Introduction to Business Management
Chapter 1: The Business World and Business
Management
The Role of Business in Society
Business is a complex system that transforms resources into products and services to meet
societal needs in exchange for profit.
It involves four key elements:
Human activities
Production
Exchange
Profit
Needs of Society and How Businesses Satisfy Them
Society's Needs:
Human needs are virtually unlimited and can be categorized as:
Physical needs
Safety needs
Social needs
Esteem needs
Self-realization needs
Society's Limited Resources:
These are the factors of production used to satisfy needs:
Natural resources (land, minerals, forests, water)
Human resources (physical and mental talents of people)
Capital (machinery, buildings, equipment)
Entrepreneurship (the capacity to take risks and organize production)
The Cycle of Need Satisfaction:
1. The community has unlimited needs and limited resources.
2. The community chooses an economic system to satisfy its needs.
3. The chosen economic system (e.g., market economy) mobilizes resources.
4. Entrepreneurs and businesses (need-satisfying institutions) transform resources into
products and services.
5. These products and services meet the community's needs.
6. If needs are not satisfied, the community may change the system or choose another.
7. The economic motive (profit for entrepreneurs) drives this process.
Economic Systems
Market Economy:
Characteristics: Private ownership of production factors, freedom of choice, free
competition, profit motive, private businesses manage, independent workers' unions.
Driving Force: Profit and reward based on individual ability.
Advantages: Private initiative, economic freedom.
Disadvantages: Unstable environment, cyclical fluctuations, high social costs.
Socialism:
Characteristics: Basic industries owned by the state, freedom of choice, limited
competition, profit motive recognized by state-owned concerns (based on worker needs),
government policy restricts decisions in state organizations, workers free to choose jobs.
Driving Force: Profit motive recognized, but state organizations may be driven by worker
needs.
Advantages: Possibility of full employment, state stabilizes economic fluctuations.
Disadvantages: Little incentive in state organizations.
Command Economy (Communism):
Characteristics: State owns and controls all industries and agriculture, no competition,
profit not allowed, workers motivated by state glory, party members are managers, limited
job choice, state-controlled unions.
Driving Force: Work for the glory of the state.
Advantages: State can concentrate resources towards specific goals.
Disadvantages: Low productivity, low standard of living, difficult or impossible planning.
Interface Between Business and a Market Economy
A market economy is a system of businesses (small and large) that mobilize resources to
satisfy inhabitants' needs.
Businesses form industries.
Stakeholders in the Market System:
Communities: Provide demand for products/services and supply production factors.
Private Enterprises (Businesses): Transform production factors into products and
services.
State (Government): Collects taxes, provides goods/services, regulates private activity,
and can supply goods/services.
Interactions:
Businesses supply products/services to communities and receive payment.
Communities supply production factors to businesses and receive payment.
Businesses and communities pay taxes to the state.
The state supplies products/services to businesses and communities.
The Nature and Purpose of Business Management
Science: Business management is studied as a science, examining the enabling factors,
methods, and principles that ensure efficient business functioning.
Purpose: To study how a business can achieve its financial and non-financial objectives
efficiently and productively.
Development: Business management is a young applied science. While principles can be
applied scientifically, intuition and experience are also crucial, making successful
management an art as well as a science.
Interdisciplinary Nature:
Business management draws from various fields, including:
Economics
Statistics
Mathematics
Psychology
Sociology
Anthropology
Computer science
Engineering
Law
Accounting
Management Functions
The chapter introduces the concept of different management functions (though not detailed
in the provided text, it's a learning outcome). These typically include planning, organizing,
leading, and controlling.
Chapter 2: Entrepreneurship
Definition of Entrepreneur and Entrepreneurship
Entrepreneur: An individual with a unique personality and the ability to create new
businesses, identify consumer wants, and deliver them with value. They set up businesses,
take financial risks, and aim for profits.
Entrepreneurship: The process of identifying what consumers want and delivering it with the
best possible value. It is a continuous process in dynamic environments, involving creating
and building something of value from resources amidst risks and uncertainty.
Roles of Entrepreneurs and Small Businesses in the
Economy
Stimulating Economic Development: Creating new businesses and investments.
Job Creation: Establishing businesses that grow and employ more people.
Generating Income: Contributing to national and local economies.
Strengthening Market Competition: Introducing new products and services.
Increasing Productivity: Through innovation and efficiency.
Innovation: Entrepreneurs are often responsible for introducing new products, services, and
processes.
Contribution to GDP: Evident in both formal and informal sectors.
Becoming an Entrepreneur
Traits and Characteristics:
Achievement motivation
Internal locus of control
Innovation and creativity
Risk tolerance
Propensity to pay-it-forward
Skills and Industry Experience:
Strategy skills
Planning skills
Communication skills
Marketing skills
Financial skills
Project management skills
Human relations skills
Necessity-Based vs. Opportunity-Based Entrepreneurship:
Necessity-Based: Driven by a lack of other employment options (survivalist-driven).
Opportunity-Based: Driven by the desire to exploit a business opportunity or seek a better
one.
The Entrepreneurial Process
The entrepreneurial process can be viewed as a framework for decision-making about new
ventures:
1. Personal Entrepreneurial Orientation:
This involves self-reflection on:
Personal beliefs (values, priorities, definition of success)
Personal preferences (excitement, lifestyle, curiosity)
Personal practices (energy, perseverance, learning from mistakes, problem-solving)
Personal characteristics (risk comfort, willingness to sacrifice, resourcefulness)
Personal goals (direction, aspirations)
Personal skills (abilities, salesmanship, persuasion)
2. Decision to Become an Entrepreneur: The individual decides if they want to enter the business
world.
3. Entrepreneurial Activities and Skills: Identifying and developing necessary abilities.
4. Idea Generation: Coming up with business ideas.
5. Opportunity: Identifying a viable business opportunity.
6. Resources:
Assessing whether the required resources are available or can be accessed. This includes:
Contact resources
Seed money
Venture funds
Growth capital
7. Feasibility Assessment/Study: Determining if the idea or opportunity has value and is likely to
succeed.
8. Business Plan: Developing a detailed plan to convince investors, banks, or suppliers.
9. Proceed with Implementation: Moving forward with launching the business.
Skills and Resources Required
Skills:
Strategy planning
Communication
Marketing
Financial management
Project management
Leadership and direction
Management and learning
Human relations
Resources:
Financial resources
Human resources
Operating resources
Educational resources
Ways of Entering the Business World
Starting a New Business:
This involves finding a good idea and developing it.
New Venture Ideas: Often found in growth industries like education, healthcare, tourism,
and privatized government services.
Requirements for a Good Opportunity:
Clearly defined market need.
Scalability (ability to reach more people without proportionally high costs).
Solves a problem effectively.
Potential for growth.
Rewarding for investor/entrepreneur.
Right timing (window of opportunity).
Buying an Existing Business:
Advantages: Pre-existing groundwork, easier financing, established customer base,
experienced employees, existing supplier relationships, inventory and equipment in place.
Disadvantages: Inflated purchase price, underestimation of working capital, undesirable
location, difficult-to-change business image, inherited employees, resistance to change,
potential liabilities, obsolete inventory/equipment.
Franchising:
An entrepreneur (franchisee) buys the right to operate a business using a franchisor's
name, products, and systems, paying ongoing fees.
Corporate Entrepreneurship:
Large corporations introduce new products/services through internal processes and
resources, creating opportunities for diversification within the business.
Feasibility Study
Purpose: To collect data and forecast whether an idea, opportunity, or venture will survive.
Outcome: Leads to a decision to move forward or abandon the idea.
Value: Helps entrepreneurs commit to or abandon ideas based on assessed viability.
Chapter 3: Establishing a Business
Key Considerations for Different Forms of Business
The choice of business form has a significant impact on all aspects of the business.
Considerations:
Size of the business
Nature of business activities
Participation style
Management structure
Financing needs
Accountability of participants
Tax and legal implications
Continuity of the business
Risk of failure
Potential future growth
Legal Forms of Enterprise in South Africa
Legal (Juristic) Personality: A business entity that exists independently of its members, has
its own rights, assets, and obligations, and has perpetual existence. This protects members
from personal liability.
Registration Requirements: Businesses often need to register for income tax, VAT, and
comply with acts like the Unemployment Insurance Act.
Sole Proprietorship
Definition: Owned and managed by one individual.
Advantages: Easy and inexpensive to set up, owner has total decision-making authority,
minimal legal restrictions, easy to discontinue.
Disadvantages: Owner is personally liable without limitation, limited diversity of skills, limited
access to capital, lack of continuity, limited growth potential.
Partnership
Definition: A contractual relationship between two or more persons (partners) operating a
lawful business for profit.
Advantages: Ease of formation, diversification of skills, increased opportunity for capital
accumulation, minimal legal formalities.
Disadvantages: Personal liability of partners, difficulty in disposing of an interest, potential for
conflict, lack of continuity (unless agreed otherwise).
Close Corporation (CC)
Definition: Members both own and control the CC. It is a juristic person with its own rights,
assets, and liabilities.
Note: No new close corporations may be registered in South Africa as of 2011.
Advantages: Benefits of a separate legal person, limited liability for members, increased
capital-acquisition potential, relatively simple management, continuity.
Disadvantages: Membership limited to ten persons, juristic persons cannot be members,
stricter accountability criteria.
Company
Definition: Developed to meet the need for raising more capital. It has shareholders and a
board of directors. A company is a legal (juristic) person.
Types: Private companies and public companies (shares can be listed on the stock
exchange).
Advantages: Legal and natural persons can be shareholders, no restriction on shareholder
numbers, limited liability for shareholders (except in personal liability companies), ability to
raise large capital, separation of ownership and control, continuity, transferability of shares.
Disadvantages: High degree of legal regulation, high operational costs, complicated decision-
making.
Business Trust
Definition: A trust established to conduct business for profit. It does not inherently have legal
personality but is often treated as such by legislation and is a separate taxpayer.
Advantages: Ease of formation, natural and legal persons can be parties, limited liability for
parties, extreme flexibility, absence of onerous legal regulation, possibility of continuity.
Disadvantages: Limited access to capital, potential for conflict due to lack of regulation,
costly High Court litigation for disputes, high income tax rate (45%).
Co-operative Societies
Definition: An autonomous association of persons united voluntarily to meet common
economic, social, and cultural needs through a jointly owned and democratically controlled
enterprise.
Advantages: Recognized as juristic persons, limited liability for members, any person can be
a member, no restriction on member numbers, participatory nature, services can be more
accessible and cheaper, relatively flexible, less stringent legislation than companies, enabling
legislation for specific groups.
Disadvantages: Often lack managerial expertise, participatory decision-making can be
complex, requires mentorship and support, potential for tension between members, business
efficiency can be negatively impacted by conflicts between worker and owner roles, short-
term member goals may contrast with long-term entity interests.
Developing a Business Plan
Objectives:
Identify and describe the business opportunity.
Present a written plan for exploiting the opportunity.
Attract investors or persuade financial institutions.
Reasons for Writing a Business Plan:
Sell the business to founders.
Obtain financing.
Attract investment funds.
Arrange strategic alliances.
Obtain large contracts.
Attract key employees.
Complete mergers and acquisitions.
Motivate and focus the management team.
Stakeholders:
Internal: Management, employees.
External: Customers, investors, banks.
Evaluation of Business Plans (Matrix): This involves assessing factors like the product/
service development, market acceptance, management team experience, and financial
projections against a risk/return framework.
Scope of Planning:
The amount of planning depends on:
Entrepreneur's style and ability.
Management team preferences.
Complexity of the business.
Competitive environment.
Level of uncertainty.
Content of a Business Plan:
Executive summary
General description of the venture
Products and services plan
Marketing plan
Management plan
Operating plan
Financial plan
Supporting materials
Location Factors
The choice of location is crucial for a business's success.
Key Factors:
Sources of raw materials
Availability of labour
Availability and cost of transport facilities
Proximity and access to the market
Availability and costs of power and water
Availability of capital
The existing business environment
Climate
Availability and costs of a site and buildings
Attitude, regulations, and tariffs of local authorities
The social environment
Central government policy
Personal preferences