BUSINESS M ANAGEMENT TRAINING COLLEGE

S OUTH A FRICA ’ S M OST P RESTIGIOUS D ISTANCE E DUCATION B USINESS C OLLEGE

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DIPLOMA IN BUSINESS MANAGEMENT 1ST YEAR OR

DIPLOMA IN HUMAN RESOURCE MANAGEMENT 1ST YEAR

STUDY GUIDE: 611-SG-3

MANAGEMENT PRINCIPLES:
MODULE 1: INTRODUCTION TO MANAGEMENT
 READ THIS BEFORE YOU DO ANYTHING ELSE!
ICONS USED IN THIS MANUAL

LESSON 1 Indicates the start of a new lesson

Indicates the start of a Chapter (also top left of STUDY chapters)

Usually an explanation or definition of a specific word or concept

Examples of a specific topic or concept

Important information.

Take a break from your studies!

Making notes while you study is very important. Spaces have

been allocated throughout this manual for this purpose

Indicates self assessment and self assessment answer section

THESE SHOULD NOT BE SUBMITTED FOR ASSESSMENT

Outcomes for this Module (What you will learn)

Study instructions

Steps to be followed in order to complete/execute/do a specific

action or task.

Prescribed textbook

Erasmus, B.J., Strydom, J.W. & Rudansky-Kloppers, S. eds.

2013. Introduction to Business Management. 9th ed.
Cape Town: Oxford University Press. ISBN 978 0 19 9059829

Only purchase the 9th edition if you did not already purchase the 8th edition.

2 © Business Management Training College (Pty) Ltd

 STUDY INSTRUCTIONS

ASSIGNMENT STRUCTURE
NQF 6 DIPLOMA: FIRST YEAR

YOU Read and study the contents of the study guide and relevant
ARE
HERE
Step 1 textbook/s and then complete the formative assessment for
module 1 online via the Virtual Campus.

Step 2 Formative assessment for module 2 to be completed.

Step 3 Formative assessment for module 3 and summative

assessment for module 1, 2 & 3 to be completed.

Step 4 Formative assessment for module 4 to be completed.

Step 5 Formative assessment for module 5 to be completed.

Step 6 Formative assessment for module 6 and summative

assessment for module 4, 5 & 6 to be completed.

Step 7 Formative assessment for module 7 to be completed.

Step 8 Formative assessment for module 8 and summative

assessment for module 7 & 8 to be completed.

Step 9 Final Integrated Summative Assessment (FISA) to be

completed.

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 READ THIS BEFORE YOU DO ANYTHING ELSE!

STUDY PLANNER
INTRODUCTION TO BUSINESS M ANAGEMENT
NQF LEVEL 5 / 15 CREDITS*

CHAPTER 1 - THE NATURE OF MANAGEMENT

Plan when you will start and finish your lesson. Example: 1 May 2017 | 1 June 2017

Lesson 1.1 Levels and functions of management |

Lesson 1.2 Managerial roles |

Managerial skills and competencies at different

Lesson 1.3 |
levels of management

Classical and contemporary management

Lesson 1.4 |
theories

Lesson 1.5 The macro, micro and market environment I

Lesson 1.6 Preparing for environmental change I

CHAPTER 2 - THE BUSINESS WORLD AND BUSINESS MANAGEMENT

Lesson 2.1 Needs and need satisfaction |

Lesson 2.2 The main economic systems |

Complete online formative assignment through

Formative |
the Virtual Campus

Summative No summative assignment due after this module Not applicable

*SAQA equates one credit with ten notional hours of study. Credits include all studies
related to this module, including prescribed and recommended research, assignments
and work related projects if required. Credits will only be granted upon completion of the
full programme.

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 STUDY INSTRUCTIONS

STUDY AND RESEARCH

INTRODUCTION TO BUSINESS M ANAGEMENT

Textbook References

CHAPTER 1 - THE NATURE OF MANAGEMENT

Lesson 8th edition 9th edition

1.1 Covered in study guide. Chapter 6, pages 174 - 176

1.2 Covered in study guide. Chapter 6, pages 179 - 180

1.3 Covered in study guide. Chapter 6, pages 177 - 178

1.4 Covered in study guide. Chapter 6, pages 181 - 186

1.5 Chapter 4, pages 100 - 134. Chapter 4, pages 101 - 133.

1.6 Covered in study guide. Covered in study guide.

CHAPTER 2 - THE BUSINESS WORLD AND BUSINESS MANAGEMENT

Lesson 8th edition 9th edition

2.1 Chapter 1, Pages 12 - 18. Chapter 1, Pages 12 - 18.

2.2 Chapter 1, pages 18 - 36. Chapter 1, pages 18 - 38.

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5
 QUALIFICATION OUTLINE

QUALIFICATION OUTLINE

The main focus of this programme is to ensure that you develop the ability to
apply theory in practice. The curriculum consists of 360 credits, progressively
arranged in 24 modules over a minimum of 3 years of study. In order to continue
with the consecutively numbered module you need to be found competent against
the outcomes of the module. The 1st year modules are the same for both the
Diploma in Business Management and Diploma in Human Resource
Management.

DIPLOMA IN BUSINESS M ANAGEMENT

This programme will induct you in three disciplines of management:

 The process of leading and directing an organisation or part of it through the
manipulation of: Human Resources, Financial Resources, Material Resources and
Intellectual Resources.
 The functions of management by measuring and adjusting the initial plan in
order to reach an indented goal by: Planning, Organising, Leading, Coordinating
and Controlling.
 The tasks of management which includes: Strategic Management, Financial
Management, Marketing Management, Information Management and Public
Relations Management.

AT THE END OF THIS QUALIFICATION YOU WILL BE ABLE TO DEMONSTRATE DETAILED

KNOWLEDGE OF:
 The management of an organisation.
 The operations of an organisation.
 Marketing and marketing communications of an organisation.
 The financial influences and finances of an organisation.
 Human resources management within an organisation.

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 QUALIFICATION OUTLINE

DIPLOMA IN HUMAN RESOURCE M ANAGEMENT

Students who hold this qualification will be able to operate competently across the
four main aspects of the core processes and practices of human resources
management.
 Strategic planning for human resources management and practices.
 Acquisition, development and utilisation of people.
 Establishment and improvement of labour and employee relations.
 Compensation and administration related to human resources management.

AT THE END OF THIS QUALIFICATION YOU WILL BE ABLE TO DEMONSTRATE DETAILED

KNOWLEDGE OF:
 Conducting human resource planning as part of the business process of an
organisation.
 Conducting human resources practices within a workplace.
 Contributing to the improvement of labour and employee relations in a workplace.
 Managing productivity within an organisation.
 Conducting business administration duties according to organisational practices
and standards.

The modules covered in the NQF 6 Diploma programmes will now be explained in
the following sections.

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 DIPLOMA IN BUSINESS
MANAGEMENT

1ST YEAR 2ND YEAR 3RD YEAR

SUBJECTS SUBJECTS SUBJECTS
 Management Principles  Human Resource  Human Resource
 Business Administration Management II Management III
 Entrepreneurship  Marketing Management II  Marketing Management III
 Operations Management II  Operations Management III
 Financial Management II  Financial Management III

Assignments Assignments Assignments

 8 Formative assignments  8 Formative assignments  8 Formative assignments
after each module after each module after each module
 3 Summative assignments  4 Summative assignments  4 Summative assignments
after each subject after each subject after each subject
 1 Final Integrated  1 Final Integrated  1 Work Integrated Learning
Summative Assessment Summative Assessment Project (WIL)
(FISA) (FISA)  1 Final Integrated
Summative Assessment
(FISA)

First Academic Year

SUBJECT: Management Principles (three modules)

The subject consists out of three modules namely an Introduction to Management,
Planning and Organising and Leadership. These modules provide a framework to
prepare students for the world of business by placing an emphasis on basic managerial
functions such as establishing a business, being an entrepreneur, and creating a
business plan through strategic planning, organising, leading and control.

SUBJECT: Business Administration (three modules)

Business administration plays a vital role in the success of the organisation. This subject
consists out of three modules including the Introduction to Business Administration, Risk
Management and Financial management. The aim of the subject is to allow students to
explain the role of the administrative function, to compile and achieve objectives, to
understand risk in a business and to enable students to be able to define and explain
financial management as well as to do basic financial accounting, statements and
business calculations.

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 QUALIFICATION OUTLINE
SUBJECT: Entrepreneurship (two modules)
The subject consists of two modules, both discussing Entrepreneurship and the
Entrepreneur as a Manager. The basic business concepts of the prospective
entrepreneur are underlined as well as entrepreneurial skills, product, price, promotion
and advertising decisions. Students will be able to identify feasible business ideas and
be familiar with managerial aspects like operational, financial and human resource
management.

Second Academic Year

SUBJECT: Human Resource Management II (two modules)

The subject includes two modules which will provide students with an Introduction to
Human Resource Management as well as to Labour Legislation. Human Resource
Management will be discussed in a broader context and students will develop an
understanding of the planning and analysing processes that goes into developing human
resource strategies and policies. The second module gives an in-depth explanation of
employee grievance, principles of employment equity and the implementation of codes of
conduct.

SUBJECT: Marketing Management II (two modules)

Marketing management consist out of the Introduction to Marketing Concepts and
Promoting Products and Services. The first module focuses on the nature of marketing,
the marketing landscape, consumer behaviour, market segmentation, targeting and
positioning. The second module concentrates on product decisions, building, measuring
and managing brand equity, value-creation in services marketing and pricing decisions.

SUBJECT: Operations Management II (two modules)

Operational management consist out of two modules which include an Introduction to
Operational Management and Operational Management in Action. These two modules
focuses on the differences between services and goods, gives an introduction to
forecasting, qualitative and qualitative factors, product development and the product life
cycle. Furthermore students will also get a basic introduction to total quality management
(TQM), service quality as well as quality tools and techniques.

SUBJECT: Financial Management II: (two modules)

Financial management offers an Introduction to Economics as well as a module that
includes Financial Ratios, Planning and Practices. The student will gain knowledge about
the interdependence between major sectors, microeconomics, macroeconomics,
measuring the performance of the economy and the importance of supply and demand.
During the second module students will learn how to prepare budgets, monitoring actual
costs, handling the administration of VAT and conducting a financial analysis.

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 DIPLOMA IN BUSINESS M ANAGEMENT

Third Academic Year

SUBJECT: Human Resource Management III (two modules)

The subject consists out of two modules. The first of which is Human Capital Development
which will give the student a holistic overview of organisations and the impact of training
and development in the originations. The second module focuses on Industrial and Labour
Legislation and covers aspects like collective bargaining, disciplinary and grievance
procedures.

SUBJECT: Marketing Management III (two modules)

Marketing management consists out of two modules, Integrated Marketing Management
and Marketing as a Business Strategy. Together these two modules provides the student
with an international perspective of the marketing mix, different means of communicating in
marketing, cyber marketing and how to plan, implement and control a marketing strategy.

SUBJECT: Operations Management III (two modules)

The subject consists out of two modules, Operational Concepts and Enterprise Resource
Planning. After completing these modules the student will have a clear understanding of
concepts such as supply chain and inventory management, and short term scheduling.
The student will also be able to plan for resources such as material and capacity.

SUBJECT: Financial Management III (two modules)

The subject consists out of two modules known as Managerial Accounting where the
student will learn about the basic concepts of costing with the focus on cost accumulation,
cost analysis and cost control. The second part covers Advanced Economics which
provides the student with an in-depth knowledge about the monetary, fiscal and foreign
sectors. Aspects like inflation, unemployment and economic development are also
discussed in-depth.

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NOTES:
 DIPLOMA IN HUMAN
RESOURCE MANAGEMENT

1ST YEAR 2ND YEAR 3RD YEAR

SUBJECTS SUBJECTS SUBJECTS
 Management Principles  Human Resource Planning  Human Resource Planning
 Business Administration and Administration II and Administration III
 Entrepreneurship  Organisational Behaviour II  Organisational Behaviour III
 Labour and Industrial  Labour and Industrial
Relations II Relations III

Assignments Assignments Assignments

 8 Formative assignments  8 Formative assignments  8 Formative assignments

after each module after each module after each module
 3 Summative assignments  3 Summative assignments  3 Summative assignments
after each subject after each subject after each subject
 1 Final Integrated  1 Final Integrated  1 Work Integrated Learning
Summative Assessment Summative Assessment Project (WIL)
(FISA) (FISA)  1 Final Integrated
Summative Assessment
(FISA)

First Academic Year

SUBJECT: Management Principles (three modules)

The subject consists out of three modules namely an Introduction to Management,
Planning and Organising and Leadership. These modules provide a framework to
prepare students for the world of business by placing an emphasis on basic managerial
functions such as establishing a business, being an entrepreneur, and creating a
business plan through strategic planning, organising, leading and control.

SUBJECT: Business Administration (three modules)

Business administration plays a vital role in the success of the organisation. This subject
consists out of three modules including the Introduction to Business Administration, Risk
Management and Financial management. The aim of the subject is to allow students to
explain the role of the administrative function, to compile and achieve objectives, to
understand risk in a business and to enable students to be able to define and explain
financial management as well as do basic financial accounting, statements and business
calculations.

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 QUALIFICATION OUTLINE

SUBJECT: Entrepreneurship (two modules)

The subject consists of two modules, both discussing Entrepreneurship and the
Entrepreneur as a Manager. The basic business concepts of the prospective entrepreneur
are underlined as well as entrepreneurial skills, product, price, promotion and advertising
decisions. Students will be able to identify feasible business ideas and be familiar with
managerial aspects like operational, financial and human resource management.

Second Academic Year

SUBJECT: Human Resource Planning and Administration II (three modules)

Learners will be able to recognise and effectively apply concepts such as structural and
strategic issues, job specification, job analysis, job description in a work place or
organisation. The basic implementation, utilisation and implications of The Employment
Equity Act is also described and discussed in this subject. Further discussions include
setting goals and objectives of the organisation, developing organisational structures and
understanding the basic processes of performance appraisals.

SUBJECT: Organisational Behaviour II (three modules)

In this subject learners will have a basic understanding of organisational and individual
behaviour, employee motivation and empowerment as well as employee relations.
Learners are taught how to effectively apply the concepts related to recruitment,
legislation, job satisfaction, performance standards and employee contact development.
After completing this module, learners will understand the purpose, monitoring,
enforcement and implementation of The Basic Conditions of Employment Act.

SUBJECT: Labour and Industrial Relations II (two modules)

This subject explains the fundamentals of employment relations and legislation relative to
skills development and employment equity.
Upon completion of this module, learners will have a good understanding of the impact
labour legislation has on the employment relationship. The creation and functioning of a
bargaining council is explained. Collective agreements and concepts like their structure,
origins and legal standards are discussed. Learners are also able to identify and outline
key elements of employment legislation and the link between employment equity and the
business strategy of an organisation.

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 DIPLOMA IN HUMAN RESOURCE M ANAGEMENT
Third Academic Year

SUBJECT: Human Resource Planning and Administration III (three modules)

Different remuneration systems are explained as well as the major job evaluation systems
used in South Africa. Incentive schemes are explored with regards to the motivation and
performance of employees. Payroll concepts are examined as well as legal requirements
of SARS that impacts wages and salaries to design a basic pay structure. A brief overview
of the statutory regulations governing occupational health and safety in South Africa are
outlined with examples. The promotion of employee wellness and disease prevention are
discussed including the structural design of an HRIS and the different types of information
systems.

SUBJECT: Organisational Behaviour III (three modules)

Leadership is defined in detail as well as the reasons why ethics and trust are vital to
effective leadership. Different types of reports and written forms of business
communication are explained with examples. Strategies to promote a learning culture
within an organisation are investigated with methods to conduct performance evaluations.
The purpose and relationships between the Skills Development Act, the Skills
Development Levies Act and the South African Qualifications Authority Act are studied.

SUBJECT: Labour Relations III (two modules)

This subject identifies and defines the different types of strikes as well as the main
reasons for strikes in South Africa. The legality of strikes and lockouts in terms of the
Constitution and Labour Relations Act are examined. Different codes of conducts are
described and ethical behaviour and dilemmas are discussed.

Furthermore we discuss collective bargaining as the primary interaction process between

labour and management. The conflict process is outlined as well as the initiation and
execution of the negotiation process to resolve conflict. Last but not least different trade
union and management negotiation tactics are identified.

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NOTES:
 ADDITIONAL INFORMATION

ASSIGNMENTS

Formative Assignments
Formative assignments are completed after each module. These assignments
monitor your progress. Formative assignments can be completed directly online
via the Virtual Campus and you will receive results immediately upon submitting an
online formative assignment.

Summative Assignments
Summative assignments are completed after each subject and measure
your competence thereof. Summative assignments can be downloaded from the
Virtual Campus and once completed, it can be uploaded for marking.

Final Integrated Summative Assignments (FISA)

Students will have to complete an integrated assignment at the end of each
academic year. Therefore, the student will complete a total of three FISA
assignments for this qualification. The FISA is an assignment that combines all
your studies for the programme in one assignment.

Work Integrated Learning Projects (WIL)

Students will have to complete a project or assignment based on current
developments in the third academic year. A research component will form part of
this assignment.

Note
You need to pass each module’s assignment/s in order to get access to the next
module’s assignment/s. The pass mark for all assignments is 65%. A maximum
amount of four attempts are allowed per assignment. The first two attempts are
included in your study fees, for a third and fourth attempt resubmission fees will
apply.

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 ADDITIONAL INFORMATION

VIRTUAL CAMPUS

The Virtual Campus is a student support platform where you can view the latest
College news, download your study material, view results, talk to your lecturers
and fellow students, do assignments online for instant results and much more.

To log in, go to the following link: [Link]

You will need your student number for your user name ( the last five digits) and ID
number for your password.

If you struggle to log in or to complete your assignments online, please let us know by
sending an email to vc@[Link] or contact us on 011 708 0159 or 010 010
0936.
Below is an example of the log in page:

Once you successfully logged in, this page will display:

© Business Management Training College (Pty) Ltd

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 INTRODUCTION

INTRODUCTION TO

MANAGEMENT

Businesses are managed by professional managers. Managers are often

seen as people who drive fancy company cars and earn big salaries. So it’s
natural to wonder if these managers are really worth the money they are
costing the business. Would it not be possible for the organisation to continue
business without the help of managers?

In order to understand management we need to first understand what a

manager is. Hellriegel, D., Jackson, S.E., Slocum, J. & Staude, G. eds
(2008:7) defines a manager as a person who plans, organises, directs, and
controls the allocation of human, material, financial, and information
resources in pursuit of the organisational goals.

If managers are the people responsible for achieving the organisational goals,
what does the term management mean?

De Beer and Rossouw (2012:30) defines management as the art of getting

things done through people. This means that the organisational goals that
have been set can only be achieved by getting other people to perform the
tasks, rather than managers performing the tasks. There is no generally
accepted definition of management.

The term management can also be used to refer to the tasks and activities
involved in managing an organisation namely planning, organising, controlling
and leading.

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 INTRODUCTION

THE CONCEPT OF MANAGEMENT

Key points
 Effective and efficient management practice is equally important in large and
smaller business organisations as well as non-profit organisations.
 SMEs need to play a greater role in the economy. Management training and
development should therefore be a priority.
 South-Africa’s new government structure make tremendous demands on scarce
resources and poses a challenge to management.
 South-Africa needs to overcome poverty and can only be successful if it improves
its level of management skills.

According to Hellriegel, D., Slocum, J. & Jackson S.E. eds. (2013:5) all
organisation share three common characteristics:
 every organisation has a purpose;
 every organisation is made up of people;
 every organisation group these people together in some way or other.

People in organisations can be divided into two categories: managers and

operative employees. Operatives are those people responsible for a particular
task. They do not have authority over other people. Managers on the other hand
can be categorised as a top, middle or first-line managers and have both
supervising and directing responsibilities.

Figure 1.1 demonstrates the various organisational levels. Adapted from Hellriegel
et al. (2013:7)

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19
 THE CONCEPT OF MANAGEMENT
The term ‘management’ refers to the process of getting things done, effectively
and efficiently, through and with other people. Hellriegel et al. (2013:7)

The term process refers to the main activities or tasks that managers perform:
planning, organising, leading and controlling. During your first year of management
studies we are going to focus mainly on these four basic tasks.

WHAT DOES IT TAKE TO BE AN EFFECTIVE MANAGER?

‘Management’ refers to the process of getting things done, effectively and

efficiently, through and with other people. We have already discussed the first
component of this definition namely process.

There are two other components: effectively and efficiently.

The term effectiveness refers to performing those activities that are going to
ensure that the organisation fulfils its purpose and attains its goals; in other words,
‘doing the right things’.

The term efficiency refers to how well tasks are completed; in other words, ‘doing
things right’. The measure of efficiency is the ration of inputs to outputs. Hellriegel
et al. (2013:7)

The diagram below illustrates the task of management, according to our definition
above. Adapted from Machado, R., Strydom, J.W. & Cant, M.C. (1999:53):

Planning and
decision Organising Leading Controlling
making

Human
Resource
Financial
Resources Goal
Attainment
Physical
Resource
Information
Resource

Efficiency and effectiveness

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 INTRODUCTION

The purpose of business management is to produce the most units of products

or services at the lowest possible price. From this emerges the task of business
management, which is to determine how an organisation can achieve the highest
possible output (products and services), with the least possible input (human
resources, natural resources, capital).

More specifically, the task of business management entails an examination of the

factors, methods and principles that enable a business to function as efficiently
and productively as possible in order to maximise its profits. (Du Toit, G.S.,
Erasmus, B.J. & Strydom, J.W. eds., 2012:30)

There are many definitions for productivity and most of them are complex. Yet
productivity is a very simple and vital concept.

Productivity can be seen as a measure of how efficient a person or an operation

is; it is determined by comparing:

 the value of the output result with

 the cost of the input resource.

Productivity therefore refers to the quantity and quality of output of an individual or

an organisation relative to the input resources. A productive organisation is one
where the value of the output produced, out-weighs the cost of the inputs and
processing activities.

Everybody in the organisation, but specifically people in leadership roles need to

develop a clear understanding of what acceptable and unacceptable productivity
levels look like. Management has the added accountability of maintaining a
balance between what is desired and what is unacceptable.

Inputs are normally items such as time, capital, equipment and any other
expenditure employed to produce the output. The output can be a specific product
or service that is delivered to a customer at a specific price. The margin, by which
the benefits received for the output outweigh the cost of the inputs, is critical in
today’s organisations and has a direct influence on its survival in the world
marketplace.

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 THE CONCEPT OF MANAGEMENT
METHODS OF IMPROVEMENT

One way to improve productivity is to improve the methods used for performing
work. Any change in the way a task is performed so that it lowers the cost,
completion time, or improves the quality of the product or service provided by the
task, is called a methods improvement.

The methods improvement process normally involves observing each minute

segment of a job and then examining these segments for ways to do the job better
as a whole. It may also be known as work simplification, time-and-motion study,
operations analysis, systems engineering, methods and systems analysis, waste
reduction, motion economy, or even quality circles.

Hellriegel et al. (2008:12) define managerial competencies as sets of knowledge,

skills, behaviours, and attitudes needed by managers in order to be effective in a
wide range of managerial jobs and various organisational settings. They identified
six specific competencies that are transferable from one organisation to the next
namely: communication, planning and administration, teamwork, strategic action,
global awareness, and self-management.

Communication Competency
This term refers to the effective transfer and exchange of information that leads to
understanding between yourself and others. We have learnt in our definition of
management that management involves getting work done through other people,
thus communication is essential to effective managerial performance.
Communication competency includes informal -, formal communication, and
negotiation.

Planning and Administration Competency

This competency involves deciding what tasks need to be completed, determining
how they should be executed, allocating resources to enable execution of tasks,
and finally monitoring progress to ensure that they are executed.

Some of the management tasks include:

 information gathering, analysis and problem-solving;
 planning and organising projects;
 time management;
 budgeting and financial management.

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 INTRODUCTION

Teamwork competency
Accomplishing tasks through small groups of people who are collectively
responsible and whose work is interdependent requires teamwork competency.
Managers in organisations that utilise teams can become more effective by:
 designing teams;
 creating a supportive team environment; and
 managing team dynamics.

Strategic Action Competency

Managers need to understand the overall mission and values of the organisation
to ensure that their actions and those of the people they manage are aligned with
them, this process involves strategic action competency.

Strategic action competency includes:

 understanding the industry in which the business operates;
 understanding the organisation and its business processes;
 taking strategic action.

Global awareness competency

Carrying out an organisation’s managerial work by drawing on the human,
financial, information, and material resources from multiple countries, and serving
markets that span multiple cultures, requires global awareness competency.

Self-Management Competency
Taking responsibility for your life at work and beyond involves self-management
competency. Self-management competency includes:
 integrity and ethical conduct;
 personal drive and resilience,
 balancing work/life issues, and
 self-awareness and development. (Hellriegel et al., 2008:12)

Managers have various roles to fulfil. A managerial role is a behaviour pattern

expected of an individual within a unit or position. We are going to study these
roles identified by Henry Mintzberg in the following modules. He reduced the
thousands of things managers do in the course of planning, organising, leading
and controlling to ten roles, which he grouped into three broad categories:
decisional roles, interpersonal roles and informational roles. (Hellriegel et al.,
2013:10)

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23
 CHAPTER 1
THE NATURE OF MANAGEMENT

IN THIS CHAPTER:

 LESSON 1.1 : DIFFERENT LEVELS AND FUNCTIONS OF MANAGEMENT IN

AN ORGANISATION
 LESSON 1.2 : MANAGERIAL ROLES
 LESSON 1.3 : MANAGERIAL SKILLS AND COMPETENCIES AT DIFFERENT
LEVELS OF MANAGEMENT
 LESSON 1.4 : CLASSICAL AND CONTEMPORARY MANAGEMENT
THEORIES
 LESSON 1.5 : EXPLAIN MACRO-, MICRO- AND MARKET ENVIRONMENT
AND THE VARIABLES THAT COMPRISE EACH OF THESE.
 LESSON 1.6 : PREPARING FOR ENVIRONMENTAL CHANGE

AT THE END OF THIS CHAPTER YOU WILL BE ABLE TO:

 Understand management and their functions, on different management levels.

 Explain the managerial roles, the various managerial skills and competencies
needed at the different levels of management.
 Describe the various classical and contemporary management theories.
 Explain the concepts Macro-, micro and market environment and the variables
that comprise each of these.
 Propose ways in which management can prepare for environmental change.
 LESSON 1.1
LESSON 1.1
DIFFERENT LEVELS AND FUNCTIONS OF
MANAGEMENT IN AN ORGANISATION

In this Lesson:

Any organisation, whether new or old, whether small or big needs to run
smoothly and achieve the goals and objectives which it has set. For this they
develop and implement their own management concepts. There are basically
four management concepts that allow any organisation to handle the tactical,
planned and set decisions.

These are planning, organising, leading and controlling. The four basic
functions of the management are just to have a controlled plan over the
preventive measure.

CONCEPTS AND VOCABULARY TERMS YOU NEED TO UNDERSTAND:

 Ethics: The rules or standards governing the conduct of a person or the members
of a profession.
 Systems Approach: unique approach to problem solving, in that it views certain
'problems' as a part of the overall system.
 Sustainability: To keep in existence; maintain.
 Pragmatic: Dealing or concerned with facts or actual occurrences; practical.
 Model: a simplification of the real world in order to explain complex relationships in
easy-to-understand terms.
 Organisational design: matching the organisation’s structure to its strategies.
 Obsolete: No longer in use.

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Key points
Managers work at different levels and deal with different challenges. Managers are
classified according to two areas, namely by functions and by levels. Basic
management activities are:
 planning;
 organising;
 leading; and
 control.

Management tasks include, but are not limited to:

 decision making;
 communicating;
 controlling;
 disciplining;
 motivating;
 coordinating;
 evaluating; and
 delegating.

General management functions include:

 human resources;
 marketing;
 public relations;
 production;
 finance management; and
 administration.
The four management functions as performed by each of the levels are illustrated
in table 1.1.
TABLE 1.1 PLANNING ORGANISING LEADING CONTROLLING
Long term. Determine Leading the whole
Design broad
Top mission and vision, organisation Controls whole
organisational
Management overall strategies of through the top organisation.
structure.
entire organisation. executive.
Medium and short-
term planning. Controlling
Leading by means
Middle Implement plans, Organise functional management
of department
Management policies and strategies areas. activities of own
heads.
formulated by top departments.
management.
Provide technical
Short term. Implement Apply policies, assistance, Controls achieving
Lower
plans of middle rules and motivate sub- of day-to-day
Management
management. procedures. ordinates. goals.
Supervises.
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 LESSON 1.1
THE PROCESS AND TASKS OF MANAGEMENT

The management process consists of four main tasks. These tasks include
planning, organising, leading and controlling. These tasks use resources to
achieve the organisations’ goals and objectives, and are interrelated. That means
that you cannot make a decision in one area without considering its affect on the
others:

Planning Organising Leading Controlling

a) Planning is deciding what the organisation is going to do. It consists of the

following activities:

 Developing a purpose and vision for the organisation.

 Identifying and forecasting changes occurring in the macro, market and micro
environment.
 Setting integrated objectives and strategies for the organisation and each of its
functional departments. It is essential that the management team develop these
together so that they are consistent vertically and horizontally in the organisation.
 Developing tactical and operational plans and schedules of action to achieve the
objectives in each functional department.
 Developing integrated company and departmental budgets against which
performance is measured.

b) Organising is deciding how the strategies and plans will be executed. It consists
of the following activities:

 Identifying the work to be done and grouping it into logical operating functions and
units.
 Establishing job positions and working relationships between the operating units
and departments.
 Recruiting, selecting and placing people in these positions.
 Establishing methods of coordinating activities between units and departments.

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c) Leading is getting people to work willingly to execute plans. It consists of the
following activities:

 Communicating with them.

 Motivating people.
 Making decisions and solving problems related to people.
 Managing conflict and change in an organisation.
 Developing teams and individuals.

d) Controlling ensures that plans are executed correctly. It consists of the following
activities:

 Establishing standards of performance. This is done at the planning stage for each
of the resources and functional departments.
 Measuring actual performance against those standards.
 Evaluating reasons for deviations from the set standards.
 Taking corrective action.

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 LESSON 1.2
LESSON 1.2
MANAGERIAL ROLES

In this Lesson:

The Canadian academic, Henry Mintzberg who had trained as a mechanical

engineer, wrote his PhD thesis at the MIT Sloan School of Management
analysing the actual work habits and time management of chief executive
officers (CEOs). In 1973, Mintzberg's thesis on the nature of managerial work
was adopted as a study and published for a wider audience.

He reduced the thousands of things managers do in the course of planning,

organising, leading and controlling to ten roles, which he grouped into three
broad categories: decisional roles, interpersonal roles and informational roles.
He then identified ten separate roles in managerial work. (Hellriegel et al.,
2013:10)

Mintzberg found that although individual capabilities influence the

implementation of a role, it is the organisation that determines the need for a
particular role, addressing the common belief that it predominantly a
manager's skill set that determines success.

Effective managers develop protocols for action given their job description and
personal preference, and match these with the situation at hand.

CONCEPTS AND VOCABULARY TERMS YOU NEED TO UNDERSTAND:

 Officiates: To perform the duties and functions of an office or a position of

authority.
 Figurehead: a person nominally having a prominent position, but no real
authority.

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Key points

 Managers play about ten different roles, classified into three main groups namely
interpersonal, information role and decision-making role.
 The interpersonal role includes being a figurehead, a leader and a relationship
builder.
 The information role includes monitoring or gathering information, analysing the
information and acting as spokesperson for the department.
 The decision making role includes entrepreneurship and problem solving. Must
also make decisions about resources have to negotiate various parties and
stakeholders.

Table 1.2: Mintzberg’s Ten Managerial roles with some example

Category Role Examples of possible activities

Seek and receive information, scan papers and

Monitor
reports, maintain interpersonal contacts

Informational Forward information to others, send memos, make

Disseminator
phone calls

Spokesperson Represent the unit in speeches and reports

Perform ceremonial and symbolic duties, receive

Figurehead
visitors
Direct, motivate and influence subordinates to do
Interpersonal Leader tasks willingly to the best of their abilities. Conduct
training sessions and associated duties

Maintain information links in and beyond the

Liaison
organisation through networking

Initiate new projects, identify new opportunities and

Entrepreneur
areas of growth and development

Disturbance Resolve conflicts, assist subordinates to deal with

handler and embrace change, provide solutions
Decisional

Resource allocator Set priorities, draw up budgets etc.

Represent organisation during negotiations with

Negotiator
unions, suppliers etc.

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 LESSON 1.3
LESSON 1.3
MANAGERIAL SKILLS AND COMPETENCIES AT
DIFFERENT LEVELS OF MANAGEMENT

In this Lesson:

An excellent characteristic of a good leader is to be able to provide

consistent motivation to his/her team, encouraging them to attain excellence
and quality in their performance. A good leader is always looking for ways to
improve production and standards. Management skills can enable a leader to
create a quality effective team.

Concepts and Vocabulary terms you need to understand:

 Competent: the quality of being adequately or well qualified physically and

intellectually.

Key points

 Skills needed by top management differ from those required by lower

management.
 The three main skills are conceptual skills, interpersonal skills and technical skills.
 The recently established MCI (Management Charter Initiative) focuses on what
managers should do in the workplace, and not what they should know.
 Competent means that the manager must demonstrate that he or she can apply
the competence in a work situation.
 Skills and competencies must be understood against the background of the
environment in which a manager works.

We have learnt thus far what management is and what managers do. We have
also learnt various definition of management and what the management process is
all about.

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Let’s now look at Figure 1.3 that provides a structure of management’s definitions.
Adapted from Aaron J. Shenhar, J. Renier, (1996) "How to define management: a
modular approach", Management Development Review, 9(1): 25 - 31

Management
is the process of getting things done,
effectively and efficiently though and
with other people.

“what” “how”

Management is a To manage means to

science and art decide and to execute

Managing production factors:

natural resources, human Managerial roles:
resources, information resources informational, decision-making
and capital and interpersonal roles

Managing the system: Managerial phases:

resources, processes, situations Path finding; problem-solving and
and relations implementation

Managers have a duty and Management functions:

responsibility to the organisation to Planning; organising,
get results. leading and controlling

Technical Human Operational Strategic

Managerial knowledge and skills

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 LESSON 1.3
WHAT DOES IT TAKE TO BE AN EFFECTIVE MANAGER?

Hellriegel et al. (2008:12) defines managerial competencies as sets of knowledge,

skills, behaviours, and attitudes needed by managers in order to be effective in a
wide range of managerial jobs and various organisational settings. They identified
six specific competencies that are transferable from one organisation to the next
namely: communication, planning and administration, teamwork, strategic action,
global awareness, and self-management.

Communication Competency
This term refers to the effective transfer and exchange of information that leads to
understanding between yourself and others. We have learnt in our definition of
management that management involves getting work done through other people,
thus communication is essential to effective managerial performance.
Communication competency includes informal -, formal communication, and
negotiation.

Planning and Administration Competency

This competency involves deciding what tasks need to be completed, determining
how they should be executed, allocating resources to enable execution of tasks,
and finally monitoring progress to ensure that they are executed.
Some of the management tasks include:
 information gathering, analysis and problem-solving;
 planning and organising projects;
 time management;
 budgeting and financial management.

Teamwork competency
Accomplishing tasks through small groups of people who are collectively
responsible and whose work is interdependent requires teamwork competency.
Managers in organisations that utilise teams can become more effective by:
 designing teams;
 creating a supportive team environment; and
 managing team dynamics.

Strategic Action Competency

Managers need to understand the overall mission and values of the organisation to
ensure that their actions and those of the people they manage are aligned with
them, this process involves strategic action competency.

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Strategic action competency includes:
 understanding the industry in which the business operates;
 understanding the organisation and its business processes;
 taking strategic action.

Global awareness competency

Carrying out an organisation’s managerial work by drawing on the human,
financial, information, and material resources from multiple countries, and serving
markets that span multiple cultures, requires global awareness competency.

Self-Management Competency
Taking responsibility for your life at work and beyond involves self-management
competency. Self-management competency includes:
 integrity and ethical conduct;
 personal drive and resilience,
 balancing work/life issues, and
 self-awareness and development. (Hellriegel et al., 2008:12)

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 LESSON 1.3
Table 1.3 Identifies several important aspects of each key managerial
competency. Adapted from Hellriegel et al., (2013:31)

Key managerial
Important aspects of key competency
competency

Informal communication

Communication Formal communication

Negotiation

Information-gathering, analysis and problem-solving

Planning and organising projects

Planning and administration
Time management

Budgeting and financial management

Designing teams

Teamwork Creating a supportive environment

Managing team dynamics

Understanding the industry

Strategic action Understanding the organisation

Taking strategic actions

Cultural knowledge and understanding

Global awareness
Cultural openness and sensitivity

Integrity and ethical conduct

Personal drive and resilience

Emotional intelligence and
self-management Balancing work and life issues

Self-awareness and development

Spiritual intelligence

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NOTES:

36 © Business Management Training College (Pty) Ltd

 LESSON 1.4
LESSON 1.4
CLASSICAL AND CONTEMPORARY
MANAGEMENT THEORIES

In this Lesson:

Circumstances in the capitalist world gave rise to a need for

professional management. Management had to invent solutions to problems,
and they developed their own theories about the organisation and its
management.
Managers have to distinguish between poor and sound theories, to predict the
future with some degree of confidence. A sound theory describes the
circumstances under which it does and does not work.

CONCEPTS AND VOCABULARY TERMS YOU NEED TO UNDERSTAND:

 Theory: Theories are analytical tools for understanding, explaining, and making
predictions about a given subject matter.
 Productivity: the ratio of the quantity and quality of units produced to the labour
per unit of time.
 Classical: designating of a specified course of study that is or has been standard
and traditionally authoritative, not new, recent, and experimental.
 Contemporary: in the style of the present or recent times; modern.
 Bureaucratic: one who follows a routine in a mechanical, unimaginative way,
insisting on proper forms, petty rules.
 System: a set of interrelated elements functioning as a whole.
 Open system: a system is open if:
 it is dependent on the environment in which it operates
 the environment is dependent on the system
 there is a specific interaction between system and environment
 Sub-system: a system within a system.
 Synergy: The whole is greater than the sum of its parts, or individual efforts are
simultaneously applied in such a way that the result of the simultaneous
application is greater than the sum of the individual efforts.
 Entropy: The process of systems disintegration (the opposite of synergy)

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Key points
 Theories bring predictable success to the world of management. The theories of
management can be classified into the classical approach and the contemporary
approach.

CLASSICAL APPROACHES

The classical era covered the period from about 1900 to the mid 1930s. The
classical viewpoint is one of the oldest and perhaps most widely accepted view of
management. The emphasis was on the internal functioning of the organisation. It
is divided into three main branches: scientific management, bureaucratic
management and administrative management. They emerged during a time when
engineers were trying to make organisations run like well-oiled machines.

SCIENTIFIC APPROACH

 Focus is on ways to improve performance of individual workers. It also focused on

the issue of managing work – not managing people.
 Contributors to scientific management – Frederick Taylor, Frank and Lilian Gilbreth
and Henry Gantt.
 Taylor described how the scientific method could be used to define 'the one best

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 LESSON 1.4
way' for a job to be done. He analysed each and every aspect of a task and
measured everything possible to find the best way to complete the task. He tried to
eliminate unnecessary movement that slowed production down and determined
the exact sequence of activities. A standard time to accomplish each task was
then determined - this was referred to as time and motion studies.

 Taylor's four principles of management:
 Develop a science for each element of an individual's work.
 Scientifically select, train and develop the worker.
 Cooperate with workers so as to ensure that all work is done in accordance with
the principles of the science that has been developed.
 Divide work and responsibility almost equality between management and workers.
Management takes greater responsibility.
 Taylor believed money motivated workers and therefore he supported the
individual piecework system as the basis for pay (Robbins, S.P., Odendaal, A.,
Roodt, G, 2007:436).

Advantages of the scientific approach:

 Productivity and efficiency.

Disadvantages of the scientific approach:

 People are not machines and should be treated as human beings (overlooked
social needs).

PROCESS OR ADMINISTRATION APPROACH

 Planning and the organisation of people in the workplace became the focus of
consideration. It focuses on the manager and the basic managerial tasks.
 Contributor to administrative/process approach – Henri Fayol a French
industrialist.

He argued that management was an activity common to all human undertakings in

business. He felt that in order to be successful as a manager you only had to
understand the basic managerial tasks - planning, organising, controlling, leading
and apply certain management principles to them. According to Fayol,
management is a skill that one can learn once its underlying principles are
understood.

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 Fayol identified 14 principles for effective management: Smit et al. (2011:35)

1. Division of Labour
2. Authority and responsibility
3. Discipline
4. Unity of command
5. Unity of direction
6. Subordination of individual interest to the common good
7. Remuneration
8. Centralisation
9. Hierarchy
10. Order
11. Equity
12. Stability of staff
13. Initiative
14. Team spirit (Esprit de corps)

We will discuss these principles in the lesson about Organising.

Advantages of the administrative approach:

 Clear structure, professionalisation of managerial roles.

Disadvantages of the administrative approach:

 Internal focus, overemphasises rational behaviour of managers.

BUREAUCRATIC APPROACH

 The bureaucratic management approach relies on rules, a set hierarchy, a clear

division of labour and detailed procedures.
 Contributor – Max Weber. He was a German sociologist who developed a theory of
authority structures and describing organisational activity as based on authority
relations. He was one of the first to study management and organisational
behaviour from a structural perspective. He was based his studies on Germany's
governmental bureaucracy and therefore he was mostly concerned with the broad
social and economic issues facing society.
 Bureaucracy was a system characterised by division of labour, a clearly defined
hierarchy, detailed rules and regulations, and impersonal relationships.
 Limitations – managers are being compensated to do what they are told to do.

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 LESSON 1.4
Managers often rewarded for complying with out-dated rules.
 Early approaches emphasised technical aspect of work at the expense of personal
aspect.
 Depression, changes in economic, political, social, technological environments
caused managers to challenge these approaches.
 Managing people became focus.
 Hawthorne studies leaded to Human relations approach.

Characteristics of bureaucratic management: Hellriegel et al. (2013:105)

 Rules
 Impersonality - employees are evaluated according to rules and objective data,
such as sales or units produced
 Division of labour
 Hierarchical structure
 Authority structure
 Lifelong career commitment
 Rationality - the most efficient methods are used to achieve the set goals.

Advantages of bureaucratic management:

 Efficiency and consistency.
 Functions best when many routine tasks need to be done; this enables lower-level
employees to focus on handling the bulk of the work by simply following rules and
standard operating procedures.

Disadvantages of bureaucratic management:

 Rigid rules, red tape and slow decision making.

BEHAVIOURAL VIEWPOINT OF MANAGEMENT

During the 1920s and 1930s industrialised nations experienced vast social and
cultural changes. Mass production led to a second industrial revolution. The
theorists during this period advocated a theme that focused on behavioural
management, the study of how managers should personally behave to motivate
employees and encourage them to perform at high levels and be committed to
achieving organisational goals.

Mary Parker Follett made important contributions to the behavioural viewpoint in

that she believed that management is a flowing, continuous process.

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She advocated involvement of workers in solving problems, group dynamics,

dynamics of management rather than static principles and co-ordination in the
workplace. Much of her studies was in response to Taylor's work that ignored the
human side of the organisation.

HUMAN RESOURCE MOVEMENT

 Employees are more motivated by social needs and get a sense of identity through
their association with one another.
 Employees are more responsive to the social influences of their colleagues than to
management's financial incentives and rules.
 Employees are more likely to respond to manager who can help satisfy their needs.
Managers need to co-ordinate work with sub-ordinates in order to improve
efficiency.
 Contributor – Elton Mayo a Harvard Professor, joined the Western Electric
Engineers on their studies. He studied people in the work environment using
scientific methods.
 Behavioural scientists – Maslow and McGregor. Maslow proposed the widely
recognised theories of motivation. Mc Gregor is best known for his Theory X and
Theory Y assumptions.
 The Hawthorne studies (1924-1933) made the most important contribution to the
human relations movement within organisational behaviour conducted at Western
Electric Company's Hawthorne Works. The Hawthorne effect concluded that
when employees are given special attention, production is likely to change
regardless of whether working conditions change. Informal work groups and the
social environment of employees greatly influence productivity. Awareness of
employee's feeling and involvement in decision-making reduces resistance to
change.

QUANTITATIVE THEORY

 The quantitative management approach developed as a result of the intervention of

computers and enabled experts to apply mathematical techniques to management
problems.
 Quantitative techniques have four basic characteristics:
 The primary focus is on decision-making.
 Alternatives are based on economic criteria
 Mathematical models are used

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 LESSON 1.4
 Computers are essential.
 It is about ‘Crunching numbers’. Management science and operations research.
 Used in planning and control activities, product strategies, production scheduling,
capital budgeting, cash flow management, inventory control.
 Limitations of the quantitative theory – used mainly as tool or aid in decision-
making as many aspects of management cannot be quantified.

CONTEMPORARY APPROACHES

Contemporary approaches developed as the business environment became

increasingly turbulent and volatile and managers could no longer only focus on
their internal environment. The interaction between the external environment and
the organisation became the focus of the systems theory of management.

The contemporary management approaches includes:

 The Systems Approach
 The Contingency Approach
 Total Quality Management

SYSTEMS APPROACH

According to this theory the organisation is an open system which is influenced by

and influences the external environment. Any changes in the system or its
environments will influence the other parts of the system.

It is a management approach which enables the leadership to see the company as

a unified part or a major section of the larger outside corporate environment. Even
a small activity in a part has a substantial effect on other sections in the company.
Such a system may be biological, physical or social; and may enable the
management to efficiently determine the long-term goals of the company.

The systems approach states that for realising the operations of an entity, it is
essential to see the entity as a complete system.

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System comprises four elements:

 Input (resources)
 Transformation process (managerial, systems etc.)
 Outputs (procedures or services)
 Feedback (reaction from the environment)
 According to systems approach, management must combine viewpoints of various
sub-systems so that the overall goal of the system as a whole can be obtained.
 The functions of management should be seen as interdependent components that
complement each other (synergy).

The systems approach to management views an organisation as a group of

interrelated parts with a single purpose: to remain in balance (equilibrium). The
action of one part influences the other parts and causes imbalances.

Characteristics of a system:
 A system is complex: each aspect of the business must be dealt with differently.
 A system can be opened or closed.
 A system is open if:
 it is dependent on the environment in which it operates;
 the environment is dependent on the system;
 there is a specific interaction between system and external environment.
 A system strives for equilibrium.
 A system strives towards achieving a multiplicity of goals.

Managers therefore cannot deal separately with individual parts: they should view
the organisation as a whole and should anticipate the effect of their decisions on
the other parts of the organisation.

From a systems point of view, management should maintain a balance between

the various parts of the organisation as well as between the organisation and its
environment.

Which is why we will discuss the macro-, market-, and micro-environments and the
variables that comprises each of these later in this study guide.

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 LESSON 1.4
CONTINGENCY APPROACH
The contingency approach developed form the systems approach to management.
The application of management principles depends on the particular situation that
management faces at a given point in time. There is no right way to manage as
every department or unit within the organisation is unique. Every organisation
exists in a unique environment with unique employees and unique goals. Thus,
there is more than one way to achieve a goal.

According to Hellriegel et al. (2013:120) the essence of the contingency viewpoint

is that management practices should be consistent with the requirement of the
external environment, the technology used to make the product or deliver the
service and the people who work in the organisation.
The relative importance of each contingency variable depends on the type of
managerial problem identified.

TOTAL QUALITY MANAGEMENT (TQM)

TQM looks at continuous improvement and emphasises never being satisfied with
quality. Organisations feel the pressure from customers and competitors to deliver
high quality products and services on time, to reward ethical behaviour of
employees and to develop plans to manage highly effective and diverse
workforces. The quality viewpoint stresses the meeting of customer's expectations
in terms of value (performance and quality) of goods and services.

One way for top management to gain support of employees in efforts to deliver
quality is to implement TQM practices that reward employees for meeting quality
goals. The TQM philosophy requires high level of co-ordination throughout the
organisation through for example teamwork.

Management that is driven by competition, customer needs and expectations.

Creating learning organisations and promoting motivation for learning.
Counterpoint to the belief that low costs are the only way to increase productivity.

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Aspects Common to TQM and Continuous Improvement Programmes

According to Thomson & Strickland (2001) the following aspects are common to

TQM and CI programmes:

 Committed leadership
Unwavering, long-term commitment by top managers to the philosophy, usually
under a name something like Total Quality Management, Continuous Improvement
(CI), or Quality Improvement (QI).

 Adoption and communication of TQM

Using tools like the mission statement, and themes or slogans.

 Closer customer relationships

Determining customers' (both inside and outside the firm) requirements, then
meeting those requirements no matter what it takes.
 Closer supplier relationships
Working closely and cooperatively with suppliers (often sole-sourcing key
components), ensuring they provide inputs that conform to customers' end-use
requirements.

 Benchmarking
Researching and observing operating competitive practices.

 Increased training
Usually includes TQM principles, team skills, and problem solving.

 Open organisation
Lean staff, empowered work teams, open horizontal communications, and a
relaxation of traditional hierarchy.

 Employee empowerment
Increased employee involvement in design and planning, and greater autonomy in
decision-making.

 Zero-defects mentality
A system in place to spot defects as they occur, rather than through inspection and
rework.

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 LESSON 1.4
 Flexible manufacturing (applicable only to manufacturers)
Can include just-in-time inventory, cellular manufacturing, design for
manufacturability (DFM), statistical process control (SPC), and design of
experiments (DOE).

 Process improvement
Reduced waste and cycle times in all areas through cross-departmental process
analysis.

 Measurement
Goal-orientation and zeal for data, with constant performance measurement, often
using statistical methods

 Total Quality Management (TQM) is a management strategy aimed at

embedding awareness of quality in all organisational processes. TQM has been
widely used in manufacturing, education, government, service industries, as well
as NASA space and science programmes.

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NOTES:

48 © Business Management Training College (Pty) Ltd

 LESSON 1.5
LESSON 1.5
THE MACRO-, MICRO- AND MARKET
ENVIRONMENT

In this Lesson:

Nieuwenhuizen and Oosthuizen (2010:8) points out that the business

environment comprises everything that can affect the establishment’s growth
and survival positively or negatively and therefore influences the achievement
of the organisation’s objectives. The business environment present
opportunities and threats to the organisation and is continuously changing.
This means that the environment in which the organisation operates is
dynamic and that the organisation needs to adapt in order to maximize its
performance and competitiveness.
It is necessary to classify the numerous variables that influence the
organisation. This will enable us to identify certain trends for future analysis in
each section or sub-environment.

CONCEPTS AND VOCABULARY TERMS YOU NEED TO UNDERSTAND:

 Competition (as a variable in the market environment): a situation in the

market environment in which different organisations with more or less the same
product or service compete for the business patronage of the same consumers.
 Micro-environment: factors or elements in an organisation’s immediate area of
operations that affects its performance and decision making freedom. These
factors include competitors, customers, distribution channels, suppliers and the
general public.
 Market or task environment: the environment that immediately surrounds the
organisation.
 Macro-environment: major and uncontrollable external factors that influence an
organisation’s decision making, and affect its performance and strategies. Include
economic, demographic, social, legal and political conditions, technological
changes and natural forces.
 Technology: the practical application of knowledge especially in a particular area.

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Understanding the business environment in which the business operates is a very
important aspect of business management. It encapsulates many different
influences and the difficulty is making sense of this complexity, which arises
because the micro, market and macro environments and their variable are
interdependent. For example, a rise in the interest rate will have an influence on
the cost of capital, meaning it will be more expensive to borrow money from the
bank to buy an office building or machinery. Figure 1.6 below illustrates the
different layers of the business environment.

Figure 1.6 The different layers of the business environment.

The macro-environment consists of broad environmental factors that impact to a

greater or lesser degree on organisations. Having identified the key drivers of
change from the broad data, possible scenarios can be drawn which will help the
organisation to draw up its strategy.

The next layer is called an industry or sector. This is a group of organisations

producing the same products or services. A useful framework for analysing an
industry is Porter’s Five Forces Framework, which we are going to discuss in the
next part of this lesson.

The layer adjacent to the organisation itself is its competitors and markets. Within
most industries or sectors, there will be many different organisations with different
characteristics and competing on different bases. The concept of strategic groups
can help with the identification of both direct and indirect competitors. Competitor
analysis allows companies to identify and understand its competitors.
Furthermore, customers’ expectations are not all the same.

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They have a range of different requirements, which can be understood through the
use of market segments and critical success factors.

Understanding how such factors might impact on and drive change in general is
only the starting point. Managers need to understand the key drivers of change
and also the differential impact of these external influences and drivers on
particular industries, markets and individual organisations. It is worthwhile
assessing which factors are the most important at the present time and which will
be over the coming years. It is particularly important that the future impact is
assessed and fully understood.

MACRO-ENVIRONMENT (EXTERNAL)

The macro environment include the PESTLE variables. These are factors over
which management have no control. Variables in this environment have a direct as
well as indirect influence on the organisation. Uncontrollable environmental forces
or ‘megatrends’ are represented here. Economic conditions like inflation, interest
rates, fluctuations in the economy and the growth rate of the economy influence
the level of consumer spending and consequently the performance of the business
sector. Other important factors in this environment include risk, labour legislation
and tax laws, BBBEE legislation, business cycles, exchange value of our currency,
degrees of competitiveness, demand and supply, government and support
structures etc.

The external, macro environment consists of the following factors, which are
uncontrollable as far as the organisation is concerned. They all create
opportunities and threats for an organisation.

PEST and PESTEL Analysis

The PEST analysis is a useful tool for understanding market growth or decline,
and as such the position, potential and direction for a business. A PEST analysis is
a business measurement tool.

PEST is an acronym for Political, Economic, Social and Technological factors,

which are used to assess the market for a business or organisational unit. The
PEST analysis headings are a framework for reviewing a situation, and can also,
like the SWOT analysis, be used to review a strategy or position, direction of a
company, a marketing proposition, or idea.

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Where a PEST analysis most commonly measures a market; a SWOT analysis
measures a business unit, a proposition or idea. PEST analysis uses four
perspectives, which give a logical structure, in this case organised by the PEST
format, that helps understanding, presentation, discussion and decision-making.
The four dimensions are an extension of a basic two heading list of pro's and
con's.

PEST becomes more useful and relevant the larger and more complex the
business or proposition, but even for a very small local businesses a PEST
analysis can still bring up one or two very significant issues that might otherwise
be missed.

The four quadrants in PEST vary in significance depending on the type of

business, e.g., social factors are more obviously relevant to consumer businesses
and businesses close to the consumer-end of the supply chain, whereas political
factors are more obviously relevant to a municipality while environmental factors
will apply strongly to the mining business.

PEST analysis can be used for marketing and business development assessment
and decision-making, and the PEST template encourages proactive thinking,
rather than relying on habitual or instinctive reactions.

PESTLE analysis factors are Political, Economic, Sociological, Technological,

Legal and Environmental. The PESTLE analysis examines each factor to
assess what their impact or potential impact on the organisation. In this way,
they can prepare strategically for any changes that need to be made in the
organisation or simply to have the awareness of the external market to give them a
competitive edge over other firms in the industry.

How A PESTLE Analysis Can Help A Business.

The PESTLE Analysis results can be used in the decision making process. When
a new product is developed, or a new strategic plan must be implemented, a
PESTLE Analysis can investigate the opportunity for such changes, and whether
they are viable propositions for the business to undertake. This eliminates or
reduces possible risks associated with new products and new strategic plans.

A good PESTLE Analysis also means a business can minimise risk when taking
advantage of the trends and changes in the market place. The business can then
adapt and change its products and general vision to suit the needs of the market,
thereby cutting out potential risk.

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By predicting the needs of an increased market, the business can take advantage
of any opportunities that may arise. It also allows the business to make informed
decisions on any downturns in the market place. The business can be alert of any
negative forecasts in the market place, which may have an adverse impact on it
and plan accordingly.

The PESTLE Analysis can also be used to manage or reduce potential risks that
could be incurred prior to setting up a business. It can be an essential planning
tool for predicting what the market requires at a specific time and what will be
commercially successful. By looking at external factors such as political trends,
legal aspects and social factors, the business can plan ahead of other existing
businesses in the market place. By investigating the market in such a manner, the
business can plan appropriately from the very outset in order to avoid difficulties
later on.

Let's now discuss the variables of PESTLE.

 Political environment
 Economic environment
 Socio-cultural environment
 Technological environment
 Legal environment
 Ecological/physical environment
 International environment

Political environment (The state of government and public affairs in general)

The political and legal environment consists of the government and its political
programmes and policies. They include the laws of the country at all levels of
government. Many laws affect particular industries and impact on the management
of organisations in those industries. Management decisions are affected by
politics. Governments influence the organisation’s market both internally
(government expenditure) and externally (political policy). Managers must be
aware of the activities, legislation, and measures of the government as well as
political trends.
 Political stability (for example Zimbabwe and Argentina)
 Elections
 A good example is the legislation preventing advertising of tobacco products
and the huge impact it had on the way cigarette companies now function.

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Economical environment (Relating to trade, industry and the creation of wealth)

The economic environment consists of factors such as inflation and interest rates,
monetary and fiscal policies, foreign exchange rates and national economic growth
rates. The Economic environment also include the growth rate, levels of
employment, consumer income, the rate of inflation, the exchange rate. These
forces result in prosperity or adversity. The economic environment is also
influenced by crime, social and technological trends. It is important that
management be vigilant about economic trends and the mission, goals and
strategy of the organisation must be reviewed regularly.
 Exchange rates
 Unemployment
 Inflation
 Tax laws
 A good example is the change in the value of a currency that can make an
important impact on the enterprise like Zimbabwe.

Socio-cultural (Relating to matters governed by common law and factors

dictating behaviour and responses.) The social- and cultural environment
includes issues such as demography, lifestyles value and the need for satisfactory
education, health and housing. This environment is most sensitive to cross-
influences especially technology and economy. Culture also influences
organisations. The HIV/AIDS epidemic and poverty cause changes in the
environment. Management cannot ignore these social influences.

 Social norms
 Concern for health and physical well being
 Cultural diversity – interaction and barriers
 Family structures
 The large unemployment levels in South Africa create pressures in all these areas.
Crime and corruption and HIV/ AIDS affect all of us in some way.

Technological environment (The scientific study and use of applied science.)

Technology is involved in every process of the business, form manufacturing,
marketing and managing. Technology affects the ability to compete in a market. It
has strategic implications for organisations as well as industries.
It is important that management keep abreast of technological change.

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The technological environment for most organisations, are changing rapidly. It
creates opportunities for product and process innovation.
 Speed of development
 Diversity: networks, satellite, TV, radio, CD’s, on-line services
 Cost implications
 Cell phone technology that changes constantly

Legal environment
This environment is either under direct or indirect control of the government. The
government is reasonable for the legislative framework and regulations which
includes laws that influence employment, consumer protection, health and safety,
trade unions etc.

Ecological/physical environment (Natural / environmental concerns)

The ecological environment consists of natural resources and geographic
and climatic conditions. This environment contains natural resources and receives
waste, which form pollution. Managers must be aware of shortage of resources,
cost of energy, cost of pollution, damage to natural resources.
Managers in agriculture must be aware of temperatures and their influence on
resources and food production.

 Cost implications, public opinion

 Sites and locations
 The rise in temperatures can have an impact on an organisation.

International environment

The international environment includes such issues as multinational companies,

competitors who open facilities in South Africa, legislation, economic conditions
and political trends and events. Businesses that operate internationally are in a
complex environment as each country has its own unique environmental factors.
South Africa’s re-admission to international markets offers managers many
opportunities. Management must constantly assess possible global threats to their
products and markets.
 Cheap imports from China threaten many industries and companies such as the
textile industry in South Africa.

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Example – The Vibe
Thabo and James are opening a new Pub in their area – The Vibe. One of their
considerations was the risk involved in such an operation. They decided to do a
PESTLE analysis to help them identify risks by assessing the current market
conditions creating a strategic plan.

PESTLE analysis for The Vibe

Political Economical Social

 Licensing Laws in line  National and  Place to meet friends and
with Government policy international economic for locals to socialise
 Opening hours and late downturn means people  Easily accessible
night opening generally have less  Localised venue known
 Minimum wage increase disposable income for for live music, themed
affecting salaries and socialising nights for younger
wages  Rise in staff wages due consumers
 Legislation regarding to Minimum Wage  Demographically
measures of drinks increases increased local student
 National Government  Cut price offers for population
guidelines regarding alcohol in supermarket  Media concern with
health promotions negative aspects of ‘binge
 Local and National  Increases in transport drinking’
Government concerns costs in line with Fuel  Increased awareness of
regarding negative pricing health concerns
aspects of ‘binge  Increased advertising on
drinking’ mainstream media of
 Budget increases in duty consuming alcohol
on alcohol responsibly
 Wider choice and taste of
alcoholic drinks in
supermarkets for
consumers
Technological Environmental Legal
 Developments in delivery  Recycling  Smoking Ban
of cold beers and  Waste, litter, refuse  Stronger enforcement of
draughts produced in local area underage drinking
 Development of wide  Transportation and  Changes in Drink Driving
range of flavoured delivery costs of goods Laws
alcoholic drinks  Legislation on measures
 Local interest in nightlife of drinks served
promoted via multi-media,
websites, blogs and social
networking
 Advertisements for
alcohol awareness and
responsible drinking on
mainstream media
 Increased advertisement
for alcohol brands via
multi media
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THE MARKET OR TASK ENVIRONMENT

The market environment refers to the variables directly outside the organisation
that might have a positive or negative influence on the organisation. This
environment consists of the market, suppliers, intermediaries, competitors,
substitute products, possible new entrants, and labour unions.
It contains those variables that revolve around competition an pose threats or
create opportunities for organisations.

The variables are as follows:

Market – consists of people who have needs that they want to satisfy, and the
financial means to satisfy these needs. Consumer purchasing behaviour is
influenced by consumer needs, purchasing power, purchasing behaviour. These
aspects are influenced by variables in the macro-environment e.g. demographic
trends, economic factors and cultural values.
Suppliers – they provide the materials, capital or labour that is used as input, and
are converted into outputs, or products and services. The inputs must be of the
right quality, quantity and price.
Intermediaries –They bridge the gap between the manufacturer and the
consumer. Examples of intermediaries are wholesalers, retailers, agents, brokers,
banks, insurers.
Competitors – the actual quantity of a particular product, as also the price levels
of the product, are often determined by competitors, and not consumers.
Competition sees to it that prices of products do not become too high, it provides
an incentive for higher productivity and it encourages new technology to be
discovered. The consumer benefits from competition.

Porter's five forces model helps manager focus on the five most important
competitive forces or potential threats in the external environment namely:

 Bargaining power of suppliers,

 Bargaining power of customers,
 Threats of new entrants,
 Threats of substitute products;
 Rivalry amongst competitors.

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TO EXPLAIN THE VARIABLES IN A DIFFERENT WAY TO YOU.

The market or task environment consists of the following factors, which can be
influenced by management strategies:
 The organisation’s markets, which could be businesses or consumers, who need
products and services from your organisation. Each of these have unique buying
processes, behaviour, needs and attitudes. Extensive market research is
frequently needed to evaluate these issues.
 The organisation's suppliers of resources.

 The organisation's competitors who compete for resources and customers in the
marketplace. Why do our competitors take business from your organisation? Why
do you take business from them?
 The organisation's intermediaries who distribute the organisation's products and
services to the markets.
 Some authors believe that the shareholders are also part of this environment. In
the case of a public company, which is listed on the Stock Exchange, this would be
correct because most of the shareholders are anonymous as far as company
management is concerned.
 An organisation could have strategic allies or partners, either in South Africa or
abroad.

THE MICRO-ENVIRONMENT

Management organises, plans, leads and controls the activities of the organisation.
Different levels of management operate in this environment and strive to create
synergy between various goals.

The micro-environment consists of the following participants and elements in the

organisation itself. All of these are under the control of the management of the
organisation:
 The mission and goals of the organisation.
 Organisational culture which is the set of values that helps everyone understand
what the organisation stands for, how it operates, and what is important.
 The organisation and its management.
 The resources of the organisation e.g.

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Human Resources, including:
 The board of directors, who decide the overall policies and strategies the company
will adopt.
 The managers, who decide how they are going to run the company in terms of
resource acquisition and use.
 The employees e.g. sales staff whom, together with the managers, are responsible
for achieving the organisation's objectives.

Physical Resources, including:

 Buildings,
 Equipment
 Warehouses
 Inventories
 Services- and distribution facilities
To be competitive, these resources must be:
 strategically located,
 be productive,
 be low in operating costs,
 be effective distributors and
 make the proper product or service.

Financial Resources, including:

 cash flow
 debt capacity
 new equity available.

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NOTES:

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 LESSON 1.6
LESSON 1.6
PREPARING FOR
ENVIRONMENTAL CHANGE

In this Lesson:

The rapid and discontinuous change that is taking place in the

environment has a direct impact on the way that businesses are being
managed. Managers are finding that old, proven recipes for success and
specialised routines are no longer effective and it is necessary to adopt new
approaches to management.

CONCEPTS AND VOCABULARY TERMS YOU NEED TO UNDERSTAND:

 Environmental scanning: a process of gathering, analysing, and dispensing

information for tactical or strategic purposes.
 Strategic responses: Responding to information by making strategic changes or
plans.

Key points:
 Concepts from the theory of systems are used to explain the interdependence
between the business organisation and its environment.
 A business organisation is a system that operates in a specific environment.
 A business obtains inputs from the environment (e.g. labour, raw materials,
knowledge and expertise). Inputs are transformed into outputs (e.g. products,
services).
 According to systems approach, management must combine viewpoints of various
sub-systems so that the overall goal of system as a whole can be obtained.
 The functions of management should be seen as interdependent components that
complement each other. (synergy).

We have learnt in a previous lesson that because an organisation is an open

system, there are certain relations between it and the various dimensions of the
management environment. In this lesson we examine how the environment
influences the organisation and how the organisation reacts to it.

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Organisations operating in a changing environment usually experience constant
pressure to adapt their products and services to meet the demands of their
customers and their new preferences.

Hellriegel et al. (2008:217) points out that an organisation that provides good and
services in environment with slow technological innovation and relatively few
competitors (stable environments) has different problems than those of an
organisation who operates in a growing, changing, and highly competitive market
with a lot of uncertainty (changing environments).

We have learnt in the previous lesson that the competitive forces (customers,
competitors, suppliers, new entrants, and substitute goods and services) dictate
the type and amount of information that managers need in order to make
decisions.
Most organisations operate in both stable and changing environments and as a
result some functions may undergo little structural change whereas others may
change considerably.

Uncertainty in the environment

Smith, P.J, Cronje G.J., Brevis, T. & Vrba, M.J. (2008:75) points out that an
organisation’s environment can be studied from two perspectives, namely the
extent of change and the level of complexity.

The extent of change refers to the degree of stability or instability of the

environment.

Complexity of the environment depends on the number of variables, resulting in

either a complex or simple environment. Interaction between these two dimensions
determines the level of uncertainty that the environment holds for the organisation.

Stable environment
A stable environment is characterized by a few changes. The changes that do
occur have minimal impact on the organisation’s internal operations. In a stable
environment top management can easily keep track of trends and what’s
happening in the business.

According to Hellriegel et al. (2008:217) a stable environment is reflected in:

 products that haven’t changed much in recent years;
 little technological innovation;
 a fixed set of competitors, customers, and other stakeholders; and
 consistent policies from government.

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Changing environment

Change is a difficult concept to define. According to Smit et al. (2008:74-75) it

means changing a state of stability top one of instability, moving from the
predictable to the unpredictable, or from the known to the unknown. It is
immeasurable and causes uncertainty. Hellriegel et al. (2008:217) points out that a
changing environment is unpredictable because of frequent shifts in products,
technology, competitors, markets, and/or political forces. Changes are the norm,
rather than the exception. Have you ever hear the expression: “the only thing
constant is change”?

A changing environment is reflected in:

 products that are continuously changing or evolving;

 significant technological innovations that make production processes or equipment
obsolete;
 sets and/or actions of competitors, customers, or other stakeholders that change
continually; and
 government actions that reflect the current level of political clout wielding by
various interest groups for consumer protection, product safety, pollution control,
and civil rights. (Hellriegel et al. (2008:218)

Smith et al (2008:76) states that insights into trends in the management/business

environment and the ability to predicts their implications for decision-making are
becoming management priority. The extent to which the environment influences
the management of the organisation depends of the type of organisation and the
nature of the environment.

The responses to the changes in the environment revolve around two main
aspects namely: environmental scanning and information management.

According to Smith et al (2008:76) if an organisation is to have knowledge of the

environment for decision-making purposes, its information management system
should make adequate provision for environmental scanning.

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 CHAPTER 2
THE BUSINESS WORLD AND

BUSINESS MANAGEMENT

IN THIS CHAPTER:

 LESSON 2.1 : NEEDS AND NEED SATISFACTION

 LESSON 2.2 : THE MAIN ECONOMIC SYSTEMS

AT THE END OF THIS CHAPTER YOU WILL BE ABLE TO:

1. Explain the role of the business organisation in making available products and
services to ensure that society thrives and exist
2. Describe the needs of society and how a business organisation satisfies those
needs in a market economy.
3. Distinguish between the world’s main economic systems
 LESSON 2.1
LESSON 2.1
NEEDS AND NEED SATISFACTION

In this Lesson:
Business management is a subject not only for “business people” but is
relevant to every person in society. Although many people are not
actively involved in “business” as such, they are involved in the business
process by merely participating in the economic life of the country. The
subject of business management encompasses all activities that are related to
the management of all types of organisations. The mind-set of management
thinking is one of the skills that need to be developed in a Business
Management programme. The aim or objective of every business should be to
satisfy the needs of the customers. When a business understands the need of
customers, and design its products to satisfy those needs, the business will
usually be successful.

CONCEPTS AND VOCABULARY TERMS YOU NEED TO UNDERSTAND:

 A business: can be defined as the organised effort of a person or a number of

people to produce or sell, for a profit, some of the products and/or services that
satisfy customer’s needs.
 The word business has corresponding meanings to: enterprise, organisation, firm
and company.
 Natural resources: The production factor of the land include agricultural land, in-
dustrial sites, residential stands etc. All such resources that nature provides for
humankind.
 Human resources: The production factor of labour. These include the physical
and mental skills of people to create products and services.
 Financial resources: This is the money needed to pay employees, to buy raw
material or whatever else is needed, and to keep the business running well.
 Material resources: These are the physical objects needed to produce a product
or service, including buildings and machinery.
 Capital: This is represented by buildings, machinery, cash registers etc. used in
the production process of final consumer products.
 Economic principle: Gaining the highest level of satisfaction of needs with lim-
ited need-satisfying resources.

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Economic activity is aimed at the fulfilment of needs and is motivated by the
compensation the entrepreneur receives. Large, medium and small businesses
exist because they have a purpose. Their vision and mission is defined in terms of
operational- and tactical plans which set out how they will achieve their goals and
objectives. The ability of the business to fulfil its vision and mission intimately leads
to customer satisfaction, profits for the business and employee remuneration.
Consequently, our standards of living are being raised. However the opposite is
true with regards to failed business ventures, it leads to huge financial losses by
the stakeholders, unsatisfied needs of consumers, dismissal of employees due to
operational requirements and ultimately leads to the disadvantage of the society at
large. (Van Rensburg, 2005:2)

A business is any organisation that uses resources to meet the needs of

customers by providing a product or service that they demand. Business activities
at all stages involve adding value to the resources such as raw material and semi-
finished goods, and making them more desirable and thus more valuable to the
consumer. Business activity uses scarce resources of our planet to produce goods
and services that allow us to enjoy much higher living standard than what would
have been possible if we remained entirely self-sufficient.

Businesses identify the needs of consumers. They purchase the needed resources
- or factors of production - in order to produce goods and services that satisfy
these needs, usually with the aim of making a profit.

Businesses need factors of production to produce goods and services, but what
are these factors? These are the resources needed by the business to produce
goods and services. They include:

 Natural resources: This refers to all means provided by nature. Characteristics of

natural resources are that they are scare and limited. Examples are crude oil,
water, minerals, coal, timber etc.

 Labour: This refers to the human being who have the knowledge (technical and
academic), physical capabilities and skills to transfer goods into products, provide a
service and take leadership.

 Capital: This is not just the finance needed to set up a business and pay for its
continuing operations, but also all of the man-made resources used in production.
These include capital goods such as computers, machines, factories, offices and
vehicles.

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 Entrepreneurship: This is the process through which the individual takes capital,
labour and natural resources and combines them with the risk linked with the
provision of goods and services. (Ferreira, 2013:3)

Businesses have many other needs before they can successfully produce goods
and services demanded by their customers. Figure 2.1 demonstrates the wide
range of these needs.

Land
Capital
 Site for building
 Finance
 Raw material
 Factories/offices
 Machines

Customers
 Internal customers
 External customers
Government
 Road/rail/airports
Business
 Legislation
needs
Suppliers  Academic and
 Manufacturers Training
and vendors Institutions
 Wholesalers and
distributors

Labour
Enterprise
 Skilled
 Risk takers
 Unskilled
 Decision makers
 Temporary
 Coordinators
 Permanent

Figure 2.1 What businesses need

Human needs and wants:

A human need is a basic requirement that an individual wishes to satisfy. Physical
needs include foods, clothing and shelter, we refer to these types of needs as
lower order needs. Individual needs include desires for knowledge, recognition and
self-actualisation needs, or higher order needs.

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We are going to learn more about needs and needs satisfaction in a module to
follow when we study Content approaches to motivation which includes Maslow’s
hierarchy of needs, Alderfer’s ERG theory and Herzberg’s two factor theory.

Wants are broader in their perspective. These are the things we do not need in
order to survival as biological creatures, but they do satisfy certain individual
needs of most human beings. For example we need food for survival but, although
we may want a juicy steak, our survival do not depend on expensive food items.
Businesses need to understand and identify who their customers are. Every
organisation has two types of customers. External customers are those customers
who buy products and services—they are the people we tend to think about when
we refer to customer service. They buy our products, come into our stores and do
business with us. These customers are in a position to enhance the reputation of
our organisation, can contribute to our growth and have a profound effect on the
overall success of our business.

According to Harris (2000:2) customers have five basic needs:

 Service: Customers expect a certain level of service with every product that they
purchase. Expectations may vary according to the value of the item, type of
service, type of purchase etc.
 Price: People have limited financial resource and therefore price is becoming more
important.
 Action: Customers expect organisation to react in response to their problems.
 Appreciation: Customers want to know that their business are valuable and that
the organisation they are dealing with cares about them and their needs.

In conclusion:
 A want refers to a vague feeling that something is absent or unavailable, although
the “something” cannot be always clearly defined. A need on the other hand is
experienced more intensely and the object of the need is definable.
 The intensity of the need can vary from a “nice to have” to a definite “must have”.
 The satisfaction of these needs and wants forms the underlying stimulus for any
business activity. The unsatisfied needs experienced by consumers are business
opportunities to business people.
 Economic factors, such as the business cycle, inflation and recession, influences
the demand for goods and services by compelling customers to reassess their
priorities in terms of consumer products.
 Each significant economic change required appropriate reaction by the business.

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LESSON 2.2
THE MAIN ECONOMIC SYSTEMS

In this Lesson:

A free market system is an economic system where the market forces are
allowed freely to determine answers to basic questions in order to guide
business activity, e.g. what need-satisfiers to produce, how to produce these
need-satisfiers, who should produce them, and for whom they should be
produced. There are no central controlling bodies to determine the
characteristics of the system since these developed spontaneously over time.
The most outstanding characteristic of the free market system is the
recognition of the individual and his/her economic rights.

CONCEPTS AND VOCABULARY TERMS YOU NEED TO UNDERSTAND:

 The free-market systems is one in which individuals or organisations who want to

be in business can enter or leave the business sector whenever they want to.
 Socialism: The fundamental assumption is that strategic and basic resources
should belong to every member of the community
 Market economy: In the market economy particular value is attached to the right
of the individual to possess property such as land, buildings, equipment or vehi-
cles, including the right to earn an income from his/her property.
 Command economy: It main characteristic is that the state owns and controls the
community’s resources or factors of production.
 Mixed economies: The dominant system incorporating certain characteristics of
the other systems.

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 THE MAIN ECONOMIC SYSTEMS
In general there are three economic systems: free market, socialist and command
economy. Remember that no economy is purely free market, socialist or command
as all economies are usually a combination of the three economies, but with an
accentuated tendency towards one of the three basic economies.

The key criteria used to differentiate between economic systems focuses on

aspects of economic freedom in terms of ownership, competition, pricing and
government interference.

The free market economy:

Countries that have a free market economy are also known as capitalist countries.

A free market economy means:

 individuals can buy and sell property;
 competition between organisations is encouraged;
 prices of goods and services are determined by the consumers;
 the government does not interfere unnecessarily in the economy.

The socialist economy:

A socialist economy is a combination of the free market and command economy.
The major industries such as electricity, water, education and health, transport,
communication etc. are usually owned by the government as socialists believe that
strategic and basic resources are communal property.

The command economy:

The communist economy as the command economy is also refers to, was a
prevalent economy in the former Soviet Union and some East European countries
in the past. This type of economy has disappeared as it was almost impossible to
create wealth in this type of economy. In this type of economy everything belongs
to the state that control all the resources and factors of production.

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 LESSON 2.2
Figure 1.3 Comparison of the three major economic systems. Adapted from
Nieuwenhuizen and Oosthuizen (2010:5)

Free Market Socialist Command

Criteria
Economy Economy Economy

Otherwise
Capitalism Socialism Communism
known as..

Individuals own Individuals can own Individuals cannot

property and property but own property or
Ownership organisation organisations in major organisations.
industries are owned by Everything is owned
government by government

Organisations Competition is limited to No competition as the

compete with each privately owned government
other to satisfy the organisations as organisations
Competition needs of consumers government organisations provides everything
have no competition and
charge whatever they
want

The demand of There is freedom of Government decides

consumers choice with regard to what consumers need
determines the which products and and what to produce
Products and availability of services consumers want
services products and to use but some products
services and services are offered
by government only

Products and Prices for government Government

services are priced provided products and determines all the
Pricing according to what services are determined prices for products
consumers are by government and services
willing to pay

Government Government owns and Government controls

involvement in the operates organisations all the factors of
Role of
economy is efficient such as electricity and production and
government in
but not restrictive. transport in major resources
business
industries

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 THE MAIN ECONOMIC SYSTEMS
Key points
 The free-market system is a complex system which consists of both big
organisations and individuals which use the resources of the country to satisfy the
people’s needs.
 Different communities use different economic systems to meet their needs using
their available resources.
 Each democratic country arranges its economic system in such a way that it solves
its wealth problem as effectively as possible in accordance with the wishes of its
inhabitants.
 The South African economic system is moving towards a free market-orientated
economy, but presently has a high degree of government participation in and
control of the economy.

A free market is one in which buyers and sellers make mutually voluntary
exchanges at a price agreed upon by both (see market economy). In economics
and political economy, it is the polar opposite of a command economy. A free
market is a concept in both ethics and economics treated as an abstract model by
many economists and some ethicists. In its idealized sense, it is a market where
all transfers of money, goods, and services are devoid of coercion and theft.

Since no country fully manifests the ideal of a free market, the term free market
economy is used for a nation state's economy that approximates the ideal by virtue
of having a government that engages in little or no interventionist economic
regulation. If such a government intervenes in private affairs, it only does so to
stop coercion that may take place among market participants. As this protection
must be funded, government taxes only as much as is necessary to perform this
function. This state of affairs is also known as laissez-faire.

A "market economy" that has very substantial regulation is not a "free market
economy." Whether any particular economy is free enough of coercion to
reasonably be called a free market economy is often a matter of political dispute:
libertarians typically say that western economies are not free, and are at best
mixed economies, due to what they believe constitutes very significant interference
by government in what would otherwise by a free market.

Whether the marketplace should be free is also disputed; many assert that
government intervention is necessary to remedy market failure that is held be an
inevitable result of absolute adherence to free market principles.

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 LESSON 2.2
Internationally, free markets are advocated by proponents of economic liberalism,
in Europe usually simply called liberalism. In the United States, support for free
market economic structures is a key tenet of U.S. conservatism and libertarianism.
Since the 1970's, promotion of a global free-market economy, deregulation and
privatisation, is often described as neoliberalism.

The term free market economy is generally used to describe western economies,
but pro-market groups would only accept that description if the government
practices laissez-faire policies, rather than state intervention in the economy. Since
the emergence of a distinct economic system in the Soviet Union, the free market
is usually contrasted to a command economy and a centrally planned economy.
However, early proponents of a market economy in 18th-century Europe
contrasted it with the mediaeval and early-modern economies which preceded it.

For social philosophy, a free market is a system for allocating goods within a
society: supply and demand within the market determine who gets what, and what
is produced. The market does this without prior external decisions or values, and
this is seen as its great advantage by its supporters. The allocation function is
usually called "the market mechanism", or again simply "the market".

A free market economy is generally understood to be different from pre-modern

economic systems. Some were monetised but that is not seen as sufficient to
define a free market. Market transactions are understood to be economic in
nature, and personal gift-giving is not generally considered a market transaction.
Neither are coerced transfers such as tribute. Lack of economic transactions, for
instance in a society of pure subsistence farming, also rules out a free market.

A free market implies the presence of competition, although monopolies that are
not maintained through coercion can be present. It often connotes the presence of
the profit motive, although neither a profit motive or profit itself necessary for a free
market. All modern free markets are understood to include entrepreneurs, both
individuals and businesses. Typically, a modern free market economy would
include other features, such as a stock exchange and a financial services sector,
but they do not define it.

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 THE MAIN ECONOMIC SYSTEMS
ORIGINS
Some theories assume that a free market is a natural form of social organisation,
and that a free market will arise in any society where it is not obstructed. The
consensus among economic historians is that the free market economy is a
specific historic phenomenon, and that it emerged in late mediaeval and early-
modern Europe. Some economic historians see elements of the free market in the
economic systems of Classical Antiquity, and in some non-western societies.

By the 19th century the market certainly had organized political support, in the
form of laissez-faire liberalism. However, it is not clear if the support preceded the
emergence of the market, or followed it. Some historians see it as the result of the
success of early liberal ideology, combined with the specific interests of the
entrepreneur.

In Marxist theory, the ideology simply expresses the underlying long-term

transition from feudalism to capitalism. Note that the views on this issue -
emergence or implementation - do not necessarily correspond to pro-market and
anti-market positions. Libertarians would dispute that the market was enforced
through government policy, since that has a connotation of repression, and
Marxists agree with them, for different reasons.

THEORY
If a government is present, its use of force in the marketplace is ideally limited to
protecting the market participants from coercion, including protection of property
rights and enforcement of contracts. The essence of a free market can be
understood as a game in which the players compete according to a common set of
rules that prevent coercion (including theft); the enforcement of these rules may be
carried out by a neutral referee (government). Players in this game may have
different skills, knowledge, and wealth, which may conflict with social norms of
fairness, so a free market may not accord with what some would consider a fair
market. Or, some may see the equal application of the rules to all participants as
the essence of fairness.

This conception of a market as a pure economic system based on freedom from

coercion among market participants as well as from government is in fundamental
contrast to a command economy.

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 LESSON 2.2
The law of supply and demand predominates in the idealised free market,
influencing prices toward an equilibrium that balances the demands for the
products against the supplies. At these equilibrium prices, the market distributes
the products to the purchasers according to each purchaser's use (or utility) for
each product and within the relative limits of each buyer's purchasing power. The
necessary components for the functioning of an idealised free market include the
complete absence of artificial price pressures from taxes, subsidies, tariffs, or
government regulation (other than protection from coercion and theft), and no
government-granted monopolies (usually classified as coercive monopoly by free
market advocates) like the United States Post Office, Amtrak, arguably patents,
etc.

This equilibrating behaviour of free markets makes certain assumptions about their
agents, for instance that they act independently. Some models in econo-physics
have shown that when agents are allowed to interact locally in a free market (i.e..
their decisions depend not only on utility and purchasing power, but also on their
peers' decisions), prices can become unstable and diverge from the equilibrium,
often in an abrupt manner. The behaviour of the free market is thus said to be non-
linear (a pair of agents bargaining for a purchase will agree on a different price
than 100 identical pairs of agents doing the identical purchase). Speculation
bubbles and the type of herd behaviour often observed in stock markets are
quoted as real life examples of non-equilibrium price trends.

Free-market advocates, especially Austrian school followers, often dismiss this

endogenous theory, and blame external influences, such as weather, commodity
prices, technological developments, and government meddling on non-equilibrium
prices.

The distribution of purchasing power in an economy depends to a large extent on

the labour and financial markets, but also on other factors such as family
relationships, inheritance, gifts and so on. Many theories describing the operation
of a free market focus primarily on the markets for consumer products, and their
description of the labour market or financial markets tends to be more complicated
and controversial.

The free market can be seen as facilitating a form of decision-making through what
is known as dollar voting, where a purchase of a product is tantamount to casting a
vote for a producer to continue producing that product.

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 THE MAIN ECONOMIC SYSTEMS
The effect of economic freedom on society's and individuals' wealth remains a
subject of controversy. Kenneth Arrow and Gerard Debreu have shown that under
certain idealised conditions, a system of free trade leads to Pareto efficiency,
which is almost certainly never true in a command economy, not least because a
government is likely make mistakes in distributing resources, since the information
to its disposal is far less than perfect.

Many advocates of free markets, most notably Milton Friedman, have also argued
that there is a direct relationship between economic growth and economic
freedom, though this assertion is much harder to prove both theoretically and
empirically. Joshua Epstein and Robert Axtell have attempted to predict the
properties of free markets in an agent-based computer simulation called
Sugarscape. They came to the conclusion that, again under idealised conditions,
free markets lead to a Pareto distribution of wealth.

This finding confirms the ideas of Vilfredo Pareto himself, who believed that the
"natural" tendency of society is towards a power law distribution of wealth, power,
or influence.

PRACTICE
While the free-market is an idealised abstraction, it is useful in understanding real
markets whether artificially created and regulated by governments or non-
governmental agencies, or phenomena such as the black market and the
underground economy, which can be remarkably robust in persisting despite
attempts to suppress these markets. Taxes and government regulation bias the
equilibrium points of every large government-sanctioned economy in existence
today, so that these economies are only relatively free or unfree. Monopolistic
practices, cartels, externalities (like pollution), and asymmetrically distributed
information are often cited as potential problems that may exist in a free-market
economy.

Knowledge bias can lead to what many may see as evils of such an economy, like
insider trading, price fixing, price gouging, adverse selection, moral hazard, and
the principal-agent problem which they claim justify government intervention to
remedy. Some believe that the notion of a free market is inherently unachievable
because its operation depends on a class system, Commodity fetishism and they
hold that governments create property rights and are fundamentally involved in
markets through the enforcement of such rights. Others argue that the concept of
property comes from natural law and therefore it is incorrect to see governments
as creating markets.

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 LESSON 2.2
THE DEGREE OF MARKET FREEDOM
The Heritage Foundation, a conservative think tank, tried to identify the key factors
which allow to measure the degree of freedom of economy of a particular country.
In 1986 they introduced Index of Economic Freedom (IEF), which is based on
some fifty variables. This and other similar indices do not define a free market, but
measure the degree to which a modern economy is free, meaning in most cases
free of state intervention.

The variables are divided into the following major groups:

 Trade policy,
 Fiscal burden of government,
 Government intervention in the economy,
 Monetary policy,
 Capital flows and foreign investment,
 Banking and finance,
 Wages and prices,
 Property rights,
 Regulation, and
 Informal market activity.
Each group is assigned a numerical value between 1 and 5.
IEF is the arithmetical mean of these values, rounded to the hundredth. Initially,
countries which were traditionally considered capitalistic received high ratings, but
the method improved over time. Today one can see a vivid correlation between the
IEF values and countries’ GDP.

IDEOLOGY AND ETHICS

Support for the free market as an ordering principle of society is above all
associated with liberalism, especially during the 19th century. In Europe, the term
'liberalism' retains its connotation as the ideology of the free market. In America it
came to be associated with government intervention, and acquired a pejorative
meaning for supporters of the free market. Later ideological developments, such
as monarchism and libertarianism also support the free market, and insist on its
pure form.

Although the Western world shares a generally similar form of economy, usage in
the United States is to refer to this as capitalism, while in Europe 'free market' is
the preferred neutral term. Use of the term ‘capitalism’ in Europe usually implies a
Marxist, or at least critical, approach, unless it is being used to describe the 19th
century.

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 THE MAIN ECONOMIC SYSTEMS
Marxism, communism, and socialism are usually seen as the main ideological
opponents of the free market. Modern liberalism (American usage), and in Europe
social democracy, seek only to mitigate what they see as the problems of an
unrestrained free market, and accept its existence as such. To most libertarians,
there is simply no free market yet, given the degree of state intervention in even
the most 'capitalist' of countries.

From their perspective, those who say they favour a "free market" are speaking in
a relative, rather than an absolute, sense. In libertarian terms they wish that
coercion be kept to the minimum that is necessary to maximize economic freedom
(such necessary coercion would be taxation, for example) and to maximize market
efficiency by lowering trade barriers, making the tax system neutral in its influence
on important decisions such as how to raise capital (e.g., eliminating the double
tax on dividends so that equity financing is not at a disadvantage vis-à-vis debt
financing). However, there are some, such as anarchic-capitalists who would not
even allow for taxation and governments, instead preferring protectors of
economic freedom in the form of private contractors.

The ethical justification of free markets takes two forms. One appeals to the
intrinsic moral superiority of autonomy and freedom (in the market), see
deontology.

The other is a form of consequentialism - a belief that decentralised planning by a

multitude of individuals making free economic decisions produces better results in
regard to a more organised, efficient, and productive economy, than does a
centrally-planned economy where a central agency decides what is produced, and
allocates goods by non-price mechanisms.

An older version of this argument is the metaphor of the Invisible Hand, familiar
from the work of Adam Smith, although it is older. In Smith's time there were no
centrally planned economies to serve as a comparison, he was simply arguing that
the market benefits the common good. Modern theories of self-organization say
the internal organization of a system can increase automatically without being
guided or managed by an outside source. When applied to the market, as an
ethical justification, they are appealing primarily to its intrinsic value as a self-
organising entity.

Intense admiration for these abilities of the market became a characteristic of

some pro-market argument in the 1990's, especially among those who saw the
internet as a form of perfect market.

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Economics (from the Greek οίκος [oikos], 'house', and νομος [nomos], 'rule', hence
"household management") is a social science that studies the production,
distribution, trade and consumption of goods and services. Economics is said to be
normative when it recommends one choice over another, or when a subjective
value judgment is made. Conversely, economics is said to be positive when it tries
to objectively predict and explain consequences of choices, given a set of
assumptions and/or a set of observations. The choice of which assumptions to
make in building a model as well as which observations to highlight is, however,
normative.

Economics, which focuses on measurable variables, is broadly divided into two

main branches:
 micro economics, which deals with individual agents, such as households and
businesses, and
 macro economics, which considers the economy as a whole, in which case it
considers aggregate supply and demand for money, capital and commodities.

Aspects receiving particular attention in economics are resource allocation,

production, distribution, trade, and competition. Economic logic is increasingly
applied to any problem that involves choice under scarcity or determining
economic value. The mainstream economic theory currently in vogue in the
business schools of most industrial countries is neo-classical economics.

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 STUDY AND RESEARCH CHAPTER 4

NOTES:

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 BIBLIOGRAPHY
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