(DETERMINES FUTURE
NEEDS)
(3)
" PURPOSE OR GOALS
!
(4)
SATISFACTION
Adapted from: Cronje, G, Du Toit, GS, Marais, A & Motlatla, MDC. 2003. Introduction to Business Management.
6th Edition. Oxford: Cape Town.
Activity 8.5
Read through the case study below and then complete the activities that follow.
Kalk Bay fisheries on the move

Refer back to the Kalk Bay Fisheries case study in study unit 7. Since we last caught up with Kleinjan
and his friends (now more like business partners), they have managed to sort out their structural issues
and lines of authority. With these issues out of the way the friends were able to get down to business.
As a result Kalk Bay Fisheries has grown into a medium-sized business with a total of 20 employees.
Kleinjan and his friends are no longer doing the fishing and processing themselves; now they are more
involved in the management of the business and the leadership and motivation of their 17 employees.
Lukas now heads up the marketing department and also oversees the activities and performance of
the sales team, consisting of the following four people:
. Phindiwe 30-year-old mother of two toddlers, with a BCom degree in marketing, who wants a job
that pays the bills and puts food on the table but also allows her flexibility to be with her children.
Lukas rates her as an average salesperson, but with a lot of potential.
. Gavin 26-year-old ``high-flyer'' and big-spending graduate. He lives the good life and is not too
worried about his long-term career path as long as he is able to finance his extravagant lifestyle.
Lukas rates him as an excellent salesperson, but is worried about his level of commitment to the
company.
. Clair 32-year-old single woman, very career-focused and highly ambitious, with an MBL degree
from Unisa. She enjoys the excitement of the sales environment but has set her sights on moving up
the corporate ladder. Lukas rates her as an average salesperson but worries about how he might be
able to accommodate her higher up in the company.
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. Bongani 40-year-old father of three school-going children. He enjoys the sales environment but is
not sure whether he will be able to make ends meet every month, let alone put aside some of his
income for his children's tertiary education. Bongani values his job at Kalk Bay Fisheries very much
and dreads losing it. Lukas rates him as a good salesperson and the most reliable member of the
sales team.
Although Kleinjan and his friends are very pleased with the growth of their business in recent times,
they believe they could grow their business even further. Fishing has been very good recently and
excess production capacity is available in their factory. Most of Kalk Bay Fisheries' sales are on a
business-to-business level and as such the sales team is viewed as the key driver of growth for the
company. The friends have agreed on a target to increase overall sales by 25% in the coming quarter.
Lukas is confident that his team can reach this target, especially considering that members of the sales
team are employed on a commission basis and as such have the power to influence their own income
levels. All members of the sales team also have company-subsidised vehicles. He is also aware that as a
leader it is his job to motivate the members of his sales team towards the attainment of this target. He
is however perplexed about what would motivate the individual members of the sales team and
therefore how he could go about motivating them.
The four members of the sales team have different personal needs, motives
and drives. Can you list the different needs of each team member?
Now that you have completed the first step of the motivation model, make
suggestions about how Lukas might go about motivating the different
members of his team towards the goal of 25% growth in sales.
This activity relates to the third learning outcome of the study unit.
Your prescribed book describes a motive as an inner drive to satisfy some kind of
human need. An analysis of the brief descriptions of the four members of the sales
team shows that the needs and motives of the four individuals clearly differ, so how
they can be motivated will also differ. It is important for Lukas to realise this. The
primary motives of the four individuals can be identified as follows:
.
.
.
.
Phindiwe ? stability of income and flexible working hours

Gavin ? high income potential, need for material possessions
Clair ? recognition, future career prospects, power
Bongani ? stability of income, job security, additional income possibilities
Can you see how the motives of the four individuals differ? For Lukas, motivating each
of the four employees will require a different approach because their individual needs
differ, while at the same time he must ensure that the organisational goals are met.
The second part of the activity required you to suggest how Lukas might go about
motivating the different members of the sales team. Here you may have suggested the
following strategies:
.
Phindiwe ? Establish a performance agreement whereby, provided the target of

25% growth in sales is achieved consistently, Phindiwe will be allowed to either
arrive an hour later for work or leave an hour earlier, depending on her family
commitments. If she exceeds the 25% target, she will need to work only until noon
on Fridays. In accepting this agreement, Phindiwe will forfeit some of her annual
performance bonus (monetary) for a more flexible work week, but can still expect
an increase in commission-based income of 25%.
Gavin ? He seems motivated by extrinsic material rewards. Lukas could establish a
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performance agreement with Gavin whereby if he reaches or exceeds the target of

25% growth he will get a monthly financial bonus over and above his commission.
If he achieves a growth in sales exceeding 30% he will be eligible to upgrade his
company car to a 1 Series BMW.
Clair ? She will probably be the most difficult of the four employees to motivate
because her motives are more intrinsic and it will be difficult to motivate her with
financial or material rewards. Lukas has noticed the need to grow the sales team,
and the associated possibility of appointing a sales manager. He might make an
across-the-board offer to all four salespeople that anyone exceeding the 25%
target will be eligible to apply for the position of sales manager. While he is sure
that all of his staff will be eligible to apply for the position he is confident that with
her drive, focus and qualifications he will be able to appoint Clair as the sales
manager. In the meantime, to ensure fairness and equity of rewards, he could
either offer Clair financial incentives similar to Gavin's or could reach an agreement
with her whereby, if she exceeds the target of 25%, the company will sponsor her
to do the Advanced Programme in Marketing Management at the Unisa Centre
for Business Management.
Bongani ? His needs centre largely on income and stability of income. With this in
mind Lukas can reach an agreement with him whereby, if the target of 25% is
reached, he will receive a monthly financial bonus over and above his commission.
This approach is similar to that of Gavin; however Bongani is also concerned about
his ability to provide for his children's higher education in the future. Lukas could
reach an agreement with Bongani whereby all commission earned on sales beyond
the 25% target will be placed in a tax-exempt education fund for his children. This
benefit will be held by Kalk Bay Fisheries until such time as Bongani requires the
funds for his children's education. Should he leave the organisation prior to this
occurring, the fund will be paid out to Bongani, but will however be subject to
standard income tax. In this way Lukas is also ensuring the loyalty of his most
reliable salesperson.
We have discussed some of the possible strategies that Lukas could employ as a leader;
of course there are many other possibilities. How do your suggestions compare with
the ones mentioned above? Although the strategies suggested differ greatly, it is still
important to remember that employees will always consider their own inputs and
outputs against their rewards and also the rewards of others. So Lukas will have to
ensure that while he motivates his employees in different ways, he does so fairly, openly
and consistently.
8.5 Groups and teams

Employees of the modern organisation do not work merely as individuals hidden away
somewhere in a small cubicle working in isolation from their co-workers. As the world
of work becomes more and more complex, so the need grows for organisations to
approach work and problems in a multidisciplinary and cross-functional manner. This
has given rise to the use of groups in teams in organisational structures with the
associated need for team leadership; this is the reason that groups and teams are
discussed as part of this particular study unit.
In section 8.5 of your prescribed book a clear distinction is made between groups and
teams and it is important that you are able to identify and understand the difference
between the two. It is also important that you familiarise yourself with the different
types of groups and teams.
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8.6 Communication
Importance and elements
By now you should have realised that leaders are human beings involved with other
human beings. For leaders to influence their subordinates they must be able to
communicate effectively. This section briefly touches on the importance of communication and the elements involved. If you have not understood the explanations in the
prescribed book and/or this study guide, then the communication between lecturer
and learner has not been successful! This could be as a result of faulty sending, or faulty
receiving, or both. It could even be a case of the channel of communication being
ineffective, because you would have benefited more from attending a discussion class
than reading the study guide on your own.
If we were to take this example and break it up in terms of the communication process
as highlighted in figure 8.4 of your prescribed book, it would look something like the
figure below.
Study Guide
Tutorials
Receiver:
!
MNB101D
Contents
Lecturers
Channel:
Message:
!
Sender:
Students
!
FEEDBACK
Students sometimes phone their lecturers for information that has been clearly set out
in a tutorial letter but they simply didn't bother to read it. That would mean poor
communication on account of poor receiving. It could also be that the explanation is so
vague that the student still doesn't understand it even after reading it. This would
simply be poor communication because of poor sending in terms of the message being
poorly constructed.
Similarly, in the business environment we often see the effects of poor communication,
and just as often hear excuses such as `Òh, so that is what you meant!'' or `Ìf you had
said so in the first place, things would have been far clearer!''
Activity 8.6
Read through the brief case study below and answer the question that follows.
Communication at Kalk Bay Fisheries

Kleinjan Jantjies calls Mr Mahlangu, his operations manager, to come to his office. When Mr Mahlangu
walks in a minute or two later, Kleinjan is busy with what appears to be an unexpected but very
important telephone conversation with one of his fishermen. After a few minutes he completes the
phone call, but his mind is clearly still very much on the conversation he has just had.
``Hello Mr Mahlangu. Take a seat. This is why I called you: at present in the factory, we have an official
lunch break lasting 45 minutes. As from the first of next month, I want to reduce this lunch break to 25
124
minutes, and bring the afternoon going-home time forward by 20 minutes. I am sure the factory staff
will appreciate the opportunity to get home earlier. Will you please inform everyone concerned?
Thanks for your time.''
Kleinjan then begins to examine some papers on his desk and indicates with a casual wave of his hand
that he has nothing further to tell his supervisor.
Mr Mahlangu, in turn, opens his mouth as if starting to say something, but thinks better of it and just
says, `ÒK, Mr Jantjies.''
Mr Mahlangu exits, looking rather despondent.
Do you think Kleinjan has been effective as a leader in terms of communicating with
his operations manager? Can you suggest how he could improve on this
communication?
There are a number of flaws in the way that Kleinjan has approached this process of
communication. Let us identify a few of them:
.
.
.
.
First, he has not given his full attention to the task in terms of scheduling a meeting
and some time to discuss the matter of changing lunch and home-going times. This
has resulted in the communication being rushed and interrupted (noise).
Second, he has not provided a justification for his thinking or decision regarding
working hours (message incomplete).
Third, he has not allowed Mr Mahlangu to ask any questions or make alternative
suggestions (feedback). He has also not engaged Mr Mahlangu on his impressions
regarding the matter.
Fourth, although Mr Mahlangu may have received and understood the message
clearly, he might not have accepted it and thus might not implement the decision as
desired. This is brought about by Kleinjan simply dismissing him with a casual wave
and not allowing time for discussion and feedback.
From the above problems you should be able to see that for communication to be
effective it needs to be a two-way process and not just a one-way command. Effective
communication ensures that a leader does persuade subordinates to work willingly
towards the goals of the organisation.
8.7 Summary
Leadership is the third task of management and is the one that sets up and keeps the
business going. As you have realised from our discussion, it is a difficult concept to
define, because it is concerned with influencing the behaviour of subordinates and
directing their activities so that the aims of the business are attained as profitably as
possible. Its components leadership, motivation, group and team behaviour and
communication are interrelated instruments used to exert that influence. Managers
should have sufficient knowledge of these factors to be good leaders as well as good
managers. We deal with the fourth and final important element of management,
namely control, in study unit 9.
1
Which one of the following statements on authority is wrong?
125
a
b
c
d
2
Which one of the following types of power is granted to all managers?

a
b
c
d
Final authority flows from delegation.

Management delegates authority to subordinates to enable them to execute
tasks.
The right to expect action from others is also conferred by members of a
group.
Power is not granted to a manager.
legitimate
personal
referent
expert
A trade union is formed to satisfy the ... needs of the employees.

a
b
c
d
e
basic
security
social
esteem
self-actualisation
Question
Answer
Reference
(section)
8.2.2.1
8.2.2.2
8.2.4
Reference
1
2
Business Success: It's a matter of reward and punish. Management Today. 2005. 21:8.
The Times 100. Siemens: Motivation within a creative environment. Information accessed at http://
www.thetimes100.co.uk/case-studymotivation-within-creative-environment89-376-1.php on 02 December
2009.
126
Study unit 9
Controlling the management process
Contents
Key concepts
Learning outcomes
Getting an overview
9.1 Introduction
9.2 The purpose of control
9.3 The control process
9.4 Types of control
9.5 Characteristics of an effective control system
9.6 Summary
Key concepts
task of control
control process
standards
control of physical resources
quantity control
material requirements planning
just-in-time system (JIT)
budgets quality control
accuracy
unnecessary
flexibility
timeliness
deviation
corrective action
deviations
focus of control
economic order
financial resources
information resources
control of human resources
integration standards
characteristics of a control system
complexity
actual performance
inventory
Learning outcomes
. analyse control as a management task, by (1) explaining the task of control and
its purpose, and (2) describing how a control process should function
. illustrate how the task of control forms an integral part of the planning process
. explain the various types of control
127
.
.
discuss the characteristics of an effective control system

describe how the control process provides feedback for the revision of planning
Getting an overview
In study unit 8, we discussed the third important element of management, namely
leadership. Control is the final step in the management task on the one hand and the
starting point for further strategy development on the other. It is the process by which
management narrows the gap between objectives and actual performance. The
management process takes place between planning and control, and successful
management often depends on sound planning and effective control. We will now look
at control in detail.
9.1 Introduction
Nature of control
Control is used to ensure that the organisation's goals and objectives are reached and
that resources are being used as productively and effectively as possible. It is therefore
used to give feedback on the other three tasks, namely planning, organising and
leadership, and to start a new cycle of the management task. Note that the word
``control'' as it is used to describe the task of management does not refer to ``being in
charge of'' or ``dominating''. Sometimes people speak of a chief executive controlling
an organisation in the same way as they speak of the police ``controlling a crowd'', or
say that a situation is `ùnder control''. This is not the meaning of control used in this
study unit.
Task of control
Control is concerned with narrowing the gap between what was planned and the
actual achievements of management, and ensures that all activities are carried out as
they should be. More accurately, control is the process whereby management obtains
information to determine whether the objectives that were set for the organisation
during the planning stage have been reached, and if not to take corrective action. The
management process thus takes place between planning and control. So it should be
clear that the task of control has its roots in planning.
9.2 The purpose of control

An organisation needs a control process because even the best-laid plans can go wrong
due to unforeseen circumstances or unexpected changes within the environment.
128
Many companies did not foresee the recession during 2009 and therefore experienced
great losses despite proper planning. Read through the case study below to see how
some small businesses survived the recession as a result of effective financial and
quality control.
Small companies survive by using control
During a recent SME survey, only 5% of small businesses indicated losses during the 2009 recession,
with 95% of SMEs keeping their businesses afloat. The majority of these businesses stem from the
agricultural enterprises and 40% of these showed profits. 60% of these enterprises also expressed
confidence in their ability to survive the recession.
How did these companies manage to survive the devastating recession? By returning to the basic
principles of business with a strong emphasis on financial control where costs were optimised. 93% of
the respondents also regarded a positive cash flow as the most important element for sustainability.
More than two-thirds of the enterprises had a positive cash flow even with the credit crisis deterring
the borrowing of funds.
Quality control was another important aspect, with service delivery a key element in retaining
customers.
Source: Thys (2009)

It is necessary for companies to do environmental scanning in order to keep abreast of
change, to determine which factors pose threats to existing goals, and to determine
which factors represent opportunities to promote current goals. It is also very
important to note the reasons why a control process is necessary in an organisation.
These reasons are briefly highlighted below:
. Without control, effective planning cannot take place.
. It enables companies to adapt to environmental change and allows them to cope
with changes and uncertainties.
. Control helps to limit the accumulation of errors due to poor decision making.
. As the size of a business increases, it becomes increasingly difficult to identify areas
of weak performance.
. Control helps to minimise costs and increases output.
. An effective control system allows management to identify problems before they
become critical for the organisation.
. Control allows management to determine whether delegated tasks have been
carried out satisfactorily.
. Increasing competition necessitates more effective cost and quality control. A lack of
control can result in resources being wasted or misapplied.
. Control usually results in better quality.
Activity 9.1
Your prescribed book has highlighted five reasons why the task of control is so
important; however, these might be quite difficult for you to understand without
practical examples and illustrations. In this activity you should complete the table
below by giving your own practical examples of reasons why control is so important.
129
Reason for importance of Practical example

control
1
Avoids poor planning
Helps to adapt to environmental change
Limits accumulation of error
Caters for increasing organisational size and complexity
Minimises cost
The following table gives some practical examples of why the task of control is an
important task in the management process.

control
1
Avoids poor planning
At the beginning of this study unit we stated

that control is intricately linked to planning.
Take for example a bicycle shop. The owner
of the shop sets a goal of selling 200 bicycles
a month. The shop owner will need to
monitor daily sales to determine how close
he/she is to achieving this goal. This
monitoring or measuring of sales forms an
integral part of the control process. At the
end of the month the shop owner will be
able to determine whether this goal has
been met or not and then set new goals for
the month(s) to come.
Helps to adapt to environmental Let's stick with the example of a bicycle shop
change
owner. A growing trend in South Africa and
the world is for people to use alternative
forms of transportation. If our shop owner is
aware of this environmental change, he
would use control to ensure that he has
more bicycles in stock for people looking for
alternative transportation. By doing this he
would not only be adapting to environmental change, but also be growing his business.
This would, however, also mean a greater
need to control the various processes in the
business. If our petrol station owner was to
grow the business to include a convenience
store, he would have a greater need to
control the various processes in the business.
130

control
3
Limits accumulation of error
Caters for increasing organisa- Due to an increase in requests for mountain

tional size and complexity
bikes, the owner decides to create a section
in his shop devoted solely to mountain bikes.
This means that he needs to employ a new
salesperson, develop new products and bring
in new equipment to cater to his new clients'
needs. The mountain bike section does so
well that he decides to open two more stores
in different geographical areas. As his
business becomes more complex, without
control he would not be able to spot
weaknesses and rectify them in time. A
manager should never assume that just
because a task has been delegated, it has
in fact been carried out. A simple example:
How many times have you given a friend or
colleague a message to pass on to another
colleague or your boss, only to find that they
forgot to do so? In the same sense a
manager needs to assess whether subordinates are doing their jobs properly.
131
Sticking with the theme of the bicycle shop,

let us consider the following scenario. The
owner has by now ordered more than 2 000
bicycles based on the increase in consumers
purchasing bicycles as an alternative source
of transportation. However, when he monitors his monthly sales he realises that only
500 bicycles were sold during the month.
Realising this, he stops ordering new stock
and avoids making the fatal error of having
too much stock. At the other end of the
spectrum, he might also not realise if there
are high sales levels if he does not monitor
daily sales levels. This could lead to a stockout situation where customers decide to
purchase their bicycles elsewhere. Let us
consider what happened late in 2005 and
early in 2006 when South African motorists
faced fuel shortages across the country.
These fuel shortages could have resulted in
problems, with the fuel production and
distribution networks being detected too late
and when they were already at critically low
levels. Similarly, if our petrol station owner
fails to monitor his daily sales levels and
stock of fuel he might not detect unexpectedly high sales, resulting in an out-of-stock
situation midway through the delivery cycle.

control
5
Minimises cost
Let us look again at the situation where the

shop owner purchased 2 000 bicycles of
which only 500 got sold. It is clear that if he
had not made use of control, he would have
ordered another 2 000 bicycles which would
have maximised his costs and resulted in a
decreased output. Returning to the example
of the fuel situation in South Africa: in 2004
and 2005 in South Africa motorists faced an
extremely volatile petrol price, with increases
from R3,30 to over R6,00 per litre. Again in
late 2007 and early 2008 a weak rand and
high international oil prices drove the price of
petrol in South Africa to over R8,00 a litre.
You can imagine the impact of such
dramatic increases in fuel prices on businesses such as airlines (eg SAA), and
transport services such as those running
taxis and buses. The owners of these
businesses would need to constantly monitor
the cost structures of their businesses and
revise their strategies to adapt to the
changing macro-environment.
9.3 The control process

The control process as illustrated in figure 9.1 represents the heart of the task of
control. It is important that you understand the sequence of these steps and how the
process is linked with the task of planning.
The control process comprises the following four steps:
.
.
.
.
setting standards that are derived from goals

measuring actual performance
evaluating deviations (the performance gap)
taking corrective action and rectifying deviations
Example
The manufacturing plant of the new 2010 Polo VW in Uitenhagen is looking to
increase automation of the plant to 65%, up from the 25% it had for the previous
Polo. To achieve this it requires 70% of the materials used to be of local content. A
performance standard has thus been established (step 1). It is now necessary to
develop a system that will ensure a continuous flow of manufacturing data to
management to enable them to observe actual performance (step 2).
132
During the third quarter though, the data shows a decrease of 10% in the plant's
automation levels. Upon investigation it is found that a local producer of the paint that
is used on the Polo's had to close shop due to a raging fire and only 50% of the
material used could be sourced locally (step 3). The deviation of 20% is noted; and
management is able to locate a new paint supplier and manages to increase the
material sourced from local content to 75%, resulting in automation levels of 70%
(step 4).
Another point to note is that the first phase is also the last part of the planning process.
Establishing standards is the same as setting specific goals (which was discussed under
the heading of planning).
In the same way, the last phase of the control process could also be part of the planning
or leadership process. For example, making new plans to counteract the deviations
would be part of the planning task, or giving recognition to a subordinate for good
results would be part of the leadership task. This merely highlights the close
interrelationship between the various management tasks.
Activity 9.2
During a recent planning session, Lizzy decided that the sales of her cupcake store,
Cup 'n Cakes, need to increase by 33% if she wants to open up a new store by the
end of the year. She instructed her sales team to also increase their sales by 33%
with the promise of additional incentives if they were to achieve their goals.
By the end of the year, her overall sales increased to 26%. Even though Lizzy did not
reach her goal of a 33% increase, the 26% increase was enough for her to open a
smaller store. Remembering her promise of an incentive, she reviewed the sales
team's figures:
Phindiwe ?
Sales increased by 13%.
Gavin ?
Clair ?
Bongani ?
Put yourself in Lizzy's shoes and apply the control process to the above situation,
highlighting each step in the process and suggesting what actions should be taken in
step 4 of the control process.
This activity relates to the first learning outcome of this study unit.
Step 1: Establish standards

In the Cup 'n Cakes example the performance standard was set at a 33% increase in
sales for the company as a whole. Lizzy then transferred this standard to each member
of the sales team, setting them equal targets of a 33% increase in sales. A timeframe
was also attached to the performance standard.
You could refer back to study unit 6 on planning to determine whether this target
meets the goal-setting specifications of relevance, realistic attainability and measurability.
133
Step 2: Measure actual performance

Lizzy has obtained overall sales figures for Cup 'n Cakes as well as individual sales
figures for each of the members of her sales team. These reports she could have
compiled from sales reports generated by the organisation's management information
system (if such a system is in place). It is important that the reports are quantifiable and
reliable to ensure effective control.
Step 3: Evaluate deviations

With the target of a 33% increase in sales as a performance standard and the reports
on actual sales figures, Lizzy will be able to compare the actual performance of the
sales team with the performance standard set. In the case of our example this
evaluation will show a negative performance gap between the set standard and actual
performance. For the sales team as a whole the performance gap is 7% (33%26%).
In her evaluation Lizzy will also need to consider the performance of individual
members of the sales team; this analysis will show that two of the members performed
very well and came close to the performance standard, while the other two members
performed very poorly and did not come close to achieving the set standard.
Step 3 of the control process is not only important for determining whether there are
deviations from standards, but also equally important for finding out the reasons for
these deviations. In the case of this example, Lizzy would need to question why two of
her team members were able to achieve the standard, and two others were not. She
would be faced with a number of possible reasons for the deviations:
.
.
.
.
The incentives in place for Phulana and Sibonbile were not appropriate and did not
motivate them. Both Phulana and Sibongile would have preferred to receive
additional leave rather than the financial incentive Lizzy offered.
The sales areas for Phulana and Sibongile do not show similar demand trends to
those of Gloria and Sally. Both Gloria and Sally managed to obtain big orders for
weddings and corporate functions, where Phulana and Sibongile managed the
shop and served individual customers.
Production and operations problems meant that Phulana and Sibongile were not
able to deliver to their clients on time, resulting in order cancellations.
There were personal reasons, such as Phulana's children getting sick or Sibongile
spending too much time on her studies.
All of the above could be possible reasons for the deviation from set standards. Lizzy
would need to sit the members of her sales team down and discuss the reasons for the
poor performance with them. She also needs to make sure that there are clear answers
from all the team members on their performance before moving on to the last step of
the process.
Step 4: Take corrective action

Having determined that standards were not met and the reasons for this, Lizzy can
now turn her attention to ensuring that similar deviations do not recur. This is where
the control process once again feeds back into the planning process. Depending on the
causes of the deviation between performance standards and actual performance, Lizzy
would have three options available to her:
.
.
Actual performance can be improved to meet the standards.

Strategies can be revised to meet the standards.
134
Performance standards can be lowered or raised to make them more realistic in

the light of prevailing conditions.
9.4 Types of control

Although we state that you should study this section of the prescribed book, do not get
too involved in the volume of detail in this section. It is more important to realise that,
although the control process is a generic process, it needs to be applied to a variety of
areas and resources throughout the organisation.
Organisations should, as a rule, identify the different areas that need to be controlled as
these areas are generally responsible for the effectiveness of the entire organisation. In
section 9.4.1 we highlight the four key areas of control:
.
.
.
.
physical resources
financial resources
information resources
human resources
The section then elaborates on each of these areas and identifies various systems for
controlling them. You need only understand the essence of these systems. We do not
require you to apply these control systems or to list the steps involved in the various
systems.
Note the four focal points or key areas of control as illustrated in figure 9.2.
Inventory
The control systems for the different kinds of inventories such as raw materials and
finished products are inventory control and quality control. Inventory control is there to
keep costs as low as possible, without causing shortages or delays. Three control
systems are relevant here: the economic order quantity (EOQ), materials requirements
planning (MRP) and the just-in-time (JIT) system.
Quality
Quality and productivity have become very important issues all over the world. Quality
control refers to the activities which are performed by management to ensure a level of
quality that will satisfy their customers and also have certain benefits for the business.
The control system used for the management of quality is known as total quality
management (TQM).
Financial resources
Aspects of control are mainly expressed in financial magnitudes. Financial resources are
135
vital to the success of any business and are at the heart of the control process (see
figure 9.2). There are two important instruments used to control the financial
resources of an organisation:
. the budget (refer to table 9.1 for an outline of the types of budgets)
. financial analysis, also known as a ratio analysis (will be discussed in your second
module)
Information resources
Management can only implement plans if they receive accurate and timely information.
The faster feedback is received on how things are going in the course of the
management process, the more effectively the control systems will function.
Human resources
The main instrument used to control human resources in a business is performance
measurement. Other instruments are specific ratios that can be applied in respect of
labour turnover, absenteeism, and the composition of the labour force.
Activity 9.3
Section 9.4.1 contains a wealth of information on the areas of control and the
different control systems for each area. We have highlighted these in the section
above. However, one way in which you can summarise the various systems of
control is by means of a mind map. We have started the mind map for you. In this
activity complete the mind map by listing the various control systems under the
areas of control. You can even take this one step further by adding a brief
description of each system.
Inventory
Information
Resources
Physical
Resources
Quality
CONTROL
Other
systems
Financial
Resources
Budgetory
Control
Human
Resources
Financial
analysis
136
Performance
Appraisal
9.5 Characteristics of an effective control system

This is a very important section and you should note the five characteristics of
an effective control system as well as the integration of planning and control
(figure 9.3).
Activity 9.4
List and describe the five criteria according to which the effectiveness of
organisational control is evaluated.
This activity relates to the fourth learning outcome of the study unit. The criteria for an
effective control system are as follows:
.
.
.
.
Integration. Control should be integrated with planning as this allows control to link
with the desired goals of the organisation, for example improving customer
services, improving quality, and protecting the organisation's assets. Control is more
effective if it is integrated into planning. Think back on how we linked planning and
control in study unit 6.
Flexibility. A control system must be able to accommodate change. Throughout this
and other study units we have reiterated that businesses operate in a continually
changing environment. Therefore management should be able to revise goals and
plans without having to devise an entirely new control system.
Accuracy. An effective control system must give a complete, objective and accurate
picture of the situation. No errors should be concealed in the data.
Timeliness. Information must be provided at the appropriate moment, not too soon
or too late. In addition to this, control data should be supplied as regularly as
needed.
Simplicity. An effective control system is not unnecessarily complex and must be
acceptable to the managers and staff who make use of the system. If it is too
complex to understand, then managers may decide to leave the system simply to
keep things going.
9.6 Summary
We have discussed control as the fourth and final step of the management process, so
the discussion of the management process is complete and with it topic 2 of this study
guide. You now have basic insight into all the general management functions.
Case study: ABI vouches for quality of Coke1
ABI, the soft drinks division of South African Breweries (SAB), had its hands full during a
strike early in 2010 when rumours surfaced about the quality of the soft drink, Coke,
produced during this period. The Food and Allied Workers Union (FAWU) suggested
that the quality of Coca-Cola products that were manufactured during the strike could
not be guaranteed and was subject to lower quality standards than usual.
137
ABI, however, vehemently denied this and stated that due to stringent quality control
measures that are in place for all Coca-Cola products, the products produced during
the strike should be of no less a quality than those produced during normal production
cycles. They also stated that the majority of ABI's work force continued to work during
the strike, and that experienced and qualified staff oversaw the manufacturing process.
They also reiterated that all ABI employees that work on the production lines are
trained up to international Coca-Cola standards.
List and discuss the two control issues ABI experienced during the strike of 2010.
What are the other areas that ABI needs to take into consideration when controlling its
production process of Coca-Cola products?
You are the new production manager of ABI South Africa. What are the characteristics
of the new and more effective control system you would put in place?
1
Chloe is in charge of managing the volunteer organisation, Barking Mad, that

provides abandoned animals with shelter and food and places them up for
adoption. What is the correct process she would follow when busy with the
management task of control?
a
b
c
d
The shelter needs to maintain an adoption rate of 26% in order to be able to

provide all its animals with shelter and food.
Chloe realises that their organisation is relatively unknown to the public and
organises a fun walk to raise awareness of Barking Mad.
Chloe compiles a detailed report of all the adoptions they have had over the
last six months.
The data Chloe has collected shows that their adoption rate is only 19%.
1
2
3
4
5
bc
cd
cb
bc
cd
d
a
a
de
b
Which of the following is a purpose of control?

1
2
3
4
a
b
d
a
a
Planning is the first step in control and without control, planning is pointless.
Control makes it difficult to adapt to change due to the different variables in
the environment.
Managers are capable of making good decisions on their own and do not
need control to limit errors.
Control processes add to the costs of an organisation.
Match the area of control in Column A with the correct type of control in Column
B:
138
Column A
Column B
a Inventory
i TQM systems
b Quality
ii Budgets
c Financial resources
iii Just-in-time
d Human resources
iv ITT systems
v Performance measurements
1
2
3
4
a
a
a
a
(i)
(i)
(ii)
(iii)
b (ii)
b (v)
b (iv)
b (i)
c (iii)
c (iv)
c (i)
c (ii)
d
d
d
d
(iv)
(iii)
(v)
(v)
Question
Answer
Reference
(section)
4 (a c d e)
9.4
9.3
4 [a (iii) b (i) c (ii) 9.2

d (v)]
Reference
1
Fin 24. com. 2010. ABI vouches for quality of Coke. Information accessed at: www.fin24.com/companies/
ABI-vouches-for-quality-of-coke-20091230 [accessed on 4 January 2010]
139

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TOPIC 1: INTRODUCTION TO BUSINESS MANAGEMENT

THE BUSINESS WORLD AND BUSINESS MANAGEMENT

THE BUSINESS ENVIRONMENT

CORPORATE SOCIAL RESPONSIBILITY

TOPIC 2: THE MANAGEMENT PROCESS

CONTROLLING THE MANAGEMENT PROCESS

Studying the prescribed book

TOPIC 1: Introduction to Business Management

The business world and business management

Getting a feel for the layout of the prescribed book

Learning outcomes and layout

Figures and tables

The study process

How to use the study guide

Learning outcomes. The learning outcomes indicate what aspects of the

The steps in the study process

Get an overview of the parts. Draw a mind map of the parts.

Completing the assignments

Which one of the following statements is correct?

Capitalism ensures a more even distribution of wealth.

Socialism discourages private initiative.

Communism ensures a better utilisation of resources.

South Africa's economic system tends towards socialism.

Which of the following statements are correct?

A business owned and managed by one person may be a private company.

A partnership is usually limited to 20 partners.

The economic principle ...

is an endeavour to achieve the maximum with the minimum.

is mainly an indication of how low the operating costs were.

is always measured in terms of the business's profitability.

the mission of the organisation

Answering a multiple-choice question

Draw an appropriate line

demonstrate an understanding of the role of business in society and the position

Overview of the topic

The business world Entrepreneurship

1.1 The role of business in society

four primary bakeries of Tiger (Albany), Premier (Blue Ribbon), Foodcorp

1.2 Needs and need satisfaction

Being hungry is classified as a physiological need; it is the most basic need.

1.3 The main economic systems

is functioning very well if an organisation is inefficient it will go bankrupt. If

How would you classify the South African economic system?

Would socialism be the answer to South Africa's economic problems?

Even though South Africa is often classified as a socialistic economic system

1.4 The need-satisfying institutions of the market economy

1.5 The nature of business management and the classification

Which of the following statements are correct?

Which of the following attributes are characteristics of a free-market economy as

private ownership of production factors

State intervention to solve an economic problem in a market economy

Answers to self-assessment questions

The Star, 23 March 2005

explain the concept of entrepreneurship and the entrepreneurial process

2.1 The role of entrepreneurs in society

Successful entrepreneurs in Southern Africa2

2.1.2 Descriptions of an entrepreneur

2.1.3 Entrepreneurship in South Africa

2.2 The role of entrepreneurs and small-business owners in

2.2.1 The small business

Operate in the informal sector of the economy