CHAPTER 1: THE BUSINESS WORLD AND BUSINESS MANAGEMENT

The purpose of this chapter:

Introduces the concept of business as an activity that involves transforming resources into
goods and services to meet societal needs, using the factors of production like (its natural
resources, human resources, financial resources and entrepreneurship) in

Highlighting the core functions of business management including planning, organizing,

leading, and controlling, while also discussing the different economic systems (market,
command, socialism and mixed) within which businesses operate and the key role of profit
generation in a market economy.

Learning outcomes

On completion of this chapter, you should be able to:

 Explain the role the business organisation plays in making available the products and
services society must have to exist and thrive
 Describe the needs of society and how a business organisation satisfies those needs in
a market economy
 Distinguish between the world’s three main economic systems
 Explain the interface between a business organisation and a market economy
 Describe the nature and purpose of business management as a science, where the
enabling factors, methods and principles of the business are studied to ensure the
efficient functioning of a business organisation
 Comment on the development of business management as a science
 Distinguish between and comment on the different management functions.

1.1Introduction

 What is a business:

A business is an organization that uses resources to produce goods or services to satisfy

consumer needs and generate profit.

1.2The role of business in society

Define the business world

The business world is a complex system of individuals and business organisations that, in a
market economy, involves the activity of transforming resources into products and services
to meet peoples’ needs

 Essential elements of a business:

 Human activities: The involvement of people in the business operations.

 Production: The process of creating goods or services e.g. the conversion of

flour, sugar and butter into bread, and an airline transports passengers to their
required destinations, and as this happens, the passengers become part of the
transformation process

 Exchange: The act of trading goods or services for money.

 Profit: The financial gain earned by a business after expenses are deducted.

1.3.3. Need satisfaction: A cycle

To be able to satisfy the needs of the community, entrepreneurs have to utilise scarce
resources in certain combinations to produce products and services

Economic principle.

Given its unlimited needs but limited resources, society is confronted with the fundamental
economic problem: how to ensure the highest possible satisfaction of needs with these scarce
resources.

Solving the following economic issues:

 "Which"

product should we focus on producing this quarter? (Choosing between multiple products)

 "Who"

is going to be responsible for producing the new design? (Asking about the person in charge)

 "Whom"

did you consult about the production plan? (Asking who was involved in the decision
making)
  "Whose"

idea is it to manufacture this new component? (Asking who owns the idea for the new
component).

The 3 main economic systems

A market economy

 A market is any place where two or more parties can meet to engage in an economic
transaction
 Is an economic system where two forces, known as supply and demand, direct the
production of goods and services. Market economies are not controlled by a central
authority (like a government) and are instead based on voluntary exchange.
 Individuals own most of the resources like mines, retails business, hospitality, health
care services etc
 A market economy promotes free competition among market participants
 increased efficiency, production, and innovation.

Command Economies:

 An economic system in which key aspects like production, resources allocation and
pricing are all determined by a central government
 Purely command economies have no private sector and no competition. Since the
government controls production in a command economy, there is no reason for
companies to compete.
 Command Economy is an economic system in which the central government is in a
position to control and dictate a country's economic decisions.

Socialism

 In both communism and socialism, people own the factors of economic production.
 Under socialism, all citizens share equally in economic resources as allocated by a
democratically elected government
 Individuals own personal property, but all industrial and production capacity is
communally owned and managed by a democratically elected government
  Production is intended to meet individual and societal needs and is distributed
according to individual ability and contribution.

Comparison of main economic systems

MIXED ECONOMY

A mixed economy is an economic system that combines elements of both free markets and
government intervention, where private businesses operate alongside government regulation
and public services.

Here's a more detailed explanation:

 Definition:
A mixed economy lies on a spectrum between pure capitalism (a free market) and pure
socialism (a centrally planned economy), incorporating aspects of both.

 Key Features:

 Private Ownership: Most means of production are privately owned, allowing

individuals and businesses to make decisions about production and
distribution.

 Government Intervention: The government plays a role in regulating the

economy, providing public goods and services, and addressing market
failures.

 Market Forces: Prices and production are largely determined by supply and
demand, but with government intervention to ensure fairness and stability.

 Examples of Government Intervention:

 Regulation: Setting standards for safety, environmental protection, and

consumer rights.

 Social Programs: Providing unemployment benefits, healthcare, education,

and other social safety nets.

 Public Services: Providing infrastructure, defense, and other services that are
not typically provided by the private sector.

 Examples of Mixed Economies:

 United States: A mixed economy with a strong private sector and government
involvement in areas like social security, infrastructure, and regulation.

 Many European Nations: Characterized by a blend of free markets and

social welfare programs.

 South Africa: A mixed economy with private sector freedom combined with
centralized economic planning and government regulation.

Differentiate between formal and informal sector

In business management, the "formal sector" refers to businesses that are legally registered,
comply with government regulations, pay taxes, and operate within a structured framework
with clear employment practices.

The "informal sector" encompasses businesses that operate outside of this legal framework,
often without registration, tax payments, and with less structured employment practices,
typically including small-scale street vendors, home-based workers, and unregistered traders.

Formal Sector Informal Sector

Large businesses listed on the JSE Micro enterprises that do not contribute to rates
and taxes

For example Old Mutual, Exxaro, Telkom or For example independent family owned
Sasol enterprises

Sustainability

Definition: In business management, "sustainability" means operating a company in a way

that meets current needs without negatively impacting the environment, social well-being, or
resource availability for future generations, essentially balancing economic profit with
environmental and social responsibility through practices like reducing waste, promoting
ethical labour, and utilizing renewable energy sources; it's often summarized as the "triple
bottom line" of people, planet, and profit.

The business world and society both depend on and influence each other. This is the core of
sustainability, the ability of a business to survive and prosper over long periods of time.

Corporate social responsibility

Corporate Social Responsibility (CSR) is a business management concept where companies

actively integrate social and environmental considerations into their operations, going beyond
just profit-making to positively impact society and the environment through ethical and
sustainable practices, considering the needs of stakeholders like employees, customers, and
communities at large; essentially, it means businesses should operate with a focus on doing
good for the world, not just maximizing profits.

The social responsibility of business is a concept that originated in media revelations of

malpractice by businesses and the resultant insistence of society on restricting such
malpractice through regulation.

Businesses often contribute voluntarily and directly to social causes and community
upliftment by way of corporate social investment.

Employment equity is the notion that the composition of the workforce at all levels should
reflect the composition of the community.

Ethics

In business management, "ethics" refers to the set of moral principles and values that guide a
company's operations and decision-making, ensuring fair and responsible conduct towards
customers, employees, stakeholders, and the community at large; it essentially dictates how a
business should behave beyond just legal requirements, prioritizing honesty, integrity, and
respect in all interactions.

Business ethics is a concept that is closely related to social responsibility, but where social
responsibility focuses on the organisation, business ethics focuses specifically on the ethical
behaviour of managers and executives in the business world

Consumerism is a social force that protects consumers against unsafe products and
malpractice by exerting moral and economic pressure on businesses

Environmental sustainability is the practice of using natural resources responsibly to meet

current needs without harming the ability of future generations to do the same. It involves
balancing economic, social, and ecological goals

1.3Needs and need satisfaction

1.3.1The multiplicity of human needs

Differentiate between needs and wants

Needs are anything required for human survival. Food, water, and shelter and basic human
needs.
Wants are anything people would like to have, or desire. A bicycle or a cell phone are
examples of wants.

Maslow's hierarchy of needs:

is a theory that proposes that people are motivated to fulfil five basic needs. Examples of
Maslow's hierarchy of needs include

Physiological needs

The most basic needs for survival, such as food, water, sleep, and shelter

Safety needs

The need for physical safety, such as health, and financial security, such as job security

 Love and belonging needs

The need for emotional connections, such as friendships, family, and romantic relationships

Esteem needs

The need to feel good about oneself and to be valued by others

 Self-actualization needs

The need to reach one's full potential

1.3.2Society’s limited resources

Factors of production:

are the resources used to create goods and services. They are the building blocks of an
economy.

Reward: rent Reward: wages & salary Reward: Interest Reward:

Profit

 Business Organizations:

These are private entities that accept risks in pursuit of profit by offering products and
services on the market to consumers. They can take various forms, such as sole
proprietorships, partnerships, corporations, or companies.

 Government Organizations:

These public corporations offer products and services, sometimes competing with businesses
in the market, and are owned and controlled by the state, not private entrepreneurs. They play
a crucial role in providing public goods and regulating the market.

 Non-Profit Organizations:
These address social needs that may not be met by the market, such as charitable services and
community support.