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PREFACE iv
(iii) BSM1602/1/2014–2016
PREFACE
1 WELCOME
Welcome to Business Management I at Unisa. We trust that you will find this module of
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Business Management interesting and of practical value. We are aware that, as a student
the circumstances under which you will be studying will not always be ideal, and we
would therefore like to help you to complete this course successfully.
As an adult learner in distance education, you have to take full responsibility for your
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studies. Your success depends entirely on you. We suggest that you draw up a timetable
and stick to it throughout the year. From Unisa’s side, we will give you all the support
that you may need.
business management. The module will develop your understanding of the functions of
business management. It will also provide a foundation for all later modules in Business
Management.
The purpose of this study guide is to act as a link to the textbook. We trust that you will
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find this study guide supportive and that it will help you to understand the content of
the textbook better.
Before you start to study this module of Business Management I, you should first have a
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holistic view of the course. The purpose of this module, Business Management for Entre-
preneurs, is to teach you some of the business functions. However, before we give you a
holistic view of all the business functions, it is important that we revisit the explanation
of a business. A business can be described as an independent institution established by
an entrepreneur to make a profit by producing goods or providing services that satisfy
the needs of consumers. Therefore, the entrepreneur identifies a consumer need and
establishes a business in order to produce goods and/or provide services to satisfy that
need. The motive for the entrepreneur’s actions is to make a profit. Therefore, both the
entrepreneur and the consumer benefit from the establishment of the business: the
consumer is able to satisfy his or her needs, while the entrepreneur makes a profit.
Every business deals with various business functions. Businesses generally consist of
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(iv)
In a big business, departments are managed by functional managers. Functional man-
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In a small business the entrepreneur will group some of these activities together and
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manage them collectively. The entrepreneur can also use the value chain approach to
group these activities together. The entrepreneur may also appoint a person or persons
to help him or her to manage the other activities.
The entrepreneur can also outsource some of these functions to another business or
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Consider, for example, the personnel managers in a big business, who are responsible
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for recruiting, selecting, placing, training, retaining and motivating qualified employees.
As managers of a very important function, they are involved in negotiations between
trade unions and management, the training and development of employees, grievance
procedures, the settlement of disputes, the implementation of government regulations
that affect employment, performance evaluation and employee interests that affect
productivity. In a small business, however, the entrepreneur may be responsible for
this function or may appoint a person to manage this activity. The change from the old
economy to the new economy creates a positive environment in which the entrepreneur
can outsource some of these functions according to his or her needs.
Effective functional management requires that the objectives of each functional de-
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partment are achieved and that policy is effectively implemented. Long-term, medium-
term and short-term aspects of the functional department are addressed at the level of
functional management. Medium- and short-term planning and control are particularly
important in this regard.
If the entrepreneur or functional managers could manage their own departments in-
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dependently of the business, coordination would not be necessary. However, this is not
possible because each function in a business is like part of a machine. Accordingly, the
machine will function only if all the parts work correctly. If one or more parts do not func-
tion, are missing or are broken, the machine will not work. Differences between functions
must therefore be identified, corrected and aligned with each other.
that they all move in the same direction and support one another so that the overall
objective of the business can be achieved.
Ensuring this cooperation, alignment and unity between the functional areas of the busi-
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ness is generally the responsibility of the entrepreneur or, in big business, top manage-
ment, but every functional manager should also try to achieve this. Planning, for instance,
cannot be done separately by the various functions. For example, it would detrimental
to the business as a whole if the financial department wished to expand but the human
resources function were not aware of it. Who would recruit and employ the necessary
(v) BSM1602/1/2014–2016
staff? Such an expansion will only happen smoothly if the management process is ap-
proached as a team effort.
s 655
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We trust that this study guide will help to make your studies more meaningful and to
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agement I. The purpose and the learning outcomes of this module are therefore aimed
at developing your expertise and abilities in the field of business management.
4 MODULE OUTCOMES
After completing this module, you should have the competence to apply business prin-
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ciples and skills to assist with the management of the different functions of an enterprise,
or to conduct business with identified support.
(vi)
5 ASSESSMENT CRITERIA
31 The assessment criteria for this module are as follows:
module:
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(vii) BSM1602/1/2014–2016
7 A MIND MAP FOR GENERAL MANAGEMENT
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(viii)
9 USE OF ICONS
35 Icon 36 Description
Assessment. When you see the assessment icon you will be re-
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Mind maps are provided to help you see the relationship between
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Read. The read icon will direct you to certain sections of the pre-
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(ix) BSM1602/1/2014–2016
10 GENERAL INFORMATION ON THE STUDY GUIDE
This study guide was compiled to help you with your studies. I trust that you will find it
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a useful aid and that it will help you to complete this course successfully.
1 Mind maps
Before you start studying a chapter, it is very important that you know what that particular
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chapter entails. I have drawn up a mind map for each chapter to give you an overview
of its contents. You can add more keywords to each mind map and use it as a summary
of the chapter. Remember that a mind map is just one possible study method and that
you do not have to study this way.
1 Learning outcomes
Before you do any of the exercises, you must test yourself by answering the questions
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that were asked in the learning outcomes. It is very important that you study the chapter
before you try to answer the exercise based on that particular chapter – you cannot ap-
ply the theory to a case study if you do not have a thorough knowledge of the theory.
1 Core notes
The core notes serve as background to and a summary of each chapter. You can add your
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1 Exercises
An exercise based on a case study has been provided for each chapter. As the examina-
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tion will be based on a case study it is very important that you know how to approach
a case study.
yy Read through the case study without trying to analyse it in any way.
yy Read through the questions asked on the case study.
yy Make sure that you understand the theoretical basis for each question. You cannot
look for a solution before you are completely sure what the question is about.
yy Read through the case study again and remember the contents of the questions.
yy Start working through the case study and identify the specific information you need
to answer each question.
yy Integrate the theory with the information from the case study by indicating how the
theory has or has not been applied.
yy Draw your own conclusions.
(x)
11 EVALUATION OF EXERCISES
You will be marking your own exercises with the help of the suggested solutions at the
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end of each chapter. The answer book indicates how you should allocate the marks.
Remember that you are in control of your own studies. Only you will know whether
you have studied the chapter first, whether you have completed the exercise on your
own without looking at the solutions and whether you have followed the guidelines for
evaluating the exercises.
12 PROGRESS REPORT
You can use the progress report to indicate your marks for the exercises. One mark per
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question is allocated.
EXERCISE MARKS
Exercise 1
Exercise 2
Exercise 3
Exercise 4
Exercise 5
Exercise 6
Exercise 7
Exercise 8
Exercise 9
Average %
56 Please note:
You must evaluate your own exercises. Do not submit any of these exercises to your
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lecturers. Only the assignments in Tutorial Letter 101 must be submitted for evaluation.
13 CONCLUSION
The lecturers in Business Management would like to guide you so that you can complete
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this subject successfully. It is important that you feel free to discuss any problems you
experience with your studies in this subject with us. You are welcome to telephone us
or to visit us personally. We will be happy to help you.
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60 Author
61Elsa Kruger
(xi) BSM1602/1/2014–2016
14 REFERENCE
Zhu, Z, Hsu, K & Lillie, L. 2001. Outsourcing: a strategic move: the process and the ingre-
dients for success. Management Decision 39(5):373–378.
(xii)
Chapter 1
Introduction to business management for the
entrepreneur
Contents
1 BSM1602/1/2014–2016
1.2 KEY CONCEPTS
Key concepts
You will need to master the following key concepts in order to achieve the learning
outcomes for this chapter:
yy entrepreneur
yy manager
yy small business management
yy business management tasks
yy business environment
yy micro environment
yy market environment
yy macro environment
yy consumers
yy suppliers
yy intermediaries
yy competitors
yy political environment
yy social environment
yy physical environment
yy economic environment
yy technological environment
yy international environment
2
1.3 A MIND MAP FOR CHAPTER 1
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1.4 OVERVIEW
This chapter in the prescribed textbook explains the broad environment in which the
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small business functions. The environment in which a business functions may be defined
as the sum total of all the factors and variables that influence the establishment, growth
and continued existence of the business positively or negatively. In section 1.9 we will
discuss the environment in which the business functions in more detail.
3 BSM1602/1/2014–2016
1.5 INTRODUCTION
64 The creation of an enterprise consists of three stages
conducts a feasibility study – a general examination of the potential of the idea and his
or her ability to convert the idea into an enterprise.
and profit potential of the idea. A business plan then is drawn up – a business plan is a
detailed plan of action that sets out the nature and strategy of the enterprise.
is pivotal for the development and growth of economic systems. The importance of en-
trepreneurship has been widely recognised in South Africa, with government authorities
making enormous efforts to identify entrepreneurs, provide them with capital, stimulate
their businesses, assist their development and generally make it easier for them to enter
business.
The entrepreneur can thus be described as a person using his or her talents and abili-
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ties, taking the initiative in acquiring capital and natural resources, combining them and
providing the necessary management, and so converting an original idea into a business.
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Go back to your prescribed textbook and study these key components now.
4
1.7 ENTREPRENEUR VS MANAGER
Make sure you understand the difference between an entrepreneur and a small business
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Activity 1.1
Do you think the entrepreneur and the small business manager could be one and the
same person?
1Feedback
Whether the entrepreneur and the small business manager are the same person or not de-
pends on the type of business that is involved. In some cases they are the same person and
in some they are not.
Although it may seem that the role of the entrepreneur is more important than that of the
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Do you know the difference between the marketing function and the public relations
function?
2Feedback
The marketing function is concerned with the sales of products or services and finding new
markets. The public relations function, on the other hand, is responsible for creating and
maintaining a positive image for the enterprise.
yy Natural resources. Natural resources are all the means provided by nature. A char-
acteristic of natural resources is that they are scarce and limited. Examples of natural
resources are crude oil, water and minerals.
yy Capital. During its establishment, the business needs capital in order to start operat-
ing. This capital is usually provided by the owners and the investors in the business.
yy Labour. No business can function without human beings. The human personnel have
the knowledge (technical and academic), physical capabilities and skills needed to
convert goods into products, provide a service and take leadership.
6
yy Entrepreneurship. Entrepreneurship is the process through which the individual takes
capital, labour and natural resources and combines them with the risk linked to the
provision of goods and services.
yy Knowledge. Traditionally, only four factors of production were identified. However,
Peter Drucker added a fifth factor of production, namely, knowledge. Knowledge as
the fifth factor of production is embedded in the era of knowledge management.
Accordingly, information technology has revolutionised businesses, making it pos-
sible to determine wants and needs quickly and to respond with the desired goods
and services.
The term “economic motive” refers to the satisfaction of the multiple human needs by
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means of goods and services; however, the highest possible satisfaction of needs with
scarce factors of production is referred to as the “economic principle”.
preneur to make a profit by producing goods or providing services that satisfy the needs
of consumers. Therefore, the entrepreneur identifies a consumer need and establishes an
enterprise to produce goods and/or provide services to satisfy that need. The motive for
the entrepreneur’s action is to make a profit. Both the entrepreneur and the consumer
benefit from the establishment of the enterprise because the consumers are able to
satisfy their needs, while the entrepreneur makes a profit.
various events and variables influence the activities of the enterprise. These events may
pose opportunities or threats to the enterprise. We can use technological development as
an example. On the one hand, it offers opportunities because new products and services
are created, while on the other hand it can constitute a threat because it may result in an
enterprise’s products or services becoming obsolete.
It is essential for an enterprise to be aware of such variables and events, as these can
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have a fundamental effect on the daily functioning of the enterprise and can also make
demands on the enterprise’s management. With the help of action plans, management
should be able to utilise the influence of these events and changes to the benefit of
the enterprise. If it is not possible to use the influence of the variables in a positive way,
management should at least try to neutralise the negative effects.
The entrepreneur should therefore be familiar with the business environment and its
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opportunities and threats because this is of primary importance for the growth and
continued existence of the enterprise. The impact of the business environment on an
enterprise plays a significant role in the success or failure of the enterprise. For this reason
the entrepreneur should study the business environment thoroughly, as without such
knowledge it is impossible for the management of an enterprise to achieve its predeter-
mined objectives.
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The business environment is usually divided into three components, namely, the micro,
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market and macro environments. Each of these three components of the business environ-
ment involves a variety of variables that influence the enterprise positively or negatively.
Activity 1.3
Do you think it is possible for any enterprise to exist in total isolation? In other words, is
it possible for an enterprise to grow and exist if factors such as the consumer and his or
her needs, the competitors, and the prevailing economic and political conditions are not
taken into consideration?
3Feedback
An immediate answer to activity 1.3 should be no! It is impossible for any enterprise, large or
small, to function in isolation.
The business environment can positively and/or negatively affect the enterprise. The
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entrepreneur should be aware of the variables in the business environment, since they
present the strengths, weaknesses, opportunities and threats that can benefit or harm
the enterprise.
86 The entrepreneur compiles his/her SWOT analysis from this business environment.
8
87 Micro environment: Strengths and weaknesses
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1MICRO ENVIRONMENT
yy Internal environment – the enterprise itself
yy Under direct control of the management of the enterprise
1Mission and objectives
yy What you want to achieve with the business and how you want to achieve it
1Primary (main) objective
yy Overall objective that determines the direction of the enterprise
yy Long-term objective
yy Only one primary (main) objective
yy Example: Profit
1Secondary objectives
yy Additional objectives that are set to support the primary objective
yy Short-term objectives that change constantly
yy More than one
yy Examples: quality products/good working conditions/good relations with suppliers
(a) Functions of the enterprise
yy Eight functions of the enterprise – this textbook
yy All these functions occur in every enterprise, regardless of the size of the enterprise
yy These functions operate as a system
yy There must be constant interaction among these functions
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(b) Factors of production
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1 Entrepreneurship
yy The entrepreneur is the person who takes the initiative and risk to combine the three
factors of production to start their own enterprise in order to offer products or services
that will satisfy needs.
1 Labour
yy Human resources – people with knowledge and skills required to produce the products
1 Capital
yy Financial capital – own or borrowed money
yy Physical capital – land, buildings, machinery, equipment, vehicles
yy Human capital – technical knowledge
1 Natural resources
yy Raw materials – to produce the products
yy Stock – to sell
1 MARKET ENVIRONMENT
yy External environment
yy The enterprise has limited control over this environment
(a) Consumers and their needs
yy All individuals, groups or institutions that have a specific need for your products
and services and who are prepared to pay for it
yy The people to whom you are going to sell your products
(b) Competitors
yy The enterprises that supply the same products as you
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yy We distinguish between direct and indirect competition:
Direct – the people selling the same products as you
Indirect – substitute products
(c) Intermediaries
yy People who sell your products, such as wholesalers, retailers, agents, brokers and
other facilitators
yy May influence marketing strategies by using brand names, increasing prices and
keeping incentives for their own benefit.
Activity 1.4
Do you know what “supply chain management” is? Refer to you textbook for an explanation.
1 MACRO ENVIRONMENT
yy External environment
yy The enterprise has no control over this environment
(a) Economic
yy Inflation
yy Interest rates
yy Trade cycles
yy Economic growth rate
yy Purchasing power/disposable income of consumers
(c) Technological
♦ New products
♦ New machinery or equipment
♦ More advanced production processes
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(d) Political
yy Legislation and influence of government – labour laws
yy Legislation of local authorities – health requirements
yy Trade unions
(e) Physical
yy Limited and expensive resources – use them effectively
yy Pollution – air, water, noise
(f) International
yy International economy – exchange rates
yy International politics – sanctions, war
yy International technology – more advanced machinery and equipment
Activity 1.5
What should the entrepreneur do to overcome the threats in the macro environment?
4Feedback
The entrepreneur should try to stay in step with the ever-changing macro environment by
following the newspapers, reading business journals and keeping an eye on the markets.
1.11 SELF-ASSESSMENT
To test and evaluate your knowledge of this chapter, you should now do the following
activities:
(i) Complete the self-assessment in the study guide. Remember that it is important that
you complete the exercise without looking at the answers in the solutions section.
This is the only way you can test your knowledge.
(ii) Do the self-evaluation question at the end of chapter 1 in the prescribed textbook.
READ THROUGH THE CASE STUDY AND ANSWER ALL THE QUES-
TIONS THAT FOLLOW
1 Case study: Tony’s Garden Services
After working for many years as a horticulturist at a large nursery in Roodepoort, Tony Stevens
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decides that he wants to be his own boss. He subsequently resigns and starts his own enterprise,
Tony’s Garden Services.
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Owing to the low start-up costs, there are a significant number of competitors offering garden
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services in Roodepoort, so Tony realises that, unless he can offer more specialised services, he
will not survive in this competitive market. He considers rendering three services – a basic garden
service, tree felling and the pruning of trees and shrubs, as well as landscaping. However, he
first decides to first conduct some market research to determine the need for more specialised
garden services.
Tony decides to include his two sons, Paul and John, in the business, both of whom have com-
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pleted a course in horticulture at Unisa. Paul will be in charge of running the garden services,
which consists of mowing lawns, trimming edges and the general maintenance of the gardens.
John will be responsible for tree felling and pruning the trees and shrubs. Tony, meanwhile,
will concentrate on landscaping. Tony’s wife, Sharon, agrees to handle the administration and
finances of the business. They decide to register their new enterprise as a companiy, because
they want a form of enterprise with legal personality and all of them want to be involved in the
management of the enterprise.
The Stevens family needs capital to buy four second-hand bakkies, equipment such as lawn-
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mowers and edge trimmers, garden tools and chain saws, as well as office equipment. To finance
these expenses, Tony invests R60 000 of his pension money and applies for a loan of R300 000
which will be paid back over a period of five years.
As this type of service is labour intensive, the enterprise has to employ a number of new employees.
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Paul decides to appoint two supervisors and allocates a team of four workers to each supervisor.
John decides that he is going to start with just one team and appoints six experienced tree fell-
ers to help him. As tree felling is sometimes carried out under extremely dangerous conditions,
they have to take out insurance for their employees before they can start work.
To render a service on an order basis requires extremely good planning, as well as excellent
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administration. Sharon has to take all the orders and plan the daily activities of the teams very
carefully. Every morning the workers report to the office, from where they are transported to the
different gardens together with the necessary equipment. It takes about 90 minutes to render
a basic garden service, consisting of the maintenance of a standard garden. Should the client
request extra services, Sharon has to make provision for extra time. She also has to take into
account that rain could prevent them from rendering the service and that those gardens then
have to be serviced on another day. Sharon has to calculate the time that is spent on transpor
ting the teams from one garden to another to determine the shortest route to follow in order
to save time and transport costs.
The time spent on pruning and tree felling will be determined by the size of the tree and the dif-
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ficulty of the job. If a client calls with a request for pruning or tree felling, Sharon first has to make
an appointment for John to visit the site in order to give the client a quotation and to determine
the amount of time that will be needed to complete the job, before she can schedule his day.
13 BSM1602/1/2014–2016
Sharon also has to make appointments for Tony to visit the clients who request landscaping and
provide the necessary labour and equipment to help him plant a new garden.
Today Tony’s Garden Services is one of the biggest and best known garden services on the West
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Rand. They advertise in the Yellow Pages, occasionally in the local newspaper, and their name
and contact details are on their vehicles. Tony, however, believes that satisfied clients telling
others about their services is the best type of advertising an enterprise can get. For this reason,
the enterprise is always available, even over weekends. This means that they sometimes have
to work seven days a week.
The owners of Tony’s Garden Services believe that a healthy cash flow forms the cornerstone
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of any enterprise and all their current expenses are financed by means of cash. New clients and
those who request services such as pruning and tree felling have to pay immediately after the
services have been rendered. Clients who request landscaping have to pay the full amount in
advance, so that Tony can have enough cash to buy the plants needed. Clients who use their
garden services on a regular basis, however, are allowed to pay on a monthly basis, with a dis-
count of 5% acting as an incentive for regular payments.
Another reason for their success is that they are constantly on the look-out for more efficient ways
101
of rendering their services. After dumping the garden refuse and trees at a dumping site for a
while, the Stevens family decides to use this refuse to their own advantage. For this reason, they
buy a piece of land in Kaya Sands where the garden refuse is now being used to make compost
which they then use to fertilise the gardens.
QUESTIONS
1 Multiple-choice questions
102 Choose the correct answer for each of the following questions.
1.1 Tony’s Garden Services has direct control over the … environment.
(1) business
(2) micro
(3) market
(4) macro
1.2 The new developments in the area that will need Tony’s expertise for landscaping
is an example of their …
(1) competencies.
(2) consumers.
(3) competitors.
(4) suppliers.
1.3 The creation of Tony’s Garden Services consisted of various stages. What is the cor-
rect order of these stages?
(1) Identification stage, idea stage, planning stage, implementation stage
(2) Idea stage, business plan stage, implementation stage
(3) Idea stage, planning stage, implementation stage
(4) Planning stage, organising stage, implementation stage
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1.4 Tony invests R60 000 of his pension money and applies for a loan of R300 000 which
will be paid back over a period of five years. As this type of service is labour intensive,
the enterprise has to employ a number of new employees. This statement refers to …
(1) planning.
(2) organising.
(3) leading.
(4) control.
1.6 The strengths and weaknesses of Tony’s Garden Services can be identified from the
… environment.
(1) micro
(2) market
(3) macro
(4) business
1.12 SUMMARY
Evaluate your answers to exercise 1 with the aid of the suggested solutions in the answer
103
book and calculate your percentage. If you are not satisfied with your results, revise the
topics in chapter 1 that presented you with problems. Study the theory again and contact
your tutor or the lecturer to help you to solve the problems. Do not proceed with chapter
2 unless you are completely satisfied that you understand chapter 1.
If you are satisfied with your results and are sure that you have a thorough knowledge
104
Chapter 1 introduced you to business management for the entrepreneur. It is clear that
105
the management of a small business enterprise differs from that of a larger enterprise. As
the business grows, the functions of the enterprise as well as their management become
more complex. In order to survive in the business world the entrepreneur should be aware
of the ever-changing business environment in which they function.
The eight functions of the enterprise operate as a system. There should be constant
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interaction among these functions to ensure that the enterprise operates successfully.
All these functions occur in every enterprise, regardless of the size of the enterprise, and
they are equally important to form a successful enterprise. The general management
function forms the foundation of an enterprise and supports all the other functions that
operate in the enterprise. It is important to realise that although general management
is a function on its own, it occurs in all the other functions of an enterprise. In chapter 2
we will discuss the four main functions of general management, the additional functions
15 BSM1602/1/2014–2016
of management and the important role that general management plays in the success
of an enterprise.
In the course of this chapter we have seen that it is quite impossible for any enterprise
107
to function in total isolation. Without interaction with the business environment, the
enterprise cannot continue to exist and grow. If this interaction does not take place the
enterprise’s objectives will remain a dream.
The enterprise should analyse the business environment constantly. The management
108
of the enterprise should also determine, with the help of research, what the general
trends are in the environment. From these analyses management can obtain valuable
information about opportunities and threats that will be fundamentally important during
the decision-making processes in the enterprise. The business environment offers the
enterprise opportunities that will help it to achieve its predetermined objectives and in
this way to ensure its growth and continued existence. The opposite is also true, however.
If the enterprise does not heed important signals in the business environment, it could
lead to its demise.
The various components of the business environment are not independent of each other,
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with constant interaction occurring between the different sub-environments. In this chap-
ter we have investigated the following three components of the business environment:
16
Chapter 2
General management
Contents
17 BSM1602/1/2014–2016
yy list and explain the eight steps of the planning process
yy list and discuss the four steps of the control process
yy list the requirements with which performance standards must comply
yy list and explain the six steps of organising
yy list and discuss the four leadership competencies
yy list and define the six additional functions of general management
yy list and explain the six managerial competencies
You will need to master the following key concepts in order to achieve the learning
outcomes for this chapter:
yy new economy
yy functional perspective
yy general management principles
yy planning
yy organising
yy leading
yy control
yy coordination
yy decision making
yy communication
yy motivation
yy delegation
yy discipline
yy managerial competencies
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2.3 A MIND MAP FOR CHAPTER 2
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19 BSM1602/1/2014–2016
2.4 OVERVIEW
This chapter explains the broad field of management. The prescribed textbook discusses
111
the general guidelines for managing a business and the framework within which entre-
preneurs apply the management principles. It also explains the managerial competencies
that you as entrepreneur should have if you want to manage your business effectively.
This chapter provides a holistic view of management as a science and outlines the man-
agement process as a whole.
Although management has long had the status of an autonomous science, it is not inde-
112
pendent or able to exist in isolation. Along with the various other sciences orientated to
business management, management has developed into a science with a unique body
of knowledge and professional management practices for managing a business.
different management functions, look at the mind map in the study guide.
From the mind map it is clear that management is a process involving activi-
ties that direct an enterprise’s resources in order to attain its goals in a specific
environment.
Activity 2.1
How you would explain what management is in your own words? Write down your ex-
planation is five points.
Feedback
Management can be explained as follows:
20
yy A manager organises human, financial, physical and information resources in such as
way that they are used optimally in a business.
yy A manager plans by setting objectives and devising the necessary methods to achieve
these objectives
yy A manager ensures that people carry out instructions according to plan.
yy Managers coordinate activities and allocate work to certain people so that the objectives
of the organisation can be achieved.
yy Managers help people to achieve the planned objectives.
it was once viewed. Today’s entrepreneurs manage in an economy of ideas – the new
economy. South African entrepreneurs are entering a future that is fast-moving and
characterised by fundamental change.
As an entrepreneur who manages your own business, you should recognise and ac-
116
knowledge the following key components that reshape the world of this new economy:
21 BSM1602/1/2014–2016
Feedback
Certainly, economic changes have caused many businesses to fail.
If you want to be a successful entrepreneur and manage a successful business, you must
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(b) Globalisation
yy Entrepreneurs should be able to manage their businesses in a worldwide market.
yy Multinational businesses have offices and facilities across the world – without
reference to national borders
Go back to your prescribed textbook and study these key components now.
22
It is important that you recognise the difference between general management principles
119
and the different functional management principles. The different business functions refer
to the different sections or departments in the business; therefore, the functional man-
agement principles relate to the activities that are specific to each section or department.
In contrast, the general management principles relate to the activities that contribute to
managing the whole business effectively and efficiently across all levels and departments.
Activity 2.3
Is there a difference between general management principles and the other functional
management principles?
Feedback
Yes, general management differs from the other functions in that it cannot be placed in a
“department” on its own. General management concerns all the activities that are necessary
for the very important task of management on all levels throughout the entire business.
120
There is, and should be, constant interaction and coordination among these functions
122
The departments/functions must be aligned in such as way that they all move in the
123
same direction and support one another so that the overall objective can be achieved.
All these functions occur in every enterprise, regardless of its size. In a small business the
entrepreneur will group some of these activities together to be managed by one per-
son. In a large business, on the other hand, a functional manager will manage a specific
department/function of the enterprise, such as marketing or administration.
23 BSM1602/1/2014–2016
The entrepreneur can also outsource some of these functions to another business or
124
person. Outsourcing means the transfer of responsibilities for a specific business function
from an employee group to a non-employee group.
The difference between general management principles and other functional man-
125
agement principles
1 General management
yy This function differs from the other functions – it cannot be placed in a department
of its own.
yy General management is responsible for the management activities (planning, organi
sing, leading and control) on all levels in all the departments of the business.
yy This function is responsible for all the activities that are performed in the enterprise
to enable the enterprise to attain its goals.
1 Financial management
yy The financial manager is responsible for the effective planning, organising and control
of all the financial activities.
yy Financial activities include obtaining capital and the efficient use of capital.
1 Marketing management
yy Responsible for the transfer of the products from the manufacturer to the consumer,
as well as the activities that make this transfer possible.
yy Activities include market research, market segmentation, deciding on the target market,
deciding on the marketing strategy and compiling a marketing plan.
1 Operations management
yy Concerned with the transformation of inputs into outputs by using the four factors
of production to manufacture a product/render a service.
1 Purchasing management
yy Ensures that production means of the right quality are supplied to the enterprise in
the right quantities, at the right time, to the right place, from the right supplier, at the
right price.
yy It includes the determination of purchasing needs and finding suitable suppliers.
1 Information management
yy Responsible for the collection, processing, analysing and distribution of information.
yy Communicates the information to management to enable them to make informed
decisions.
24
1 Public relations management
yy Responsible for the promotion of the image of the enterprise among all the interest
groups of the business.
yy This function evaluates public attitudes, plans and executes a plan of action to earn
public acceptance and understanding in order to ensure positive support from all the
relevant interest groups.
Activity 2.4
Do you think that general management principles are more important than other func-
tional management principles?
5Feedback
No, general management principles should be applied in all the other functions as management
does not change. Management is the process of utilising an enterprise’s resources to achieve
specific objectives through the functions of planning, organising, leading and controlling.
Go back to the mind map of this chapter. See if you can identify the differ-
127
or exist in isolation. Thus, in discussing planning do not forget about the other three tasks
and the integral role they play in the management process. It is important to remember
that management is a process of utilising an organisation’s resources to achieve specific
objectives through the functions of planning, organising, controlling and leading.
yy Planning. This is the management process through which the vision, mission and
objectives of the organisation are defined and through which a comprehensive hier-
archical plan to integrate and coordinate activities is devised.
yy Organising. This is the management task concerned with arranging the activities and
resources of the enterprise through the allocation of duties, responsibilities and au-
thority to persons and divisions, and the determination of the relationships between
them, in order to promote cooperation, the systematic performance of the work and
the achievement of objectives in the most efficient way possible.
yy Leading. This refers to the way in which a person in a leadership role relates to other
members of the team/group. The nature of this relationship is such that the members
of the team cooperate voluntarily to achieve the objectives that the leader has set for
himself or herself as well as for the team/group.
yy Control. This is a continuous process through which managers oversee employees’
progress in reaching specific objectives. Managers do this by measuring actual per-
formance against set standards and by making corrections if any deviations occur.
Planning and the different levels of planning at the different levels of management can
130
be summarised best in the following diagram. Please take note of the different planning
that takes place on the different management levels.
26
131
133
These functions/elements are closely connected to form a unit – one cannot exist without
134
the other.
27 BSM1602/1/2014–2016
136 Meaning: Management should determine in advance what the business wants to
achieve and how these objectives can be attained.
Do you think that any one of these types of planning is more important than the others?
28
6Feedback
In general, management is very important at any level and of any type, but if management
at top level does not plan effectively, the planning at the lower level might be fruitless.
1 Objectives
1 Mission
yy The broad goal of the enterprise
1 Primary (main) objective
yy Overall objective that determines the direction of the enterprise
yy Long-term objective
yy Only one primary (main) objective
yy Example: profit
1 Secondary objectives
yy Additional objectives that are set to support the primary objective
yy Short-term objectives that changes constantly
yy More than one
yy Examples: quality products/good working conditions/good relations with suppliers
137
1 Strategic objectives
yy Determine and formulate the mission
yy Long-term objectives
yy Example: delivering a good service to consumers
1 Functional/tactical objectives
yy Derived from long-term objective
29 BSM1602/1/2014–2016
y Objectives are set for each function of the enterprise
y Medium to short-term
y Example: 20% increase in market share over the next three years
1 Operational objectives
y Short-term objectives
y Example: 5% increase in sales each month
1 Individual objectives
y The personal objectives of each employee and the activities that they carry out
y Example: determining the exact needs of clients by a member of the sales staff
1 Steps of planning
1. Identify opportunities and threats
y Evaluate opportunities and threats from the business environment.
2. Formulate objectives
y Draw up objectives – what is the end result that you want to achieve?
30
4. Identify alternative plans of action
y Develop alternative plans for all the assumptions.
7. Draw up a budget
y This will ensure that you have the necessary financial resources to carry out the
plan.
1 (B) CONTROL
138 Definition: Determining realistic standards against which employees’ actual perfor-
mance can be measured, so that deviations can be identified and corrective
steps can be taken.
139 Meaning: The manager ensures that employees carry out instructions according to
plan.
31 BSM1602/1/2014–2016
y Requirements with which performance standards must comply,
y Standards should be: realistic and clear
acceptable to staff
1 (C) ORGANISING
140 Definition: Deals with the grouping and coordination of activities, the creation of posts
and the allocation of duties, authority and responsibilities.
141 Meaning: This entails the provision of resources – labour, capital and raw materials/
stock – and the division and distribution of tasks.
142 This means you must determine in advance how, where, by whom, when
and with what resources jobs must be carried out.
32
2. Identify and analyse activities
y The activities that should be carried out can be determined on the basis of the
nature and extent of the work.
Authority
y The right to give orders and to expect compliance
Responsibility
y Employees’ obligations to their employer to carry out instructions according to
prescribed guidelines laid down in the enterprise
33 BSM1602/1/2014–2016
1 (D) LEADING
143 Definition: The way in which a manager helps subordinates so that they will work
together voluntarily to achieve the objectives of the business.
144 Meaning: The relationship between a leader and members of a working group should
be such that the members of the group will work together willingly to
achieve the objectives of the group.
Activity 2.6
Do you think that if a manager is taking corrective action, it is a way of punishing the
workers?
7Feedback
No, not at all! Although some employees might see it as punishment, or the corrective procedure
might not have been done correctly. It is important to remember that corrective action should
be aimed at changing behaviour in order to prevent incorrect actions in the future.
1 Leadership competencies
1. Management of attention
yy Good leaders should have the ability to draw people to them.
yy Should have the ability to motivate people to achieve the vision of the business
through active contribution and discussion.
2. Management of meaning
yy Communication and alignment work together to make the vision of the business
clear to others.
3. Management of trust
yy Reliability, honesty, integrity and mutual trust should be combined with team-
work, recognition of performance, participation and empowerment.
4. Management of self
yy Leaders should know their strengths and weaknesses.
yy Leadership styles
yy Various leadership styles exist according to which leaders can manage the
employees.
yy No leadership style will be perfect in all situations.
yy A good leader should have the ability and judgement to sum up circumstances
and to adapt his/her style accordingly.
34
2.12 THE ADDITIONAL FUNCTIONS OF GENERAL
MANAGEMENT
(a) Coordination
Definition: The process in which the functions of the enterprise are treated as a
functional unit, so that the objectives of the enterprise can be achieved.
(b) Decision making
Definition: Various possible solutions are considered for problems and the best
solution is chosen.
(c) Communication
Definition: Transfer of messages (information) between the enterprise and its
external environment, and within the enterprise itself.
(d) Motivation
Definition: The entrepreneur persuades his/her employees that they should vol-
untarily do the work as well as possible (they must be willing to do the
work).
(e) Delegation
Definition: Allocation of power (authority) and responsibility to subordinate em-
ployees to enable them to do the work.
(f) Discipline
Definition: Shapes the behaviour of employees so that their conduct helps to
ensure the successful operation of the enterprise.
Activity 2.7
There are various ways in which a manager can motivate his/her employees. Can you
name a few?
8Feedback
35 BSM1602/1/2014–2016
2.13 MANAGERIAL COMPETENCIES
(a) Communication
yy Informal communication
yy Formal communication
yy Negotiation
(c) Teamwork
yy Team design
yy Creating a supportive environment
yy Managing team dynamics
(f) Self-management
yy Integrity and ethical conduct
yy Personal drive
yy Balanced work and private life
yy Self-awareness and development
2.14 SELF-ASSESSMENT
To test and evaluate your knowledge of this chapter, you can now do the following
activities:
(i) Complete the self-assessment in the study guide. Remember that it is important that
you complete the exercise without looking at the answers in the solutions section.
This is the only way you can test your knowledge.
(ii) Do the self-evaluation question at the end of chapter 1 in your prescribed textbook.
36
EXERCISE 2
145 Read the case study and answer the following questions.
Ballito, a coastal town north of Durban. She registered her enterprise, MaMa’s Clothes, as a sole
proprietorship. Mary started on a small scale, since she had only R50 000 to invest in the enterprise.
She was afraid to borrow money because she did not know whether the enterprise would be a
success or not. She rented small premises near the beach and bought three sewing machines.
She employed five employees to help her – three seamstresses, one cutter and one saleslady.
She bought her raw materials, such as the fabric (material), buttons, zippers and cotton (thread),
in Durban. At that stage, Mary manufactured just a small range of clothes, such as ladies’ dresses
and skirts, which she sold in her shop and at the local flea market.
As more and more people have become aware of Mary’s clothes in the three years since she
147
Because Mary’s clothes and the sandals produced by the local people have complemented
148
each other, she decides to incorporate nine of these people into her enterprise as co-owners.
However the incorporation of the new owners has meant that her premises have become too
small for manufacturing both the clothes and the sandals. She therefore decides to build a new
factory on a small piece of land that she has inherited from her grandfather. This land is about
10 kilometres outside Ballito, but still falls within the municipal area, and is already supplied with
water and electricity.
New members of staff have to be appointed to manufacture the clothes and sandals. To help with
149
the upliftment of the area, Mary decides to employ people from the local community, despite
the fact that most of them are unskilled and will need training. She feels that this is part of her
social responsibility towards the community of Ballito.
Today Mary is regarded as one of the best clothing manufacturers in the area. The new factory
150
has enabled her to manufacture a wide range of clothes and sandals. Her clothing range now
consists of pants, shorts, shirts and T-shirts, for both men and women, as well as ladies’ dresses
and skirts.
QUESTIONS
1 Multiple-choice questions
151 Choose the correct answer for each of the following questions.
2.1 The … management function is concerned with the activities of obtaining, recor
ding and analysing information and communicating the results to management,
who will then safeguard these assets, promote activities and achieve the objectives
of the business.
(1) financial
(2) marketing
(3) administrative
(4) information
37 BSM1602/1/2014–2016
2.2 The primary objective of MaMa’s Clothes would be …
(1) not to borrow money.
(2) to provide clothes of outstanding quality.
(3) to make a profit.
(4) to maintain good relations with the fabric suppliers.
2.3 The various functions of MaMa’s Clothes must operate as a unit (system). To which
additional function of general management does the abovementioned statement
refer?
(1) Coordination
(2) Communication
(3) Cooperation
(4) Motivation
2.4 Mary must lead her employees in such a way that they will work together voluntarily.
Which additional function of general management could assist her to achieve this?
(1) Coordination
(2) Communication
(3) Cooperation
(4) Motivation
2.5 When Mary allocates power and responsibility to subordinate employees, it refers
to …
(1) delegation.
(2) decision-making.
(3) dedication.
(4) discipline.
2.6 The top management of MaMa’s Clothes would be responsible for … planning.
(1) strategic
(2) functional
(3) operational
(4) tactical
2.7 The way in which Mary motivates her employees to perform their duties voluntarily
refers to …
(1) planning.
(2) organising.
(3) leading.
(4) control.
38
(3) are set to support the primary objective
(4) want to achieve with the business
2.15 SUMMARY
Evaluate your answers to exercise 2 with the aid of the suggested solutions in the answer
152
book and then calculate your percentage. If you are not satisfied with your results, revise
the topics in chapter 2 that presented you with problems. Study the theory again and
contact your tutor or the lecturer to help you to solve the problems. Do not proceed
with chapter 3 unless you are completely satisfied with your understanding of chapter 2.
If you are satisfied with your results and are sure that you have a thorough knowledge
153
Chapter 2 dealt with the functions of general management. The four main functions
154
and the six additional functions are closely connected to form a unit – one cannot exist
without the other. These functions cannot be isolated from one another and must be
applied as an integrated whole.
No enterprise can exist without the necessary financial resources. Enterprises need capi-
155
Owing to the integrated nature of the management function, it is understood that en-
157
trepreneurs should have some knowledge of the various functions in a business so that
they can carry out their management functions effectively. It is, therefore, the task of the
entrepreneur as manager to ensure that the business moves towards the achievement
of the business’s goals, such as prosperity (some businesses refer to this as maximising
profit), service to the community and providing security for employees.
2.16 SOLUTIONS
Question No. Answer
2.1 2
2.2 3
2.3 1
2.4 4
2.5 1
2.6 1
2.7 3
2.8 3
39 BSM1602/1/2014–2016
REFERENCE
De Beer, AA, Rossouw, D, Moolman, B, Le Roux, EE & Labuschagne, M. 1998. Focus on
supervision in general management. Cape Town: Juta.
40
Chapter 3
The financial function
Contents
yy list and explain the components of the capital need with the aid of practical
examples
yy explain how the capital need can be determined
yy list and explain the sources of capital
yy give the definition and an example for each of the following concepts:
−− short-term capital
−− medium-term capital
−− long-term capital
−− money market
−− capital market
41 BSM1602/1/2014–2016
−− balance sheet
−− cash budget
yy give the formula for calculating the profitability of the enterprise and the formula
for calculating the profitability of own capital and explain the method for calculat-
ing both of these concepts
yy list and explain the six secondary objectives of financial management
yy explain the seven methods that can be used to ensure a positive cash flow
yy list the three methods that can be used to manage the growth of a small business
yy explain what a budget is
yy explain the things that the financial manager should consider when he/she makes
credit evaluations
You will need to master the following key concepts in order to achieve the learning
outcomes for this chapter:
yy balance sheet
yy assets
yy liabilities
yy owner’s equity
yy financial planning
yy income statement
yy cash flow
yy cost of sales
yy liquidity
yy profitability
yy leverage
yy forecast profits
yy break-even point
42
3.3 A MIND MAP FOR CHAPTER 3
158
3.4 OVERVIEW
Every day business takes place in South Africa; every day people are involved in a business
159
activity and every day we will buy at least bread, milk, cool drinks, sweets, or other forms
of food from a business. Financial activity plays an important role in all these activities,
and therefore every business, regardless of its size, will have a financial department. The
person who heads up this function is usually called the financial manager. The financial
function is one of the functions of an enterprise.
To obtain a holistic view of the financial function, look at the mind map in
160
43 BSM1602/1/2014–2016
3.5 WHAT IS FINANCIAL MANAGEMENT?
The financial function refers to all the activities in the business that are involved in ob-
161
taining capital and the efficient use of capital. These activities cannot be carried out ef-
fectively without the necessary management and are therefore linked to management
activities. The financial manager is responsible for the effective planning, organisation,
coordination, delegation and control of all the financial activities in the business in order
to achieve the business’s primary objective.
Chapter 3 (The financial function) in your prescribed textbook discusses the essence of
162
Remember that the financial manager is responsible for managing the financial function
163
nancial statements. The general purpose of financial statements is to provide the owner
of the business with information. To be able to understand the financial statements of
your business, it is essential that you understand what information is reflected and when
the balance sheet and income statement should be prepared.
of the business can be analysed by using ratios. Your prescribed textbook discusses the
different groups of ratios and indicates how the ratios should be interpreted. This will
enable you to understand the role and use of ratios in financial analysis.
A financial ratio is therefore a tool for analysing financial statements. A ratio is a figure
166
that indicates the relationship between two figures or groups of figures in the financial
statements of the business (particularly the income statement and the balance sheet).
Go back to your prescribed textbook and study these key components now.
44
Study the section “Financial ratio analysis” in your prescribed textbook. Pay
special attention to the section on following:
yy liquidity
yy profitability
yy activity or turnover ratios
yy leverage or debt ratios
yy break-even analysis
Activity 3.1
9Feedback
No conclusion on the financial performance or financial situation of the business can be made
by simply calculating a ratio. In itself a ratio is not an absolute measure for the success or failure
of a business. The ratio must be compared with a norm. This comparison is the beginning of
an investigation into the financial performance and situation of the business.
sions on how these needs will be financed, and making decisions on how the capital of
the business can be employed to achieve the main objective of wealth maximisation.
Financial planning begins with forecasting the future capital needs of the business in
168
the short, medium and long term. To understand forecasts, you first have to know what
the components of the capital needs of the business are.
45 BSM1602/1/2014–2016
170 Meaning: The financial function must determine the extent of the capital need by
deciding which and how many fixed and current assets are needed by the
enterprise and how these assets will be financed.
Activity 3.2
10Feedback
Capital goods are any material that adds to the asset (capital) of an enterprise. Examples are
machinery and equipment, utilities like power generators and office equipment like comput-
ers and furniture. These can be used for their usable life to produce the products or services of
the enterprise and increase the value.
1 1. INTRODUCTION
yy No enterprise can exist without the necessary funds.
yy Money is needed to establish the enterprise.
yy Money is also needed to ensure that the enterprise can continue to function on a daily
basis – money to buy raw materials to manufacture products or money to buy stock
to sell to the consumers.
yy The financial function must be managed in a meaningful and orderly way so that the
business can generate enough cash over the short term and enough profit over the
long term.
1 2. FOUR DECISIONS
171
46
1 2.1 Investment decision
1 (a) What and how many fixed and current assets must be acquired?
Activity 3.3
11 Feedback
1 Fixed capital
172 Definition: Fixed capital is capital invested in fixed assets.
47 BSM1602/1/2014–2016
1 How do we determine the extent of the capital need?
1. The marketing function must do a sales forecast – estimate the sales for a future
period.
2. This is done to determine what and how many fixed and current assets will be
needed to manufacture these products or to buy stock.
176
Examples
yy Grocery store – needs variable capital to buy more cool drinks and ice cream dur-
ing summer, Easter eggs for Easter, more stock for month ends or festive seasons.
48
yy Furniture manufacturer – needs more wood to manufacture more furniture to
make provision for times when consumers will buy more furniture.
Other examples of variable capital needs include factors such as an increase in credit
177
Activity 3.4
12Feedback
Variable capital is “variable” because its value changes (varies) within the production process.
Examples could include:
yy During the holidays people buy more cool drinks, so a grocery store would buy more to
ensure it has enough stock to sell.
yy Summertime – ice cream, swimwear and the like
nal and external sources of capital. Internal sources of capital are often the cheapest and
easiest to obtain. However, if the business does not have the necessary internal sources,
external sources will have to be used.
Internal sources of capital refer to sources available within the business itself and include
179
the following:
yy undistributed income
yy reserves (retained income)
yy depreciation amounts
External sources of capital refer to sources available outside the business and consist of
180
yy shareholders
yy financial institutions
49 BSM1602/1/2014–2016
181
1 Own capital
yy Capital made available by the owners of the enterprise
yy Also known as owners’ equity
1 Borrowed capital
yy Capital from non-owners of the enterprise – financial institutions or suppliers
yy Also known as loan capital (foreign capital)
1 (b) What forms of financing will be used?
182
1 Short-term capital
yy Capital made available for one year or less
yy Suppliers credit – the enterprise buys stock or raw materials on credit from its suppliers
yy Used to acquire current assets
1 Medium-term capital
yy Period of between one and five years
yy Term loans – for a period of one to five years
yy Used to acquire fixed assets such as machinery, equipment and vehicles
50
1 Long-term capital
yy Period of longer than five years – up to 20 years
yy Used to buy property such as land and buildings
1 Money market
yy Capital made available in the short term
yy Less than one year
yy Examples: short-term loans, bank overdrafts
1 Capital market
yy Capital made available over the medium and long terms
yy Longer than one year
yy Examples: mortgage bonds, term loans
1 (c) At what costs will the capital be obtained?
yy At what interest rate will the capital be financed?
yy Interest is paid on borrowed capital
1 2.3 Dividend decision
yy How will the net income after tax be divided among the owners?
yy What percentage profit will be ploughed back into the enterprise?
1 2.4 Record-keeping decisions
yy How and in what way should the financial transactions be recorded?
(a) Financial record-keeping
yy All enterprises should start with a cashbook, petty cash book and a general ledger.
yy Other financial registers include accounting books such as a sales journal, a debtors
ledger, a creditors ledger, a wages and salaries journal and a purchases journal.
183
1 1. Income statement
184 Definition: A summary of the income and expenditure (profit or loss) of the enterprise
over a specific period of time, for example a financial year
51 BSM1602/1/2014–2016
1 Main entries on an income statement
185 Sales
186 – Cost of sales
187 = Gross profit
188 – Expenses
189 = Net profit
Activity 3.5
13 Feedback
52
1 2. Balance sheet
201 Definition: A balance sheet is an indication of the financial position (assets and li-
abilities) of the enterprise at a certain point in time/on a specific date.
53 BSM1602/1/2014–2016
1 (c) Purpose of financial statements
215
216
54
1 1. Liquidity ratios
217 Liquidity
218 Definition: Liquidity is the ability of the enterprise to make the necessary payments
regularly and on time.
219 Examples: Payments of monthly accounts such as rent, salaries, interest, suppliers,
water and electricity.
222Current liabilities
Activity 3.6
Do you know the difference between current assets and current liabilities?
14Feedback
yy Current assets: raw material (items used in the manufacturing process), stock on hand
(items to sell), debtors (people that owe your business money – money still coming into
the business.
yy Current liabilities: people your business owes money – suppliers, creditors etc.
55 BSM1602/1/2014–2016
232 (b) Net profit margin
233Net profit after tax
Sales 234
240 Definition: The profitability net income after interest, earned during a specific period
on own capital invested – total capital minus borrowed capital.
56
255 (d) Debt to equity ratio
Total assets – Total equity
256
Accounts receivable
263
271
278
279
57 BSM1602/1/2014–2016
1 (a) Primary objective
280 Profitability
yy Profitability is the relationship between the net income earned over a certain period
and the capital used/invested to generate that income.
yy Growth means that the enterprise will need more working capital.
58
More current assets will be needed – cash to buy more raw materials or stock
and to pay more salaries and wages.
mination of prices
3.10.3 BUDGET
282 Definition: A budget is a plan, expressed in money, of activities for a future period.
A monetary plan for a future period
59 BSM1602/1/2014–2016
1 CREDIT AND COLLECTION METHODS
Credit has become a way of life. It is an integral part of the economy in which we live and
284
in which the business operates. The aim of credit is to satisfy needs by offering goods
and services that we do not pay for immediately. Credit stimulates the economy and
helps it to grow.
obtain goods, service or money in the present on the basis of a promise to pay for these
in the future. This means that the buyers immediately receive the goods or services that
they are buying, but they only have to pay for them later. The buyers promise to pay the
amount that they owe in the future.
Study the section “Credit and collection methods” in your prescribed textbook.
Note that this section is split into two parts — “Management of receivables”
and “Credit applications”.
planning for this valuable asset has driven countless small businesses into bankruptcy.
Cash-flow planning can spell the difference between success and failure for your business.
For entrepreneurs to manage and plan their cash flow effectively, it is important for them
287
to look beyond the bottom line of their financial statements and focus on what it takes
to keep the business going, in other words their cash.
60
3.11 SELF-ASSESSMENT
To test and evaluate your knowledge of this chapter, you can now do the following
activities:
(i) Complete exercise 3 in this study guide. Remember that it is important to complete
the exercise without looking at the solutions in the solutions section . This is the only
way you can test your knowledge.
(ii) Do the self-evaluation question at the end of chapter 3 in your prescribed textbook.
EXERCISE 3
288 Read the case study and answer the questions that follow it.
many new business opportunities for potential entrepreneurs. Makwetsa Nyems is one of these
new entrepreneurs.
After conducting thorough market research, Makwetsa realised that there would be a great need
290
for electrical appliances in the Botlokwa area. He found that no other shops in the area were
currently supplying these products and the closest competitors were in Polokwane, some 60
kilometres from Botlokwa. He subsequently resigned from his job to open a shop selling electrical
appliances, such as stoves, kettles, irons, refrigerators and washing machines. His target market
consisted of the inhabitants of Botlokwa and the surrounding areas.
He established his enterprise, Nyems Electrical Appliances, in January 2001 and registered it as a
291
sole proprietorship. Makwetsa decided to start on a small scale because he had only R30 000 to
invest in the enterprise and would have to borrow the rest of the capital he would need. He used
his own capital to buy a second-hand bakkie to make deliveries, but took out a loan of R60 000
from a bank to buy his initial stock. This loan would be paid back over a period of five years. He
rented a house in the residential area of Ramatsowe and converted it into a shop, using a bank
overdraft of R10 000 to pay for the renovations and to buy a till and counters.
He employed two employees – Joe, who was responsible for sales, and David, who was respon-
292
sible for deliveries. He ordered his products from a manufacturer in Johannesburg, about 360
kilometres from Botlokwa. These products were of outstanding quality, but he had to pay the
transport costs. This increased the cost of purchasing, especially with the increase in fuel prices,
and this in turn caused an increase in his selling prices.
Although his market research showed that there were many households that would need electri-
293
cal appliances and that there were no competitors in the area, Makwetsa did not consider the
average income of his target market. Botlokwa is a rural area with poor inhabitants. In order to
sell his expensive products, such as washing machines and stoves, he had to allow his consum-
ers to buy on credit. This, in turn, forced him to buy his stock on credit, which increased the
cost of purchasing even more. By contrast, his competitors in Polokwane were big enterprises
that were able to buy their stock in bulk and to pay in cash with the result that their prices were
much lower than his.
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Consequently, as a result of a lack of proper cash flow, he experienced problems in meeting his
294
monthly obligations, such as the payment of salaries, rent and interest. To make matters worse, he
kept no records of his income and expenditure, nor had he any knowledge of financial statements.
QUESTIONS
1 Multiple-choice questions
295 Choose the correct answer for each of the following questions.
3.1 The tills and counters that Makwetsa had to buy can be regarded as an example of
his … capital.
(1) permanent
(2) own
(3) fixed
(4) operating
3.2 An example of Makwetsa’s variable capital need would be the capital that he needs
to …
(1) buy the till and counters for his shop.
(2) place fixed monthly orders for appliances.
(3) pay the monthly salaries of his employees.
(4) buy extra stock over the Christmas season.
3.3 Makwetsa experienced problems in meeting his monthly obligations, such as the
payment of salaries, rent and interest.
This refers to his …
(1) activity.
(2) liquidity.
(3) solvency.
(4) profitability.
3.4 The guidelines according to which Makwetsa has to conduct his financial activities
refers to …
(1) the financial procedures.
(2) the budget.
(3) financial analysis.
(4) the financial policy.
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3.6 Makwetsa needs to get an idea of the financial status of Nyems Electrical Appliances.
He requires a detailed list of all material and intangible items that Nyems Electrical
Appliances owns, as well as a statement showing how much money the business
owes. Which of the following financial statements would you recommend?
(1) Break-even statement
(2) Income statement
(3) Balance sheet
(4) Cash budget
3.7 The ability of Nyems Electrical Appliances to pay monthly accounts, such as salaries,
interest, suppliers, water and electricity, is called liquidity. There are various formulas
that can be applied to work out liquidity ratios. Identify the following formula:
Current assets – inventory
Current liabilities
(1) Acid test (quick) ratio
(2) Debt ratio
(3) Current ratio
(4) Gearing ratio
3.8 Freddy sells his products on credit to his consumers. When he has to decide on the
terms on which credit will be granted, he has to …
(1) decide on the credit period and whether he will charge interest on overdue
accounts
(2) judge the collateral of consumers.
(3) judge the creditworthiness of consumers.
(4) decide whether the risk of non-payment is too high.
3.12 SUMMARY
Evaluate your answers to exercise 3 according to the suggested solutions in the solutions
296
section and calculate your percentage. If you are not satisfied with your results, revise
the topics in chapter 3 that presented you with problems. Study the theory again and
contact your tutor or the lecturer to help you to solve the problems. Do not proceed
with chapter 4 unless you are completely satisfied with your understanding of chapter 3.
If you are satisfied with your results and are sure that you have a thorough knowledge
297
Chapter 3 dealt with all the aspects of financial management. Any person who estab-
298
lishes a business enterprise will naturally want to make a success of it. However, without
the proper management of the enterprise’s finances, it will not be possible to achieve
maximum return on the capital invested in it.
A business enterprise is created when a need in the market for a product or service is
299
indentified. However, the consumers must be made aware of your product or service,
otherwise no one will buy it. Thus, the marketing function is responsible for introducing
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the product/service to the consumers as well as the actual transfer of the product/service
to the consumers. In chapter 4 we will discuss all the activities that make the transfer of
a product/service to the consumers possible.
effectively, financial managers must have knowledge of various financial aspects. They
are also responsible for managing all the facets of the financial function efficiently. The
aim of this function is to make the best possible contribution to the attainment of the
business’s objectives within the broad framework of its strategies and plans.
3.13 SOLUTIONS
Question No. Answer
3.1 3
3.2 4
3.3 2
3.4 4
3.5 3
3.6 3
3.7 1
3.8 1
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Chapter 4
The marketing function
Contents
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yy list the four elements of marketing communication and give a practical example
of each element
yy explain what a marketing plan is
yy list the benefits of drawing up a marketing plan
yy list the eight steps in the marketing plan
yy explain what the executive summary entails
yy explain the following topics of the market analysis:
−− market research
−− market demand/attractiveness
−− product life cycle
−− enterprise analysis (SWOT analysis)
−− competitor analysis
−− product analysis
−− customer analysis
Key concepts
You will need to master the following key concepts in order to achieve the learning
outcomes for this chapter:
yy micro environment
yy market environment
yy macro environment
yy marketing concept
yy consumer orientation
yy profit maximisation
yy integration
yy social responsibility
yy marketing process
yy market research
yy market segmentation
yy target market
yy marketing strategy
yy product
yy price
yy distribution
yy marketing communication
yy marketing plan
Look at the mind map in the study guide in order to obtain a holistic view
301
66
4.2 A MIND MAP FOR CHAPTER 4
302
4.3 OVERVIEW
303 The marketing function in your business is very important because, by marketing your
product or services, you generate an income. The marketing function in the new era can
therefore be described as the process of determining customer needs and wants and
then providing customers with goods and services that meet or exceed their expecta-
tions. In other words, the goal of the marketing function is to find a need and to satisfy it.
Activity 4.1
Do you think the marketing function has always had a customer-oriented approach?
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15Feedback
No, a business can be a production-orientated business, which focuses on the internal capa-
bilities of the business rather than on the desires and needs of the marketplace.
16 Feedback
In the 1930s and 1940s the emphasis of the marketing function was on selling and advertising
rather than on the customer. During this time most businesses paid little attention to what
consumers wanted or needed and how best to satisfy those wants and needs. Marketers often
annoyed consumers with their constant promotions designed to persuade them to buy existing
products, and did little to service them after the sale.
Go back to your prescribed textbook and study the key components of the
marketing function now.
The activities that must be carried out to make the transfer of products/services possible
306
include market research, market segmentation, deciding on the target market, deciding
on the marketing strategy and compiling a marketing plan.
INTRODUCTION
4.4.1 Three different types of business
(a) Production-oriented
yy Focuses on the internal capabilities of the enterprise instead of on the needs of
consumers.
(b) Sales-oriented
yy Focuses on high sales figures and aggressive sales techniques.
(c) Market-oriented
yy Focuses on satisfying consumers’ needs while meeting the objectives of the
enterprise.
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Activity 4.2
17 Feedback
The marketing mix refers to the combination of the product, price, place (distribution) and
promotion – known as the four Ps – which must be combined in the most suitable manner to
ensure sales of the product or service.
307
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yy Marketing activities
yy Relationship marketing
yy Defining marketing
yy The marketing process
yy The marketing environment
yy Market segmentation
yy The marketing strategy
and marketing communication of ideas, products and services to create exchanges that
satisfy individual and organisational goals.
Activity 4.3
Can you give examples of the way in which products have been marketed to you by com-
panies in your environment?
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4.6 THE MARKETING ACTIVITIES
The following marketing activities are needed to bridge the gaps between production
310
and consumption:
1 Transport
yy Transport is needed to deliver the product to the consumer in the quickest and safest
way.
yy Bridges the space gap
(c) Storage
yy Warehouses are used for storage – for example, seasonal production.
yy Bridges the time gap
(d) Financing
yy Costs are incurred in the transfer of products from sellers to buyers.
yy Bridges the ownership gap
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4.8 THE MARKETING PROCESS
4.8.1 Market research and the marketing environment
(a) Market research
Definition: Market research refers to the gathering of information on a certain
market group so that better marketing decisions can be made.
The purpose of market research:
yy to identify the needs for products or services
yy to understand the market
yy to know who the consumers are, what their needs are and whether the product
will meet their needs
yy to identify opportunities and threats in the marketing (business) environment
(b) The marketing (business) environment
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311 Please note:
The above are just a few examples – your own SWOT analysis will depend on the given
312
case study or on your particular situation. Remember that you cannot list the same ex-
ample (such as my examples of sufficient capital and lack of capital) as both a strength
and a weakness – it cannot be both. The same applies to opportunities and threats. You
must use different examples when you compile a SWOT analysis.
Activity 4.4
Can you do a SWOT analysis on your favourite shop or a restaurant that you visit regularly?
18 Feedback
A SWOT analysis is a useful instrument for helping managers to identify the internal strengths
and weaknesses of a business as well as the external opportunities and threats facing it. SWOT
is an acronym: S = strengths, W = weaknesses, O = opportunities, T = threats.
316
317
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318 Geographic
yy Where are the consumers? Where do the consumers live (area)?
yy Where do they work?
319 Demographic
yy Who are the consumers? What is their level of education/occupation/income?
yy What is their average age/gender/social class/average size of their households?
320 Psycho-graphic (lifestyle)
yy What products do they buy? What do they spend money on?
yy How do consumers spend their free time/entertain?
321 Behaviouristic (buying pattern)
yy When do they buy the products?
yy How often do they buy?
It is important to remember that the type of questions that you will ask under each segment
322
will depend on the type of enterprise and the type of products you are going to offer.
From the above segments, you can choose the specific market segment or segments
323
yy Identify the segments that seem promising for the type of product/service offered.
yy The marketing effort will be focused on this target market.
4.8.4 The marketing strategy/mix
326 Definition: A marketing strategy/mix is refers to the combination of the product, price,
distribution and marketing communication in the most suitable manner
to ensure the sales of the product or service of the enterprise.
327 Meaning: The marketer must decide on the products that will be offered, the price at
which the products will be sold to the consumers, the distribution channel
that will be used to transfer the products to the consumers and the mar-
keting communication methods that will be used to make the consumers
aware of the products
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329
1 Product
yy The product or service that you offer based on the need or opportunity identified
yy Includes colour, size, packaging, quality, guarantees and after-sales service
1 Price
yy The selling price
yy Should be profitable (at least cover the costs), but affordable and competitive
1 Distribution (place)
yy How does your product reach the market?
yy The transfer of the product from the manufacturer to the consumer
yy Direct distribution – sell directly to consumers
yy Indirect distribution – wholesalers, retailers, agents
1 Marketing communication (promotion)
yy How will you make consumers aware of your product?
yy Four elements of marketing communication
1 Advertising
yy Radio, newspapers, billboards, pamphlets
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1 Sales promotions
yy Special offers, discounts, gifts, trade-ins
1 Personal sales
yy Sales staff, door to door, catalogues
yy Publicity
yy Sponsorships, donations, articles in magazines
Note: In your prescribed textbook the elements of the marketing mix are called
the “four Ps”, being:
yy Product,
yy Price,
yy Distribution (Place) and
yy Marketing communication (Promotion)
Activity 4.5
19Feedback
You will most probably fall into the consumer market (see prescribed textbook for more infor-
mation). Therefore, you will buy goods and services for personal consumption and therefore
price and quality will play a decisive role.
yy identify changes in the marketing environment and determine ways to react to them
yy have a better understanding of the enterprise’s position in the market as far as con-
sumers and competitors are concerned
yy have a better idea of the objectives – the plan acts as a guide for reaching goals
yy establish how to obtain resources for the intended plan
yy keep staff informed about what is expected of them
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Study the section titled “The marketing plan” in your prescribed textbook. It is
important that you know the steps in the marketing plan.
2. Growth
y Increase in demand, awareness of increases in the market and profit increases.
3. Maturity
y Many competitors.
y Prices may be reduced as a result of competition.
4. Decline
y Decline in the need for the product and consequently profits decrease.
y Advertising may be stopped.
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(d) Enterprise analysis
y Compile a SWOT analysis for the enterprise.
y Identify strengths, weaknesses, opportunities and threats.
(e) Competitor analysis
y Compile a SWOT analysis for the three major competitors.
y Evaluate the location, target markets, marketing strategies and market share of
these competitors.
78
1 Step 7: Budget
y The marketing plan should be in line with the allocated money in the marketing budget.
y This step will indicate how this amount will be spent on marketing activities over a
certain period.
1 Step 8: Control
y To ensure that set objectives are achieved
y Should take place regularly, because the plan does not make provision for unforeseen
circumstances and adjustments
y Helps to determine whether the plan of action is a success or not by evaluating sales
figures
4.10 SELF-ASSESSMENT
To test and evaluate your knowledge of this chapter, you can now do the following
activities:
(i) Complete the self-assessment in the study guide. Remember that it is important that
you complete the exercise without looking at the solutions in the answers section.
This is the only way you can test your knowledge.
(ii) Do the self-evaluation question at the end of chapter 4 in your prescribed textbook.
EXERCISE 4
334 Read the case study and answer the following questions.
that time he obtained his National Diploma: Operational Management at Unisa, as a result of
which he was promoted to the position of operations manager. In his free time, John played the
part of a DIY handyman and took care of all the maintenance in and around his home. After his
wife, Jill, graduated from the Tshwane University of Technology she worked as a store manager at
a large commercial enterprise. She has worked with customers every day of her life and gained a
great deal of experience in communicating with, as well as organising and coordinating, people.
John and Jill have always dreamed of having their own business. When John’s mother died, he
336
inherited R1 500 000. He also had savings to the amount of R200 000 that could be used to open
their own business.
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In January 2007, John and Jill saw a large property advertised in the local newspaper, which was
337
being auctioned from an insolvent estate. This property had the potential to be developed as
a hospitality enterprise.
In February 2007, John and Jill both resigned and bought the property on auction for an amount
338
of R1 100 000 using their combined pension funds. Their vision was to convert the property into
a guesthouse, something which they had been dreaming of doing for many years. They decide to
call the guesthouse Isiphiwo Guest Lodge. Isiphiwo is a Zulu word meaning “God given”. John’s
experience in management and his DYI skills have benefited the business, while Jill’s experience
with communicating, organising and coordination are also of great value. Together, John and
Jill make an excellent team.
John and Jill appointed six qualified and experienced employees at the guesthouse. All the fur-
339
niture, machinery and kitchen and office equipment needed were purchased for an amount of
R600 000. The garden tools were bought from Pretoria Tool Centre for R150 000. John invested
his savings and the rest of his pension in the guesthouse, while Jill contributed the remaining
R400 000 of her pension. For the residual amount, they applied for a loan of R500 000 to be paid
back over five years.
John and Jill sold their house for R2 500 000 because they could occupy a flat on the guesthouse
340
premises. As they had no mortgage bond on their house, this money could also be used to buy
the guesthouse.
The fact that South Africa would host the 2010 FIFA World Cup had been known since 2004 and
341
John and Jill realised that the event presented a great opportunity for their guesthouse, as it was
situated close to one of the rugby stadiums at which the soccer matches would be played. The
guesthouse has eight rooms, each with an en suite bathroom, DSTV, a bar fridge, a telephone
and a kettle, and cups and saucers. Towels and small samples of toiletries are also provided.
Although Isiphiwo Guest Lodge is well situated and well known, John and Jill have realised that
342
the hospitality industry is a competitive market and there are several other guesthouses in the
area. Nevertheless, people often prefer guesthouses to hotels and big lodges, mainly because
the rates are lower and because they feel more at home in a smaller place where they receive
personal attention.
To advertise their establishment, John and Jill used the local newspaper and magazines such as
343
Getaway. Moreover, the name and contact details of the guesthouse were displayed on each of
their vehicles. A huge sign on the gate also displayed the services they provide. In addition they
approached the Mamelodi Sundowns soccer team to sponsor their jerseys for the duration of
the Soccer World Cup. This meant that this great soccer team would be playing in kit display-
ing the emblem of the guesthouse. Six months prior to the soccer tournament, the guesthouse
also placed an advertisement on the internet using an international agency that specialises in
advertising tours and accommodation in South Africa.
Isiphiwo Guest Lodge is registered as a private company, as both John and Jill are involved in
344
the management of the guesthouse. Jill is responsible for the administrative function and John
is in charge of the maintenance of the premises and is responsible for the record-keeping of all
the financial transactions.
Every morning, Jill discusses the daily schedule with the supervisor of the cleaners for cleaning the
345
guesthouse and discusses the schedule for serving breakfast with the kitchen staff. The staff work
shifts and it is vital for everyone to know their routine and the division of tasks every day. Jill has
80
a control sheet that has to be completed and signed every day after a task has been completed.
Each employee must also sign an attendance register when they report for duty every morning.
Because of the workload, Jill has appointed a receptionist, Sarah, to assist in the office. In addition
346
to receiving guests and handling reservations, she has to manage all the administrative work.
Sarah also supervises the guesthouse whenever John and Jill are unavailable.
Isiphiwo Guest Lodge is a successful enterprise because John and Jill, and the staff, do their best
347
to make guests feel at home. Moreover, this type of service will always be in demand.
QUESTIONS
1 Multiple-choice questions
348 Choose the correct answer for each of the following questions.
4.1 The name and contact details of the guesthouse are displayed on all their vehicles.
A big sign at the gate also clearly indicates the service they render. This refers to …
(1) marketing.
(2) publicity.
(3) advertising.
(4) public relations.
4.2 Although Isiphiwo Guest Lodge is well situated and well known, John and Jill have
realised that this market is competitive and there are several other guesthouses
in the area. However, people often prefer guesthouses to hotels and big lodges,
because the rates are lower and they feel more at home. There are various types of
enterprise and Isiphiwo Guest Lodge is a … type of enterprise.
(1) sales-oriented
(2) market-oriented
(3) production-oriented
(4) business-orientated
4.3 John and Jill compiled a SWOT analysis shortly before the Soccer World Cup to
see how competitive the guesthouse was. Which analysis best describes Isiphiwo
Guest Lodge?
(1) S: good location; W: lack of management skills; O: soccer world cup; T: crime
in the area
(2) S: soccer world; W: crime in the area; O: good location; T: lack of management
skills
(3) S: experienced staff; W: shortage of capital; O: soccer world cup; T: other
guesthouses
(4) S: sufficient capital; W: shortage of capital; O: soccer world cup; T: other
guesthouses
4.4 John and Jill realised that the 2010 FIFA World Cup is event would be an ideal op-
portunity for their guesthouse, as it is close to the rugby stadium where some of
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the soccer matches were to be played. To do proper marketing John and Jill had to
do market segmentation. John took note of heterogeneous and homogeneous
markets which of the following phrases would best describe these concepts to John?
(1) All the soccer fans watching the Soccer World Cup worldwide are heteroge-
neous, but those that would be attending live matches in Pretoria and were
looking for accommodation are homogeneous.
(2) All the other guesthouses in Pretoria are heterogeneous and those that would
be providing accommodation to the soccer fans are homogeneous.
(3) The Mamelodi Sundowns is heterogeneous, but while team members are
wearing the sponsored jerseys, they are homogeneous.
(4) All the suppliers of Isiphiwo Guest Lodge are heterogeneous, but when they
supply the guesthouse they are classified as homogeneous.
4.5 John is ready to conduct the market segmentation of Isiphiwo Guest Lodge. Under
which segment does the following statement fall?
“Isiphiwo Guest Lodge is launching a promotion that is aimed at young, educated
soccer fanatics who follow their teams all over the world.”
(1) Geographic
(2) Demographic
(3) Psychographic
(4) Behaviouristic
4.6 John has studied the marketing function for Isiphiwo Guest Lodge thoroughly. He
has learnt that not all factors in a SWOT analysis are of equal value. Accordingly, he
has to identify those critical factors that can have a major effect on Isiphiwo Guest
Lodge. Which one do you think he may overlook?
(1) Competitor analysis
(2) Customer analysis
(3) Co-operator analysis
(4) Customer characteristics
4.7 John and Jill should be able to form a clear picture of what they want to achieve
with the marketing of Isiphiwo Guest Lodge products and services. This picture
should be clearly set out in the form of objectives. By setting objectives they are
developing the …
(1) marketing mix.
(2) marketing policy.
(3) marketing segmentation
(4) target market.
4.8 When John and Jill decided to launch a marketing campaign, they had to compile
a marketing plan. A marketing plan refers to …
(1) the division of the total market into smaller segments with certain similarities.
(2) the gathering of information on a certain market group so that better market-
ing decisions can be made.
82
(3) increase in demand – awareness increases in the market and profit increases
(4) a detailed plan of how a product or service will be marketed.
4.11 SUMMARY
Evaluate your answers to exercise 4 with the aid of the suggested solutions in the study
349
guide and calculate your percentage. If you are not satisfied with your results, revise the
topics in chapter 4 that presented you with problems. Study the theory again and contact
your tutor or the lecturer to help you to solve the problems. Do not proceed with chapter
5 unless you are completely satisfied with your understanding of chapter 4.
If you are satisfied with your results and are sure that you have a thorough knowledge
350
ing function represents the group of activities which concerns the transfer of goods and
services from the producer to the consumer. These activities are related to the needs of
consumers and the availability of goods and services to satisfy those needs at the right
place and time, in the right form and quantity and at a reasonable price, so that as many
as possible of these goods and services can be sold. Once you understand the market-
ing function, you will have a clear idea of the importance of marketing in the business.
Specific marketing objectives must be set and marketing plans are then compiled ac-
354
cording to these objectives. These marketing plans must indicate how the business will
achieve the marketing objectives. The marketing plan is discussed as a step-by-step
process. The marketing plan, like a road map, serves to guide you to where you want to
be and indicates how you should set about getting there. By following these steps, you
can draw up a plan of action for marketing your product or services in a practical and
structured manner.
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4.12 SOLUTIONS
Question No. Answer
4.1 3
4.2 2
4.3 3
4.4 1
4.5 2
4.6 3
4.7 1
4.8 4
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Chapter 5
The operations management
Contents
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yy explain what operations scheduling entails and list the five techniques of opera-
tions scheduling
yy explain the categories of forecasting
yy explain the five Ms with the aid of practical examples
yy explain the strategies that the operations unit can consider if the capacity is
smaller than the demand
yy explain what effective scheduling entails
yy list and explain the three types of inventory cost
yy list and explain the three types of carrying cost
yy explain what the break-even point entails and how it is calculated
yy list and explain the seven factors of operations improvement
You will need to master the following key concepts in order to achieve the learning
outcomes for this chapter:
yy operations function
yy operations management
yy product/service
yy value and time
yy transformation process
yy lead time
yy performance objectives
yy lean supply and agile supply
yy operations systems
yy types of layout
yy long-term, medium-term and short-term operations planning
yy capacity planning
yy aggregate planning and master scheduling
yy operations scheduling
yy forecasting
yy five Ms
yy inventory costs
yy carrying costs
yy break-even point
yy operations improvement
Go back to your prescribed textbook and study these key concepts now.
86
5.3 A MIND MAP FOR CHAPTER 5
356
5.4 OVERVIEW
In the past, business economists used the term “production management” when refer-
357
ring to the management methods and techniques used to manufacture products. The
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problem is that not all businesses manufacture products; some offer a service. However,
in order for businesses to render a service, they have to apply a management process
that is just as strict as the processes used by businesses that manufacture products. Op-
erations management applies to all business and is a broader concept than production
management.
ActivityI 5.1
Why do business economists prefer to use the term “operations management” to “pro-
duction management”?
20Feedback
Operations management applies to all business and is a wider concept than production man-
agement. For this reason, business economists prefer to use the term “operations management”
to “production management”. Operations management therefore describes the management
process used in manufacturing businesses as well as in businesses that offer a service.
5.5 INTRODUCTION
The basic purpose of any business is to make a profit. However, for a business to make a
358
profit, it must make or sell goods or render services. All enterprises need an operations
function, whether they manufacture products, render services or sell products to the
consumers.
The purpose of the operations function is to make sure that there are goods and services
359
to sell to consumers. The operations function is responsible for the actual manufacturing
of the products or the rendering of services. In response to the demands of the consumer,
the business must make these goods and services available. For the operations function
to perform effectively, the factors of production have to be used in order to produce the
goods and services required. The operations process refers to the transformation of the
factors of production into goods and services that satisfy the needs of the consumers.
The process of transformation usually takes place in the manufacturing field. Operations
management is about change, creativity, productivity and adding value.
In producing goods and services, the economic principle should always be taken into
360
consideration. This is done with the sole aim of making sure that the required levels of
effectiveness and efficiency are achieved. Another important factor to take note of is the
interdependence of the factors of production during the production process.
88
361
processes. Such processes are technologically diverse, embracing both manufacturing (in
other words, the conversion of inputs into goods) and the provision of services. Therefore,
operations are the processes involved in creating goods and services. The purpose of
operational management is to make sure that goods and services are available to sell to
consumers. Therefore, the operations process, as stated earlier, refers to the transforma-
tion of the factors of production into goods and services that can satisfy the needs of
the consumer. The process is concerned with the conversion of raw materials or semi-
processed products into end products.
Study this section in your prescribed textbook. You will note that your textbook
discusses the following aspects:
Activity 5.2
What formula would you use to obtain an accurate quotient for productivity?
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21Feedback
Output income
Productivity =
Input expenses
Your textbook describes, under the following headings, the creative process technologies
366
In your prescribed textbook, study the creative process technologies that assist
in the transformation process carefully, and make sure that you can explain the
operations management principles that promote value and save time. In section
5.9 and 5.10 in this study guide you will find some core notes on this section.
yy The essence of any transformation process is to add value and eliminate waste.
yy This refers to the just-in-time philosophy and is also known as “lean production”.
yy It means to use less of everything and to focus only on adding value.
yy JIT systems eliminate waste, promote value-adding activities and quality, and focus
on lead-time reduction.
374 TQM
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5.8 THE TRANSFORMATION PROCESS
375
376
1 Rendering of services
377
1 Example: Unisa
378
92
Activity 5.3
Apply the transformation process to any activity you perform daily, such as cooking,
reading, exercise playing sports and suchlike.
1 PROCESS MANAGEMENT
1 Primary lead-time elements
yy Queue time – the period during which a job stays in the queue at a work centre.
yy Processing time – the actual time needed to process the job.
yy Set-up time – the time needed to prepare equipment for processing a new job.
yy Waiting time – the idle time between processing a job and its passage to the next
work centre.
yy Inspection time – the time needed to compare the actual quality with the standards.
yy Transportation time – the time needed to transport the job from one workstation to
another.
1 PERFORMANCE OBJECTIVES
yy Quality
yy Dependability
yy Speediness
yy Flexibility
yy Productivity and efficiency
yy Low cost and affordability
1 PRODUCTIVITY
yy More output with the same amount of input
yy Same level of output with using less input
1 MACRO-PRODUCTIVITY
yy This refers to a nation’s entire production – the GDP (gross domestic product).
yy GDP per capita means the total output of a country divided by its total population.
1 MICRO-PRODUCTIVITY
yy This refers to an individual enterprise’s operations.
yy It focuses on how well operations perform in terms of value, effectiveness, efficiency,
utilisation, impact and quality.
1 Two measurements
yy The ability to achieve production
yy Output income divided by input expenses
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Activity 5.4
How do you think can productivity be further improved for any business?
Feedback
22
Yes, all operational management (OM) concepts relate to optimising resources, which implies
value. Most of the OM principles relate to the well-known JIT (‘Just in time’) philosophy. Refer
to earlier discussion in this regard.
concerning the available resources. Remember that the transformation process refers to
the process by which inputs have to be converted into outputs. Normally the inputs are
a combination of the available resources, which include the production machinery, layout,
capital and raw materials. It is up to the entrepreneur to make the decision regarding the
operations strategy that the business must follow. The entrepreneur must also decide
on the operations design.
In your prescribed textbook, study the section “Operations strategy and op-
erations design”.
94
5.9.2 Types of operations system
380 Definition: The operations system refers to the method of manufacturing – how the
products are going to be manufactured.
381
382 The operations system will be determined by the types of product produced:
(a) Continuous or repetitive system
yy Mass production of standardised products
yy Repetitive – output can be counted physically
yy Continuous – output can be measured in terms of specific units
yy Manufactures only one type of product on a continuous basis for a long time
yy When products are changed, all machines must be adjusted
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5.9.3 The relationship between the operations system and the type of
layout
383
ment is quite important. Planning is chiefly concerned with the setting of objectives and
with devising the necessary plans to achieve these objectives. It is clear that the entrepre-
neur must perform certain tasks to ensure that the operation’s objectives are achieved.
Although entrepreneurs cannot afford to neglect any of their tasks, it can be argued that
in today’s highly competitive market, planning must take priority. These planning tasks
can be divided into long-term, medium-term and short-term tasks:
yy Long-term tasks. These tasks of the entrepreneur are non-recurrent. There are long
periods between one decision and another. These decisions relate to fixed capacity
planning and product planning.
yy Medium-term tasks. These tasks of the entrepreneur consist of planning the manu-
facturing quantities and organising the resources needed. This planning includes the
following:
−− aggregate planning, in which the operations manager determines the total number
of all the products that will be manufactured for the whole year
96
−− master scheduling, which is done in order to determine how much of a specific
product must be completed within a specific period of time
−− operations scheduling, which refers to the route the product takes and the se-
quence of events as it moves through the factory
−− capacity planning, which entails determining the size of the enterprise, the equip-
ment, the labour needs and the stock planning
yy Short-term tasks. These tasks of the entrepreneur usually deal with the distribution
of work and control.
During the execution of tasks it is important that consistent control should be exercised.
385
By exercising control, the entrepreneur ensures that people carry out instructions ac-
cording to plan. If instructions are not carried out according to plan, the entrepreneur
exercises control by making the necessary corrections or adjustments during the opera-
tions management process.
A production control method that is efficient in one firm may be totally inadequate in
386
another. Consequently, there is no single production control method that can be applied
in all businesses with the same degree of efficiency.
Factors which will especially affect the production control method are the size of the
387
business, the degree of detail required for control, the nature of the production process,
the types of product being produced and the nature of the market that is being supplied.
Study
In your textbook the various aspects of this section are discussed under the fol-
lowing headings:
yy T he specific objectives of demand management and demand management
activities
yy Categories of forecasting
yy The “Ms” of capacity
yy Fixed-capacity planning
yy Adapting capacity to a change in demand
yy The activities of operations scheduling
yy Forward and backward scheduling
yy Gantt charts and other techniques
yy Inventory management
yy Material requirements planning
yy Determining inventory quantities
yy Break-even analysis
Activity 5.4
97 BSM1602/1/2014–2016
23Feedback
Study the section “Operations planning and control” in your prescribed textbook.
Take note of the table in your study guide explaining the difference between
lean supply and agile supply. The figures on inventory costs and carrying costs
will also help you to understand this part of the work better.
1 Long-term planning
yy Fixed-capacity planning – the layout of the factory
yy Product planning – product development and aggregate forecasting
1 Medium- to short-term planning
yy Variable capacity planning
yy Item forecasting
yy Master scheduling
yy Operations scheduling
yy Inventory management
1 CAPACITY PLANNING
388 Definition: The capacity is the greatest possible workload that an enterprise can
handle within a certain period.
389Meaning: yy It means the maximum number of products that can be manufactured
within a certain period.
yy It means the maximum number of services that can be rendered within
a certain period.
yy It means the maximum number of products that can be kept in a
store, or the maximum number of clients that can be handled within
a certain period of time.
98
1 OPERATIONS PLANNING
391
393 Definition: This refers to the demand for a product group (range of products) during
a specific period, for example one year.
394 Meaning: The planned production of all the products that the enterprise manufac-
tures or sells for the whole year.
yy First-in-first-out
yy Last-in-first-out
yy Shortest processing time
yy Longest processing time
yy Due-date principle
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5.10.1 Objectives of demand management
yy Long-term objectives – relates to fixed capacity planning
yy Medium-term objectives – relates to aggregate demand
5.10.2 Categories of forecasting
Qualitative techniques
401
strategies:
yy differentiation of the product
yy acquire additional fixed assets
yy introduce overtime
yy introduce additional shifts
yy temporary means of production – additional staff for a certain period
yy transfer of capacity from other divisions
yy specialisation of products
yy acquire additional machines
100
407 The opposite of these strategies could be applied if the capacity is greater than the demand.
(b) Dispatching
(c) Control
(d) Expediting
yy allow a realistic schedule and allow for any essential changes and emergencies
yy allow enough time for all the activities
yy allow enough time before, between and after each activity
yy do not schedule all the available capacity of the plant
yy begin at the present and add the times of all the necessary activities
Backward scheduling
410
yy begin at the ending time and subtract the times of all the activities to arrive at the
starting point
411
412
Activity 5.5
Don’t you think that backward scheduling would be an ideal way to plan your prepara-
tion for the exams?
24Feedback
Yes, if you use the date of the examination as your milestone, you can work days backward
to see when you should start studying for the exams. This way you can plan how to study all
the modules you will be writing in the exam and accommodate bottlenecks.
102
413 Cost of insufficient stock
yy This refers to the cost of running out of stock – the operations function will come to a
standstill if there is no stock available, which implies loss in production and therefore
loss in sales.
414 Inventory timing by means of the re-order point
yy This refers to a certain level of stock at which the stock must be replenished .
yy Safety stock – the stock that must be kept to provide for unforeseen circumstances.
5.10.10 Material requirements planning
yy This is a computer-based system that determines when orders should be issued and
what the planned orders will be.
Fixed costs
Units =
423
424
preneur is on the threshold of a new world. Rapid developments in technology will affect
every aspect of the entrepreneur’s existence in the future. Because of these rapid changes
in the environment, the need for leadership and quality in every field is growing daily.
Leadership and quality have a direct influence on the success of a business. The type
426
of leadership that is applied largely determines whether the business will prosper or
fail. In practice there are numerous examples of struggling businesses that have been
transformed into successes through excellent leadership and quality products. However,
there are also many examples of successful businesses that have been ruined by poor
leadership and quality.
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Therefore, leadership and quality are the pivotal points for an entrepreneur, which can
427
cause a business to swing in the direction of either success or failure. It is good leadership
that ensures that the business objectives are achieved successfully.
Quality refers to the excellence of the entrepreneur’s product. The customers’ expecta-
428
tions of a product or service must be met and exceeded. Entrepreneurs must ensure
attractiveness, reliability, long-term dependability and lack of defects.
Your textbook uses the following headings to discuss the different aspects of operations
429
improvement:
yy Never-ending improvement through total quality management (in this section please
pay attention to total quality management as a holistic approach to quality)
yy Maintenance and replacement
yy Preventive maintenance
yy Total productive maintenance and improvement
yy Safety, health and environmental management
yy Process technology improves health and safety
yy Good housekeeping
Activity 5.6
25Feedback
Yes, leaders do have a big impact on the business. The key to survival in the new economy
is leadership. The central question regarding leadership today is whether entrepreneurs can
empower the workforce.
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EXERCISE 5
434 Read the case study and answer the following questions.
the farm for 30 years, Mr Honey decided to retire and to sell the farm. Under the leadership of
Samuel Moshomo, one of Mr Honey’s employees, 80 of his employees decided to buy the farm,
which comprises 200 hectares. They subsequently approached the Department of Land Affairs
with their idea.
In November 2001, the government bought the farm as part of its land reformation policy. The
436
land was bought for R1,2 million and the ownership of the land transferred to the 80 employees,
who became the new owners of Paardedood Farm. The new owners, under the management
of Samuel and Sarah, approached the Land Bank for a long-term loan of R380 000 to build two
greenhouses and to buy equipment such as tractors and farm implements. A further R120 000
was requested as a loan to finance their initial production costs.
The work on the farm was divided between some of the new owners, and they also employed
437
50 workers.
Paardedood Farm produces vegetables, in particular tomatoes, yellow and red chillies, pep-
438
pers, baby marrows and baby gems. Paardedood buys the seed from Hygrotech and Mayford,
and then they take the seed to P/A Nursery, which specialises in growing seedlings. It takes ± 8
weeks for the seedlings to be ready to be planted. Paardedood then prepares the soil, collects
the seedlings from P/A, takes them to the farm and plants them by hand. After ± 10 weeks, the
vegetables are ready to be harvested.
The vegetables are harvested by hand and are then also sorted by hand according to quality,
439
size, colour and appearance. Next, they are packed in plastic and then in boxes, after which the
boxes are sealed for transport to the market. Paardedood Farm sells its products to the fresh
produce markets in Johannesburg and Pretoria.
QUESTIONS
1 Multiple-choice questions
440 Choose the correct answer for each of the following questions.
5.1 Paardedood Farm should focus on important concepts relating to value and time
in operations management. JIT systems eliminate waste and promote value-adding
activities and quality. Explain the concept of JIT to Samuel Moshomo.
(1) It refers to the just-in-time philosophy and it is also known as “lean production”.
(2) It refers to the just-in-time philosophy and it is also known as TQM (total qua
lity management).
(3) It refers to the just-in-time philosophy and it is also known as quality chains
and quality circles.
(4) It refers to the just-in-time philosophy and it is also known as recycling.
106
5.2 The … refers to the method of manufacturing.
(1) operations planning
(2) operations system
(3) operations scheduling
(4) operations design
5.3 When you manufacture a limited range of products in large quantities, you will use
a … operations system.
(1) project
(2) job
(3) batch
(4) continuous
5.4 The … layout is suitable for both the job and the batch systems.
(1) process
(2) cell
(3) product
(4) fixed-position
5.5 The vegetables must look good in order to sell – they must be fresh and attractive.
To which factor of product design does this statement refer?
(1) Raw materials
(2) Design effectiveness
(3) Nutritional effectiveness
(4) Sales appearance
5.6 Macro-productivity refers to a nation’s entire production – the gross domestic pro
duct (GDP). GDP per capita means the total output of a …
(1) community divided by its total population.
(2) capital divided by its total production.
(3) company divided by its total products.
(4) country divided by its total population.
5.7 Paardedood Farm will be very busy during the holidays and Samuel and Sarah will
have to do capacity planning. Which statement best describes capacity planning?
(1) The operations manager must calculate the maximum output of the various
operations units.
(2) All people employed on the farm and involved in the operations will have to
work overtime.
(3) The capacity is the greatest possible workload that a farm can handle within
a certain period.
(4) The farm is organised according to the harvest it receives.
5.8 Paardedood Farm produces vegetables, in particular tomatoes, yellow and red chillies,
peppers, baby marrows and baby gems. These are then sorted by hand according
to quality, size, colour and appearance. Then the vegetables are packed in plastic
and boxes, after which the boxes are sealed and ready to go to the market. These
actions can be classified as:
107 BSM1602/1/2014–2016
(1) inputs.
(2) transformation.
(3) production.
(4) outputs.
5.13 SUMMARY
Evaluate your answers to exercise 5 with the help of the suggested solutions in the solu-
441
tions section. and calculate your percentage. If you are not satisfied with your results,
revise the topics in chapter 5 that presented you with problems. Study the theory again
and contact your tutor or the lecturer to help you to solve the problems. Do not proceed
with chapter 6 unless you are completely satisfied with your understanding of chapter 5.
ensure products or services of high quality at an affordable price. The way in which you
manufacture your product or create your service will determine the quality and the cost
of the end product or service. The purchasing function is responsible for providing the
operations function with the necessary means of production to manufacture the products
or to create the services of the enterprise. The quality, quantity and cost of these means
of production, as well as the time of delivery, have a direct influence on the efficiency
of the operations function. In chapter 6 we will discuss the role and importance of the
purchasing function in the enterprise.
If you are satisfied with your results and are sure that you have a thorough knowledge
444
5.14 SOLUTIONS
445 Question No. Solutions
446
5.1 447 1
448
5.2
449 2
450
5.3
451 3
452
5.4 453 1
454
5.5
455 4
456
5.6
457 4
458
5.7 459 3
460
5.8
461 2
462
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Chapter 6
The purchasing function
Contents
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yy give examples of the criteria that can be used to measure the efficiency of the
purchasing activities
yy list the six main purchasing activities
yy list and explain the steps in the purchasing cycle
yy explain the three steps that the purchasing function has to follow to determine
the purchasing needs of the enterprise
yy explain the meaning of the term “the right quality”
yy explain the influence of the quality of purchased materials on the enterprise
yy explain the methods that can be used to describe quality
yy list and discuss practically the four steps of the quality control process
yy list the three options that the purchasing function has if the quality of the delivered
production means does not comply with the set standards
yy list and explain the components of inventory costs
yy explain why inventory control is so important
yy explain how the purchasing function can determine the optimum stock level of
the enterprise
yy list and explain the two types of ordering system
yy list and explain the four steps that should be followed when selecting new suppliers
yy explain the importance of purchasing prices
yy explain the internal and external factors that influence the time at which pur-
chases are made
You will need to master the following key concepts in order to achieve the learning
outcomes for this chapter:
yy purchasing function
yy purchasing policy
yy purchasing budget
yy centralised purchasing
yy decentralised purchasing
yy purchasing cycle
yy “the right quality”
yy quality of the purchased materials
yy quality control process
yy inventory costs
yy inventory control
yy optimum stock level
yy ordering systems
yy purchasing prices
Go back to your prescribed textbook and study these key concepts now.
110
6.3 A MIND MAP FOR CHAPTER 6
463
6.4 OVERVIEW
For entrepreneurs to be able to sell their products and make a profit, they need inputs like
464
capital, employees, stock and the transformation process. Capital is acquired through the
financial function, employees through the human resources function, stock through the
purchasing function, and the transformation process through the operations function.
The purchasing function is the function that gathers all the relevant information about
465
stock and raw materials in order for production to take place. This function makes the
111 BSM1602/1/2014–2016
decisions on where to buy the stock and then initiates the process of getting the right
quantities and the required quality at the right price, right place and right time. If this
does not happen, the business will have nothing to sell and cannot make any money.
The different functions in the business complement each other. Together, they all form a
466
unit and cannot operate separately from each other. Each one is part of the business as
a whole and it is generally impossible to choose any function as being more important
that the rest. Therefore, all eight functions have to cooperate to achieve the main objec-
tive of the business.
To obtain a holistic view of the purchasing function, look at the mind map in
467
of achieving the business’s main objective. Without stock the business would have noth-
ing to sell. If it cannot do business, it cannot make a profit and therefore cannot achieve
its main objective.
In short, one of the fundamentals for the sustained existence of a business is that the right
471
quantity of goods and services of the right quality must be available to the business at the
right time and place. This is the responsibility of the purchasing function. The purchasing
function must manage the business’s purchases effectively to ensure that there is always
enough stock for the business to be able to carry out its activities.
Study this section in your prescribed textbook. In this study guide you will note
that the influence of purchasing on the other functions is also briefly discussed.
Make sure that you understand the relationship between the purchasing func-
tion and the other functions.
Activity 6.1
Do you think an effective purchasing function is advantageous for the competitive posi-
tion and image of the business?
112
26Feedback
If raw materials and other production requirements are of the right quality and are available
at the right time and place, and at a good price, the business will be able to produce products
of high quality in good time at competitive prices.
The purchasing function is responsible for buying all the means of production – raw
472
materials, stock, parts, equipment and machinery – that an enterprise needs to continue
with its operations.
and quantity of production means at the right time and place, the other functions cannot
function at optimum levels.
476 Operations
yy If there are not enough raw materials or stock of the right quality, operations cannot
produce the right quality and quantity products in time
477 Marketing
yy If the marketing function does not receive products from the operations function,
it cannot deliver the right quality products in time, which will lead to dissatisfied
consumers.
478 Financial
yy As consumers will buy fewer products there is less profit.
yy Purchasing would need to buy emergency stock on which it would most probably
not be able to negotiate prices.
113 BSM1602/1/2014–2016
481 Human resources
yy Staff will probably have to work overtime once the stock arrives in order to compensate
for the backlog in production.
482 Information
yy Emergency orders will involve more information on suppliers as well as more paperwork.
Activity 6.2
Do you think the purchasing function can play an important role in the profitability and
survival of a business?
27Feedback
Definitely, if the purchasing function does not fulfil its responsibilities by supplying the right
quality and quantity of production means at the right time and place, the other functions
cannot function at optimum levels. This will result in extra expenditure by the other functions
and these expenses have to be funded from the profit the business makes. If the business can-
not make a profit, it will not survive.
planning, organising, leading and controlling to create prosperity in the different busi-
ness functions. In this way, the needs of consumers can be satisfied and the objectives
of the business achieved.
Now study this section in your prescribed textbook. It gives you a brief overview
of the way the general management principles are applied in the purchasing
function. Pay special attention to the diagram of the management principles
of the purchasing function below.
114
484 Planning
yy Formulate purchasing objects
yy Formulate purchasing policy and procedures
yy Budget for purchasing
485 Organising
yy Centralisation versus decentralisation
yy Purchasing personnel
486 Control
yy Evaluate performance of purchasing management
487
6.10 PLANNING
1 (a) Formulate purchasing objectives
1. Continuity
yy The right production means must be available at the right time and place.
Preventive measures:
yy use good reliable suppliers
yy stock control – order in time
2. Quality
yy Quality of raw materials directly influences the quality of end products.
yy Production means must comply with quality standards.
115 BSM1602/1/2014–2016
3. Effective stock control
yy Eliminates wastage, duplication and ageing of stock
4. Alternative suppliers
yy Must not be dependent on one supplier.
yy Use more than one supplier for the same production means.
yy This will ensure that another supplier can deliver the orders if the usual supplier
cannot.
Activity 6.3
Can you give one example of how a business can maintain good relations with its suppliers?
28Feedback
One way of maintaining good relations with suppliers is to pay for goods and services regularly
and on time. Remember that suppliers are also businesses that are dependent on a regular
income for their own survival.
yy Marketing must inform operations in time of the products it will need – the
quality, quantity, delivery dates.
yy Operations must inform purchasing in time of its need for raw materials – what
is needed when, the quality, quantity and cost.
yy Purchasing must inform financial of its need for capital to buy the raw materials.
yy Financial must ensure that the funds are available.
1 (c) Budgeting
yy Starts with a sales forecast from the marketing function – must indicate the expected
sales.
yy Operations determines what it requires to produce these products.
116
yy Purchasing must then determine its purchasing needs according to the needs of the
operations function.
yy The financial function must then approve the budget and include it in the general
budget of the enterprise.
Activity 6.4
Draw up a budget for your personal expenses for the next month.
29 Feedback
By drawing up a personal budget you will know beforehand how much money you must keep
aside for necessities and how much you can use for your own entertainment.
6.11 ORGANISING
1 (a) Centralisation versus decentralisation
1. Centralisation
yy One purchasing function for the whole enterprise.
Advantages
yy Buy in bulk – quantity discounts
yy Good relations with suppliers
Disadvantage
yy Extensive process – buy all the requirements of the different branches.
2. Decentralisation
yy Every branch has its own purchasing function.
Advantage
yy When raw material needs differ from branch to branch it is easier for each branch
to buy its own raw materials.
Disadvantage
yy Every branch has its own policy and procedures.
3. A combination
yy The centralised purchasing function formulates the policies and buys common
requirements such as equipment that is needed by all the branches.
yy The decentralised purchasing function buys the specialised needs and small
purchases of the individual plant.
117 BSM1602/1/2014–2016
1 (b) Purchasing personnel
yy This refers to the status and position of the purchasing personnel in the business.
6.12 CONTROL
yy The performance of purchasing management should be measured against set standards.
yy Standards could include past performance, other business units, or other businesses.
yy The process of comparison is called “benchmarking”.
1 The control process
(a) Areas that will be included in the performance evaluation
yy Are purchasing policies, procedures and practices in order?
yy Does the purchasing manager have adequate knowledge and skills to lead the
purchasing function?
yy Are training and development plans, procedures and programmes available?
yy What is the state of the relationships and cooperation between the purchasing
function, the suppliers and the other functions of the enterprise?
yy How do suppliers feel about the purchasing function?
cycle as the elements of the purchasing process, or the purchasing procedure. Some of
these activities are mutually dependent and carried out at the same time.
The purchasing activities form the core of this chapter, and it is therefore impor-
tant that you study this section in your prescribed textbook. This study guide
also provides you with some core notes on this section. Make sure that you use
these core notes to make your own summary of the section.
490 You will note that your textbook discusses this section under the following headings:
yy Quality of purchased goods
yy Purchasing quantities and inventory costs
yy Selection of suppliers
118
y Purchasing prices
y Timing of purchases
491
119 BSM1602/1/2014–2016
(d) Placing an order
Complete an order form:
y Information on the order form includes the date, what is ordered and in what
units, quantity, quality, vat, date of delivery, reference number.
Activity 6.5
120
6.15 PURCHASING QUALITY
(a) What is quality?
yy Quality represents the features and characteristics of a product that has the ability
to satisfy stated or implied needs.
121 BSM1602/1/2014–2016
(d) Methods to describe quality
y Specifications
y Standardisation
y Other forms such as market grades, brands, SABS marks, drawings and samples
y Operations manager must specify the minimum standards for a specific means
of production.
3. Report deviations
y Purchasing must inform operations about the deviations and explain the extent
of the deviations.
122
(b) Inventory costs
123 BSM1602/1/2014–2016
2. Ordering systems
492
4. Monitor suppliers
yy Follow up – did they keep to the terms of agreement?
124
6.19 TIMING OF PURCHASES
yy The timing of purchases influences the continuity of the operations and marketing
functions.
2. Advanced purchasing
yy Purchase of more materials than required, ensuring future availability.
3. Minimum purchases
yy Purchase only for the immediate need – inventory is kept to a minimum.
yy No safety stock is held and the business runs the risk of running out of stock.
6.20 SELF-ASSESSMENT
To test and evaluate your knowledge of this chapter, you can now do the following
activities:
(i) Complete the self-assessment in the study guide. Remember that it is important that
you complete the exercise without looking at the solutions in the answers section.
This is the only way you can test your knowledge.
(ii) Do the self-evaluation question at the end of chapter 6 in your prescribed textbook.
EXERCISE 6
493 Read the case study and answer the questions that follow.
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1 Case study: Kwapeng’s Café
In 1994, Amos Kwapeng lost his job as a shop assistant at Pick ‘n Pay. In order to make a living, he
494
started a small spaza shop. He operated this shop from his garage at his home in Mofolo North,
Soweto. At that stage, he concentrated on selling basic groceries only, such as coffee, sugar,
tinned food, candles and paraffin.
Since there was no other spaza shop in the immediate vicinity and the nearest supermarket
495
was 8 kilometres away in Dube, the demand for his products became so high that his premises
became too small. Kwapeng consequently decided to move to bigger premises. He found suit-
able premises at a small centre in the same neighbourhood.
Kwapeng is now selling a wide range of products, such as a variety of groceries, fresh fruit and
496
vegetables, fresh bread, cool drinks and magazines. His target market consists of people in
the local community of Mofolo North and includes housewives, teachers, road workers and
schoolchildren.
Kwapeng buys his stock from wholesalers such as Metro and Trade Centre and uses his bakkie
497
to transport it to the shop. The fruit and vegetables are bought from the fresh produce market
in Johannesburg. He buys the bread from a bakery in Johannesburg, and the agreement is that
the bakery will deliver daily. However, Kwapeng is experiencing problems with this particular
supplier, as the bakery is not very reliable. Because the bakery delivers the bread late and some-
times not at all, he realises he will have to find another bread supplier.
QUESTIONS
1 Multiple-choice questions
6.1 Kwapeng is responsible for the purchasing function and if this function does not fulfil
its responsibilities by supplying the right quality and quantity of production means
at the right time and place, the other functions cannot function at optimum levels.
This has a negative effect on the image of the enterprise. If the image of Kwapeng’s
Café is negative, which function does it affect?
(1) Operations function
(2) Marketing function
(3) Public relations function
(4) General management
6.2 It is crucial that the purchasing function of Kwapeng’s Café be well managed. Kwa
peng therefore needs to formulate purchasing objectives, a purchasing policy and
purchasing procedures, and compile a budget for purchasing. During which phase
should these activities be done?
(1) Planning
(2) Organising
(3) Leading
(4) Control
126
6.3 At Kwapeng’s Café, purchasing activities are carried out in a series of logical steps,
forming a cycle also known as the “elements of the purchasing processes” or the
“purchasing procedure”. Steps one to four involve the following steps:
−− determine the need
−− select suppliers
−− determine the price and conditions
−− place the order.
6.4 Kwapeng should weigh up costs of keeping stock versus the costs of having insuf-
ficient stock and then determine from this how much “safety stock” should be kept
to provide for unforeseen circumstances. This statement refers to …
(1) ordering systems.
(2) evaluating and selecting suppliers.
(3) the timing of purchases.
(4) inventory control.
6.5 At Kwapeng’s Café, purchasing activities are well organised and handled mainly by
Kwapeng. The purchasing function is organised according to a certain method.
This method can be called ...
(1) decentralisation.
(2) a combination of centralisation and decentralisation.
(3) purchasing procedure.
(4) centralisation.
6.6 The purchasing budget starts with a sales forecast which is supplied by the …
function.
(1) financial
(2) marketing
(3) operations
(4) procurement
6.7 The first step that Kwapeng’s Café has to follow when they select their suppliers,
would be to …
(1) monitor suppliers
(2) set the criteria for evaluating suppliers.
(3) compile a list of potential suppliers.
(4) evaluate and select the suppliers.
6.8 Kwapeng’s Café has been buying bread from a local bakery. Which objective of the
purchasing function was ignored?
127 BSM1602/1/2014–2016
(1) The “just-in-time” principle
(2) To maintain good relations with suppliers
(3) To apply effective stock control
(4) To have alternative suppliers
6.21 SUMMARY
Evaluate your answers to exercise 6 with the aid of the suggested solutions in section
498
6.22 below and calculate your percentage. If you are not satisfied with your results, revise
the topics in chapter 6 that presented you with problems. Study the theory again and
contact your tutor or the lecturer to help you to solve the problems. Do not continue
with chapter 7 unless you are completely satisfied with your understanding of chapter 6.
If you are satisfied with your results and are sure that you have a thorough knowledge
499
The concept of business functions refers to a group of similar and related activities which
500
are grouped together for practical and analytical reasons. Accordingly, all those activities
related to purchasing should be included in the description of the purchasing function.
In other words, the purchasing function includes the performance of all those activities
that provide what a business requires.
It should be clear from chapter 6 in both your textbook and your study guide that the
501
purchasing function is vitally important for the successful operation of the business and
is therefore as important as all the other business functions.
If the purchasing function does not fulfil its responsibilities, the other functions of the
502
The operations function cannot produce the right quality products in time and therefore
503
the marketing function cannot deliver the right quality products in time.
The enterprise also needs human resources to manufacture the products/create the
504
services and to sell the products/services to the consumers. A competent and motivated
labour force is a prerequisite for any successful enterprise, regardless of the size of the
enterprise.
If the human resources are incompetent and demotivated, it will lead to dissatisfied
505
consumers, less profit, a negative effect on the image of the enterprise, which ultimately
influences the survival and existence of the enterprise in the long term. Without the pur-
chasing function it would not be possible for the business to achieve its main objective
— to maximise its profit (maximisation of wealth).
128
6.22 SOLUTIONS
Question No.
507 Solutions
508
6.1 509 3
510
6.2
511 1
512
6.3
513 1
514
6.4 515 4
516
6.5
517 4
518
6.6
519 2
520
6.7 521 2
522
6.8
523 3
524
129 BSM1602/1/2014–2016
Chapter 7
The human resources function
Contents
130
yy distinguish between direct and indirect remuneration and give examples of each
yy explain the four guidelines that can be followed when you have to decide on the
salaries of your employees
yy list three other factors that will play a role in the remuneration of your employees
yy explain the other aspects that the human resource manager should look at when
employees are paid
yy list the information that should be included on a payslip
yy explain how contractors differ from ordinary employees with regard to the method
of payment, the contract and rights and advantages
yy explain what labour relations entail
yy explain what personnel administration entails
yy list the contents of a policy document
yy explain the importance of good working conditions
yy explain the difference between unsafe conditions and unsafe practices
yy explain the two groups into which the causes of accidents can be placed
yy explain the general issues that relate to working conditions
yy explain the subjects that relate to working conditions
Key concepts
You will need to master the following key concepts in order to achieve the learning
outcomes for this chapter:
yy human resource function
yy job analysis
yy job description
yy job specification
yy selection process
yy employment
yy placement
yy orientation
yy human resource provision
yy training
yy development
yy training programme
yy human resource maintenance
yy direct remuneration
yy indirect remuneration
yy salaries
yy employees
yy payslip
yy contractors
yy labour relations
yy personnel administration
yy policy document
yy working conditions
yy unsafe conditions
yy unsafe practices
Go back to your prescribed textbook and study these key components now.
131 BSM1602/1/2014–2016
7.2 A MIND MAP FOR CHAPTER 7
525
7.3 OVERVIEW
The human resource function exists in all businesses, irrespective of their size. This func-
526
tion is the function which is primarily responsible for the wellbeing of the business’s
employees. The entrepreneur plays a very important role in all the activities that make
up this function.
The human resource function can be described as all those activities in the business
527
If you analyse the description of the human resource function, you will see that it consists
528
To obtain a holistic view of the human resource function, look at the mind
530
7.5 INTRODUCTION
yy The human resource function differs from the other functions of the enterprise in the
sense that the tasks and activities that are performed in this function form part of all
the other functions.
yy An enterprise needs personnel in order to be able to carry on its business.
yy The objective of human resources is to ensure that the business employs the right
number and type of employees at the right time.
yy The human resource manager is responsible for the optimal use and maintenance or
retention of personnel.
yy This includes the training and development of personnel and maintenance through
fair remuneration, maintaining good labour relations and personnel administration
and providing good working conditions.
need to be filled in order to accomplish the main objective of the business. Aspects to
note are human resource planning; recruitment; selection, employment and placing; and
orientation, human resource provision and the law.
Before you continue to study this section, let’s look at the diagram of human
resource provision below.
133 BSM1602/1/2014–2016
534
the business staffing requirements over a specific period and formulating plans to meet
these requirements.
1 Recruitment
Recruitment involves obtaining applicants for vacant or new positions. Usually the business
536
has a policy which determines whether internal or external recruitment should be used.
tion as a guideline to make a provisional selection of the candidates, and finally compiles
a shortlist of individuals who meet the minimum requirements for the position.
Take note of the different steps in the selection procedure discussed in your
prescribed textbook as well as the core notes in this study guide.
through which new employees are given information about the objectives of the business
and the role that they are to play in the business to achieve these objectives. Induction, on
the other hand, involves transmitting relevant information to new employees regarding
their department and position, which enables them to work with self-assurance. There-
fore, orientation is aimed at the business objectives, whereas induction is aimed at the
particular departments and positions in which employees find themselves.
Activity 7.1
To be able to plan an effective human resource function, what information does the
entrepreneur need?
134
30 Feedback
The entrepreneur needs comprehensive information about the job description and job speci-
fication for each position in the enterprise. This study guide provides you with a diagram on
job analysis, indicating the difference between a job description and a job specification.
Activity 7.2
Do you know the difference between a job description and a job specification?
31Feedback
A job description is a list of all an employee’s duties and responsibilities. A job specification
describes the qualifications, skills and experience that the employee should have to perform
the duties effectively.
135 BSM1602/1/2014–2016
(b) Job description and job specification are important aids for
yy appointing new employees
yy control purposes
yy merit assessments
yy promotions
yy identification of training needs
yy establishment of salary scales
7.8 RECRUITMENT
Definition: Recruitment refers to all the activities carried when searching for and inviting
539
potential employees and suitable people to apply for the posts available
in the enterprise.
540
136
542 Information that should be included in the advertisement
y job title
y salary
y important features of the work
y requirements of successful candidate
y fringe benefits
y application procedures
y the person in charge of the applications
y a brief description of the business
7.9 SELECTION
543 Definition: Selection is the process through which the most suitable person for a vacant
post is chosen from among the applicants for the post.
3. Selection tests
y The type of test will depend on the type of job – intelligence, skills, personality.
Activity 7.3
Feedback
A selection interview is a discussion between the applicant and the employer aimed at obtain-
ing further information about the applicant. Simultaneously, the interview gives the applicant
the opportunity to obtain more information about the business and the job in question.
137 BSM1602/1/2014–2016
4. Check references
y Check references from previous employers and referees to determine the cred-
ibility of the applicant.
6. Medical examination
y Candidate must be physically suitable for the job.
8. Final offer
y Make an offer – giving the starting date, salary and benefits, time to answer
y Conclude contract
9. Appointment
y When the applicant accepts the offer, top management authorises the appointment.
y Human resources finalises all administrative matters.
138
545 Placement
yy The employee is placed in the post applied for.
yy This also happens when an employee is promoted, transferred or demoted.
7.11 ORIENTATION (INDUCTION)
546 Definition: Orientation is the process through which employees are introduced to
the enterprise, its procedures, environment and work situation and to the
co-workers, subordinates and superiors.
yy the activities of the department and how it supports the business as a whole
yy the employee’s duties and responsibilities
yy how, where and when employees are paid
yy working hours, tea times
yy leave procedures, dress code, recreation facilities
Activity 7.4
Visit the Department of Labour website at www.labour.gov.za to get the latest updated
information on legislation.
Your prescribed textbook covers the aims of training and development and
the drawing up of a training programme.
1 TRAINING
550 Definition: Training is intended to change employees’ working habits and levels of job
performance to make them more effective in their current posts.
Training focuses on the technical skills that an employee needs in order to be able to
551
perform a task. The aim of training is therefore to empower a person to perform as ef-
fectively and as productively as possible.
Development focuses on the experience and skills that entrepreneurs and their managers
554
need so as to perform their tasks. During the development process, managers or potential
managers are groomed to carry out the management task effectively.
In your own words, write down why training and development are not the same thing
and should not be confused
32 Feedback
141 BSM1602/1/2014–2016
4. Present the training or send employees for training.
5. Evaluate training
y Determine whether objectives have been achieved.
y If not, reassess the trainer, method, objectives and standards.
business which contribute to making the work situation so beneficial to the employees
that they will not resign. These activities include remuneration, good labour relations,
personnel administration and working conditions.
557
other input.
Study the diagram on remuneration below and note the difference between
direct and indirect remuneration.
142
559
2. Aspects to consider
(a) Tax
143 BSM1602/1/2014–2016
yy Employees should be registered with the Receiver of Revenue.
yy Each employee should have a tax number.
yy The employer must deduct tax from salaries and pay this monthly to the
Receiver.
yy Amounts deducted should be according to tables received from the
Receiver.
yy At the end of the financial year (28 February) each employee should receive
an IRP5 form.
yy An IRP5 form serves as a summary of the employee’s income and deduc-
tions for the past year.
(b) Payslips
A payslip must contain the following information:
yy employer’s name and address
yy employee’s name and occupation
yy period for which payment is made
yy total salary or wage
yy the actual amount paid
yy overtime if applicable
3. Contract workers
(a) Characteristics
yy These workers do not work for a salary, they are contracted to do a certain
job.
yy They get paid for what they have done – similar to a piece-wage system.
yy Remuneration is directly related to the amount of work done.
(c) Disadvantages
yy These workers do not have the same rights and advantages as employees.
yy They do not have paid leave, medical aid, pension or insurance.
employee, the employer and the state. It is important that the necessary rules, systems
and procedures are in place to control this multifaceted relationship.
144
yy Labour relations is concerned with the drawing up, maintenance, change and adminis-
tration of rules, control processes, ideologies, interaction and relations in the workplace.
yy Threefold relationship between the government, the management and labour
Unsafe practices
yy refers to accidents caused by human error
145 BSM1602/1/2014–2016
Examples of unsafe practices
yy working too fast
yy working without authorisation
yy working on moving equipment
yy moving in unsafe places
yy refusal to wear protective clothing
2. Work factors
yy Unsafe conditions
yy Inadequate working standards
(d) Legislation
1. General issues
Human resources should comply with various acts:
yy Basic Conditions of Employment
yy Compensation for Occupational Injuries and Diseases
yy Employment Equity
yy Labour Market Research and Statistics
yy Labour Relations
yy Occupational Health and Safety
yy Skills Development
yy Unemployment Insurance
2. Subjects
Human resources should be well informed about the following subjects:
yy maternity benefits
yy annual leave
yy registration
yy payslips
yy accidents
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Activity 7.6
Feedback
33
Collective bargaining is the process by which employees and their representatives negotiate
with management and come to an agreement on remuneration, conditions of service and
other working conditions.
7.18 SELF-ASSESSMENT
To test and evaluate your knowledge of this chapter, you can now do the following
activities:
(i) Complete the self-assessment in the study guide. Remember that it is important that
you complete the exercise without looking at the solutions in the answers section.
This is the only way you can test your knowledge.
(ii) Do the self-evaluation question at the end of chapter 6 in your prescribed textbook.
EXERCISE 7
564 Read the case study and answer the following questions.
our daily lives around Eskom’s load shedding. This also has a serious effect on the business sec-
tor – without power no manufacturing, trading or service delivery can take place. Businesses
have to choose to either close their doors for the period of load shedding and, by doing so,
suffer losses of thousands of rand, or to provide their own power by means of using their own
generators. Businesses that sell perishable products, such as meat, dairy products and frozen
foods, can hardly afford to be without power for three to four hours.
However, the old proverb of “one man’s death is another man’s breath” applies to the above situ-
566
ation as well. When Eskom announced their plans for load shedding, Martin Crous immediately
identified an opportunity to sell generators to households and small businesses. After speaking
to some of their acquaintances and shop owners in their suburb, Martin and his wife, Jessica,
came to the conclusion that the biggest demand would be for small generators that could pro-
vide power for an average household’s basic needs for at least four hours, and a slightly bigger
one for small businesses.
Martin and Jessica decided to import generators from China and started their own enterprise,
567
Power for the Nation. They registered the enterprise as a company. As they only needed some
147 BSM1602/1/2014–2016
office space and could use their garage to store the generators, they decided to run the enter-
prise from their home in Randburg. They invested R100 000 of their own savings and applied
for a loan of R100 000 to finance the import of their first consignment of generators. They also
applied for vehicle financing of R200 000 to buy a small second-hand truck.
Jessica would be responsible for placing the orders with their supplier in China and handling
568
the import arrangements. As soon as the supplier in China receives the order, he manufactures
the generators and then uses a shipping agent to load a container to be sent by ship to Durban
harbour. The shipping agent then receives a bill of lading from the supplier and informs Jessica
about four days before the consignment arrives in Durban harbour, so that she can pay the sup-
plier. As soon as the supplier in China receives the money, he issues a release note to the ship-
ping agent, which then hands it over to the clearing agents to issue a bill of entry. Power for the
Nation then receives the bill of entry and all other proof of ownership, and the clearing agents
release the consignment. The generators are then transported by road to Johannesburg by an
independent transport agency. As soon as the generators arrive in Randburg, Martin unpacks
the container to inspect the quality of the generators.
On arrival of the first consignment all the generators were sold within the first week, and they
569
also had a waiting list of clients who had placed orders. The prices of their generators are slightly
higher than those of their main competitors. Since big hardware stores and chain stores such
as Builders Warehouse, Dion and Game, can order in bulk, they are able to ask lower prices.
The competitive advantage of Power for the Nation, however, is that its selling price includes the
cost of delivery and installation. Accordingly, Martin delivers the generators personally to the
clients and does the installation, should the need arise. Martin is a qualified electrician and went
to China for training in servicing and repairing the generators. An ordinary generator needs to
be serviced after every 1000 hours. Part of the purchasing agreement with the manufacturer in
China is that Martin receives free spare parts equal to 10% of the monetary value of each con-
signment of generators. Additional spare parts can be delivered to Oliver Tambo International
Airport within 36 hours.
Since Martin and Jessica started importing these generators six months ago, the enterprise has
570
grown to such an extent that they have had to rent a warehouse in an industrial area for stor-
age. Moreover, their neighbours had started to complain about the noise that Martin makes
when testing the new generators before he delivers them. He also used to repair some of the
generators at home.
Eventually Martin and Jessica were no longer able to handle the workload on their own. Jessica
571
was taking the orders from clients, placing the orders with their supplier in China and handling
all the import arrangements. She needed someone to make appointments for the servicing and
repairing of the generators and to handle the general administrative work of the enterprise.
Martin was so busy with the delivery and installation of the generators that he did not have time
to attend to the requests for servicing and repair. They decided to appoint four new employees
– two technicians to help Martin with the servicing and repairing of the generators, one person
to manage the stock in the warehouse and an administrative assistant to help Jessica with the
orders for the services and repairs and to do record keeping.
As Power for the Nation places orders when they receive orders from their clients, it means
572
that they have a guaranteed income at the end of each transaction. Clients have to pay for the
generators as soon as they are delivered and installed, so that the enterprise can have enough
cash to pay for the next consignment from China.
148
The need for alternative power will definitely not decline in the near future, since Eskom has
573
already indicated that there is no short-term solution to the shortage of electricity in South
Africa. However, Martin and Jessica are aware of the fact that, if they want to survive over the
long term, they will have to extend their target market to other suburbs as well. This means that
they will have to launch a marketing campaign to make potential consumers in neighbouring
suburbs aware of their products and services.
QUESTIONS
1 Multiple-choice questions
7.1 At Power for the Nation, four new employees were appointed: two technicians, one
person to manage the stock in the warehouse and an administrative assistant. When
Martin and Jessica advertised the positions, the advertisement had to describe the
duties, authorities and responsibilities of a person in a particular work situation. All
these matters are included in a ...
(1) job evaluation.
(2) job analysis.
(3) job description.
(4) job specification.
7.2 Martin and Jessica appointed four new employees – two technicians, one warehouse
manager and one administrative assistant. They had to select the most suitable
candidate for each of these positions. The purpose of … in the selection process is
to determine the credibility of the applicant.
(1) conducting a preliminary (provisional) interview
(2) conducting the necessary tests
(3) checking the applicant’s references
(4) choosing the most suitable candidate
7.3 Which one of the following examples would be the first step that Martin and Jes-
sica had to follow when they had to determine the salaries of the new employees?
(1) Comparing the value of the post in other enterprises with the value of the post
in their enterprise.
(2) Placing the posts in sequence from the lowest level to the highest level.
(3) Arrange posts in sequence from lowest to highest level (top level).
(4) Looking at the salaries of similar posts in other enterprises.
7.4 Because of new developments in the enterprise, more people will have to be em-
ployed. The human resources manager must firstly determine what type and how
many employees are needed in order for the enterprise to expand or continue
running effectively. He or she must gather information on all vacant positions. The
process of gathering information is known as the composition of a ...
(1) job survey.
(2) job analysis.
149 BSM1602/1/2014–2016
(3) job description.
(4) job specification.
7.5 The process by which the most suitable person for a vacant post is chosen from
among all the applicants for the post is called the selection process. There are nine
steps in the selection process. The first three are to:
−− conduct a preliminary selection interview
−− complete an application form and
−− do selection tests.
What is the fourth step?
(1) Conduct an employment interview.
(2) Arrange for a medical examination.
(3) Check references.
(4) Give the final offer.
7.6 Martin is in charge of servicing and repairing the generators and he supervises
the two technicians. He has to ensure that the two technicians wear the correct
protective clothing and eyewear when working on the generators. By so doing, he
adheres to the …
(1) Occupational Health and Safety Act.
(2) Compensation for Occupational Injuries and Diseases Act.
(3) Basic Conditions of Employment Act.
(4) Labour Relations Act.
7.7 Which one of the following examples would not be included in the policy docu-
ment for Power for the Nation?
(1) Conditions of service
(2) Labour Relations
(3) Grievance procedure
(4) Disciplinary procedure
7.8 Martin will show the two technicians how to service the generators, and to do re-
pairs. This is an example of …
(1) orientation.
(2) training.
(3) development.
(4) induction.
7.19 SUMMARY
Evaluate your answers to exercise 7 with the aid of the suggested solutions at the end
574
of this chapter and calculate your percentage. If you are not satisfied with your results,
revise the topics in chapter 7 that you experienced problems with. Study the theory again
and contact your tutor or the lecturer to help you to solve the problems. Do not proceed
with chapter 8 unless you are completely satisfied with your understanding of chapter 7.
150
If you are satisfied with your results and are sure that you have a thorough knowledge
575
The growth and development of an enterprise depends not only on the owner of the
576
enterprise, but also on the employees. The employees must enjoy their work and be loyal
to the enterprise. The enterprise must appoint the right people and manage them in
such a way that they will be productive and eager to perform their duties. The aim of the
human resource function in a business is not only to recruit, select and employ suitable
employees but also to develop, train and educate existing employees. This is essential
to make sure that employees fulfil their potential.
function provides information to all the other functions of the enterprise to enable them
to make the right decisions and to ensure that the enterprise functions as a system. In
chapter 8 we will discuss the importance of information as well as the duties of the in-
formation function.
7.20 SOLUTIONS
Question No. Solution
7.1 2
7.2 3
7.3 4
7.4 2
7.5 3
7.6 1
7.7 2
7.8 2
151 BSM1602/1/2014–2016
Chapter 8
Information management
Contents
152
yy list the two methods of filing
yy list the four methods of filing paper documents and give a short description of
each method
yy list the four methods of mechanical filing and give a short description of each
method
yy list the six ways in which files can be classified and arranged and give a short
explanation of each method
yy explain how records must be prepared before they can be filed
yy list four tips for effective filing
yy explain the purpose and importance of financial record keeping
yy list the three financial registers with which all businesses must start and give an
explanation of each financial register
yy list and give a short explanation of the other seven accounting books that can
be used
yy explain how incoming and outgoing mail should be handled
yy list the two components of telecommunication
yy list and explain the nine electronic modes of communication.
yy list five advantages of using email
yy give three advantages of the use of computers in an enterprise
You will need to master the following key concepts in order to achieve the learning
outcomes for this chapter:
yy information management
yy information
yy data
yy information processing system
yy filing
yy mechanical filing
yy financial record-keeping
yy financial registers
yy incoming mail
yy outgoing mail
yy telecommunication
yy electronic modes of communication
yy e-mail
yy computers
Go back to your prescribed textbook and study these key components now.
153 BSM1602/1/2014–2016
8.3 A MIND MAP FOR CHAPTER 8
578
8.4 OVERVIEW
Previously the information management function was usually known as the administrative
579
function and the secretarial function. In those days the duties of a secretary consisted of
general office duties such as filing or dealing with post. However, the business world of
the entrepreneur has changed completely from the business world of a few years ago.
Today’s entrepreneurs manage in an economy of ideas, the new economy.
For this reason the information management function has also changed. Today, the in-
580
154
To obtain a holistic view of the information management function, look at
581
8.6 INTRODUCTION
yy The information management function is mainly concerned with the provision of us-
able information to all the users of that information (decision makers).
yy This function provides a service to all the other functions of the enterprise by supply-
ing information with which informed decisions can be made.
yy This function also entails ordinary administrative tasks such as the handling of mail,
filing, telecommunication services, printing and copying, certain aspects of bookkeep-
ing, costing, managing budget systems and keeping business statistics.
yy The size and type of business will determine the extent of the administrative tasks.
Activity 8.1
In your own words, write down five points explaining why you think information is very
important for any business
34Feedback
in order for the entrepreneur or manager of the business to make informed decisions.
Without this information, the correct decisions cannot be made. The key consideration
must always be to have the appropriate information available in an interpretable format.
155 BSM1602/1/2014–2016
In this regard the entrepreneur or manager must first define what information is required
and to what extent this can be provided by the business’s information system. Secondly,
the entrepreneur or manager must determine in what way unstructured information can
be obtained from both inside and outside sources. Thirdly, the entrepreneur or manager
must be aware of the structure of different channels of information in the business.
Resources Products
Data resources Product descriptions, customer records, employee files, inventory
databases
Hardware resources Machine – computers, video monitors, magnetic disk drives, print-
ers, optical scanners
Media – floppy disks, magnetic tape, optical disks, plastic cards,
paper forms
Software resources Programs – operating system programs, spreadsheet programs,
word processing programs, payroll programs
Procedures – data entry procedures, error correction procedures,
payslip distribution procedures
People resources Specialists – systems analysts, software developers, system
operators
End-users – anyone else who uses information systems
Network resources Communication media, communication procedures, network ac-
cess and control software
Information Management reports and business documents using text/graphic
products displays, audio responses and paper forms
Information
Definition: Information is data that has been processed, so that it can be used in
a specific situation (in decision making).
156
8.9 THE STAGES OF PROCESSING INFORMATION
585
(b) Processing
The information processing system
586
587
157 BSM1602/1/2014–2016
yy Data can be processed mechanically or by hand.
yy The steps that are followed for mechanical processing and manual processing
are the same – inputs, processing, outputs.
yy collection of data
yy processing of data
yy storing and retrieving data
yy distributing information
yy discarding information
In this study guide you will find a diagram and short notes that will help you to
understand the stages of information processing.
Activity 8.2
What factor distinguishes between data and information? Can you provide an example
of data and an example of information?
Feedback
35
Data is raw, unprocessed figures that do not make much sense by themselves. Information is
data that has been processed and summarised in order to give a statistical and logical indi-
cation of progress or the result of an activity. Examples of data: sales receipts, delivery notes,
consumer questionnaires. Examples of information: total sales for a period, number of specific
stock items received, results of consumer surveys.
1. Inputs
Before processing can take place
yy all the relevant data must be collected
yy it must first be made usable through classification, grouping and sorting.
Example
yy Before the year mark for a student can be calculated, the marks for all three
assignments should be collected, as well as the criteria according to which
the year marks are calculated.
2. Processing
yy Processing can take place by making calculations, drawing comparisons,
doing evaluations, making summaries and creating graphics.
Example
yy The actual calculation of the year mark takes place.
158
3. Outputs
yy Outputs are the result of processing.
yy It refers to processed data (information) that can be used in decision making.
yy It can be in the form of reports, summaries or statements.
Example
yy The final year mark that can be sent to the student.
1 Main systems
yy Transaction processing systems
yy Decision support system
yy Management information system
yy Executive support system
1 Additional systems
yy Systems for each function
yy Supply chain management
yy Customer relationship management
Activity 8.3
159 BSM1602/1/2014–2016
36Feedback
A SCM or a supply chain management system assists the business in managing its relationship
with suppliers to optimise the planning, sourcing, manufacturing and delivery of products
and services. These systems provide information to help suppliers, purchasing organisations,
distributors and logistics companies coordinate, schedule and control business processes for
procurement, production, inventory management and the delivery of products and services.
Study this section in your prescribed textbook under the following headings:
Below you will find a summary of the different internal and external interest groups.
Make sure that you understand the difference between external information needs
and internal information needs.
Marketing
yy Information on consumers – their needs and preferences
yy Information about products, prices, quality
yy Competitors
yy Target market and market share
160
Purchasing
yy Information about suppliers – their prices, quality, quantity
yy Stock needed
yy Stock levels
yy Delivery dates
Operations
yy Production volumes
yy Delivery dates
yy Cost of raw materials
yy Quality of products needed
Human resources
yy Human resources needs
yy Salaries
yy Labour unions
yy Training needs
Financial
yy Profitability, liquidity and solvency
yy Capital needs and budgets
yy Capital sources
yy Interest rates
Public relations
yy Image of the enterprise, public opinion and interest groups
yy Important events
yy Opportunities for sponsorships and donations
yy Publicity
(b) Employees
yy Conditions of employment
yy Leave procedures
yy Salary increases
yy Job security
(b) Suppliers
yy Creditworthiness
yy Ability to pay accounts on time (liquidity)
161 BSM1602/1/2014–2016
(c) Consumers
yy Products
yy Prices
yy Promotions
(d) Government
yy SARS needs information on your profit for tax purposes
yy UIF needs information on your deductions and contributions to the unemploy-
ment fund
Activity 8.4
Why would an external interest group, such as a supplier, require specific information
of your business?
37Feedback
External interest groups, such as a supplier, might require information on you business’s cred-
itworthiness (ability to get loans) and its ability to pay accounts on time (liquidity) before the
supplier will deliver goods and services to your business on credit. The supplier needs ensure
that you will be able to pay for goods and services delivered to your business.
in your textbook under the following headings (make sure that you can distinguish be-
tween these subsystems):
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590
1 FILING
(a) Aspects that determine the method of filing
yy The needs of your business
yy System must be able to grow and expand with the business
yy System must work in a simple way
yy The place and equipment in which documents are stored must be durable and
fire-resistant
yy System must not occupy much space
163 BSM1602/1/2014–2016
(c) Filing equipment
Includes
yy files such as concertina files, box files and book files
yy filing cabinets
Activity 8.5
What do you think would be the best way to file all the contact details of your suppliers?
38Feedback
Alphabetical – if the suppliers are filed by name details can be found easily.
164
(b) Financial registers
All businesses must start with
yy a cash book
yy a petty cash book
yy a general ledger
8.16 TELECOMMUNICATION
1. THE TELEPHONE
yy Businesses need telephones to make first impressions, sell products, provide
services and negotiate contracts.
yy The volume of calls will determine the kind and the size of the system.
yy Basic features, advanced features and customised features
2. ELECTRONIC COMMUNICATION
Electronic communication takes place by means of the Internet.
Communication takes place
yy internally via the intranet
yy externally via the extranet
165 BSM1602/1/2014–2016
1 Electronic modes of communication
(a) The intranet
yy Internal communication – within the enterprise
(c) Email
Advantages of email
yy more efficient
yy communicate more effectively
yy reduce costs dramatically – paper costs
yy improve customer service
yy improve turnaround times with clients
(d) Voice-mail
yy Telephone answering device
(e) Faxes
yy Scans and digitises images on paper
yy Transmits them over a regular telephone line to another fax machine
yy The other fax machine reproduces a copy of the image
(f) Teleconferencing
yy Electronic communication between two or more people at two or more locations
(g) Data-conferencing
yy Users at distant locations can edit and modify data files
(h) Videoconferencing
yy Includes televised pictures of the participants
age information and the administrative task is increasing at a tremendous rate. This will
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require that the small business manager keep abreast of, and anticipate, further advance-
ments and applications in the continuing computer revolution.
592 Advantages
8.18 SELF-ASSESSMENT
To test and evaluate your knowledge of this chapter, you can now do the following
activities:
(i) Complete the self-assessment in the study guide. Remember that it is important that
you complete the exercise without looking at the solutions in the answers section.
This is the only way you can test your knowledge.
(ii) Do the self-evaluation question at the end of chapter 8 in your prescribed textbook.
EXERCISE 8
593 Read the case study and answer the following questions.
is the owner of a small sole proprietorship, Fred’s Leather Designs, which manufactures purses
and handbags from ostrich leather. Freddy buys the leather from a local tannery and manufac-
tures the products with the help of his two employees Tom and Jerry. His market consists of the
local shops and hawkers, and he also sells his products to the tourists who visit the town during
the holiday season.
Although Freddy has the knowledge and skills to manufacture these products, he does not have
595
any knowledge of marketing, financial management or record keeping. He only keeps informal
records of his income and expenditure and has no knowledge of financial statements. Eventually
Freddy experiences a serious cash flow problem, because he has sold his products on credit to
the local shops, while he has to pay his suppliers in cash. To make matters worse, the price of
leather also increases due to a drought in the area, as well as an outbreak of bird flu. His sales
figures start to show a drastic decline, as he has to compete with several larger enterprises that
manufacture the same type of product in bulk at lower cost and therefore can afford to sell
them at a lower price.
Freddy eventually decides to retire and asks his son, Leon, to take over the business. Since
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childhood, Leon has enjoyed helping his father in the factory and Freddy realises that Leon has
a natural talent for working with leather and has learnt the skills needed to manufacture the
leather products. Leon takes over the business, realising that the business will not survive unless
he makes some drastic changes.
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Leon invests R30 000 of his savings in the enterprise and decides to sell a share to eight other
597
people so as to accumulate more capital and expertise. The new owners decide to register the
enterprise as a private company, Leather for Africa (Pty) Ltd, with a view to further expansion.
The new owners decide to add more products to the existing range, including a bigger variety
598
of purses and handbags, as well as belts, cellphone covers, book covers and attaché cases.
They also decide to rent a larger factory in an industrial area to increase the capacity of the en-
599
terprise and subsequently employ more staff to manufacture the products. Tom and Jerry are
promoted to supervisors of the manufacturing division.
The new owners need more capital to buy more industrial sewing machines, cutters and work-
600
benches. They also need a computer, a printer, a fax machine and a copier to do the administra-
tion. To finance these expenses they apply for a loan of R100 000 which will be repaid over a
period of five years. They also apply for a bank overdraft to buy enough leather to manufacture
the products.
Leon and the new owners realise that they will not survive if they concentrate only on the local
601
market and tourists. They therefore decided to launch a marketing campaign, starting with per-
sonal visits to owners of clothing shops in George and Mossel Bay to show them samples of their
products. Three of these shops agree to sell the products. They also advertise their products in
a regional newspaper, offering to sell them to the public on an order basis. Customers can place
orders by telephone or email, and Leather for Africa (Pty) Ltd will then post the products to them.
Leather for Africa (Pty) Ltd can now afford to sell the products at more competitive prices. Since
602
they are now buying the leather in bulk, they qualify for discount prices and the suppliers also
agree to sell leather to them on credit. This arrangement makes a great difference to their cash
flow figures.
Heidi is appointed to do the administration of the new enterprise. She is responsible for recep-
603
tion, answering the telephone, handling enquiries and complaints, taking orders, record keep-
ing and filing. She decides that she is going to use e-mail to place orders with the suppliers and
to communicate with consumers and other interest groups.
The biggest opportunity for Leather for Africa, however, comes in the form of a British tourist
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who visits the town’s annual KKNK festival in April. He is so impressed with their leather products
that he offers to sell them in his boutique in London. Although Leon and the other sharehold-
ers have no knowledge of international trade, they welcome this opportunity with open arms
and agree to manufacture the products on a fixed-order basis. Accordingly, Leather for Africa
will send the consignments by rail to Cape Town International Airport, from where they will be
transported by air to London.
QUESTIONS
1 Multiple-choice questions
8.1 All businesses rely on information when making decisions for each function. The
different departments require different types of information. Which department re-
quires information on the profitability, liquidity, solvency, capital needs and budgets,
capital sources and interest rates?
(1) Financial department
168
(2) Purchasing department
(3) General management
(4) Operations department
8.2 One morning, Leon asks Heidi why the office is so untidy. She responds by saying
that everyone just piles up documents in the office. Leon insists that the office be
cleaned immediately, as no one will be able to find any information. Leon instructs
Heidi to keep only the paperwork for the previous month. This refers to the …
(1) discarding of information.
(2) retrieval of information.
(3) distribution of information.
(4) storage of information.
8.3 All the functions of the enterprise require some form of information to operate suc-
cessfully. What function would require information on competitors and consumers’
needs and preferences?
(1) Operations function
(2) Purchasing function
(3) Public relations function
(4) Marketing function
8.4 Leon uses an information system that primarily serves the functions of planning,
organising, leading, and control at the management level of Leather for Africa (Pty)
Ltd. To what system does this refer?
(1) Transaction processing systems (TPSs)
(2) Decision support system (DSS)
(3) Management information systems (MIS)
(4) Executive support systems (ESSs)
8.5 Which concept best describes the use of the intranet for effective communication?
(1) External communication – between the enterprise and consumers, suppliers, etc.
(2) Internal communication – within the enterprise
(3) Improvement of turn-around times with clients
(4) Dramatic cost reduction – less paper cost
8.6 Which financial document keeps a record of all the stakeholders to whom Leather
for Africa (Pty) Ltd owes money?
(1) Sales journal
(2) Debtors ledger
(3) Balance sheet
(4) Creditors ledger
169 BSM1602/1/2014–2016
(3) refers to facts in an unprocessed form.
(4) cannot be used in decision -making.
8.8 The … function of Leather for Africa (Pty) Ltd will need information on the sequence
in which it should carry out the orders of the day.
(1) marketing
(2) financial
(3) operations
(4) general management
8.19 SUMMARY
Evaluate your answers to exercise 8 with the aid of the suggested solutions below and
605
calculate your percentage. If you are not satisfied with your results, revise the topics in
chapter 8 that presented you with problems. Study the theory again and contact your
tutor or the lecturer to help you to solve the problems. Do not proceed to chapter 9 un-
less you are completely satisfied with your understanding of chapter 8.
If you are satisfied with your results and are sure that you have a thorough knowledge
606
result in poor decisions being made that can lead to loss of money, time and labour, and
even the failure of the enterprise. The information management function is responsible
for providing the right information at the right time to ensure the survival and success
of the enterprise.
The information management function is aimed at service and does not directly generate
608
profit. Therefore, the administrative manager must ensure that the tasks of the administra-
tion section are really significant and necessary, and performed effectively and efficiently.
The manager must ensure that the correct information in the right quantity is available
609
in time for whoever may need it. The entrepreneur must also determine which reports
and surveys are needed, and when. Information that is made available but not used
represents a waste of labour, time, paper and everything associated with it.
concerned with the services of obtaining, recording and analysing information and com-
municating the results to management, who can then safeguard the assets, promote the
affairs of the enterprise and achieve its objectives.
An enterprise is dependent on the goodwill of the public for its success and survival. If the
611
enterprise does not treat its interest groups well or if the feelings of the people in the area
are opposed to the establishment of the enterprise, the business will not be supported
and is doomed to failure. The public relations function is responsible for promoting and
maintaining the image of the enterprise. In chapter 9 we will discuss the importance of
the image of the enterprise, the factors that determine the feelings and the opinions of
170
the public, the interest groups with which the business has to maintain good relations,
as well as the social responsibility of the enterprise.
8.20 SOLUTIONS
Question No. Solution
8.1 3
8.2 1
8.3 4
8.4 3
8.5 2
8.6 4
8.7 1
8.8 3
171 BSM1602/1/2014–2016
Chapter 9
The public relations function
Contents
172
yy list and explain the four methods of communication that can be used by small
business enterprises to make the public aware of their existence
yy explain the difference between marketing and public relations
yy list the six types of public relations campaign
yy explain the five functional stages in a campaign
yy explain the four steps in the public relations process
yy explain why an enterprise has a social responsibility towards its employees and
give three examples of how it can perform its social responsibility towards its
employees
yy explain why an enterprise has a social responsibility towards the community in
which it functions and give three examples of how it can perform its social re-
sponsibility towards the community
yy explain why an enterprise has a social responsibility towards the environment
in which it functions and give three examples of how it can perform its social
responsibility towards the environment
yy explain the tasks of the public relations function
yy list the questions that the entrepreneur can ask to determine what kind of public
relations is needed by the enterprise
You will need to master the following key concepts in order to achieve the learning
outcomes for this chapter:
yy interest groups
yy internal publics
yy external publics
yy public opinion
yy methods of communication
yy social responsibility
173 BSM1602/1/2014–2016
9.3 A MIND MAP FOR CHAPTER 9
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9.4 OVERVIEW
This chapter in the prescribed textbook explains the broad field of the public relations
613
function. Public relations is one of the business functions and, as has been seen in previ-
ous chapters, all these functions must be coordinated to enable the business to func-
174
tion effectively. The textbook discusses the guidelines and the framework within which
entrepreneurs apply the public relations principles to manage the business effectively.
Managing public relations is no different from managing any other business function
except that it is exclusively concerned with the management of relationships.
Today the interaction between the business and the environment plays a significant role
614
in the business’s success. It is therefore very important that the image conveyed by the
business should be positive and favourable.
To obtain a holistic view of the public relations function, look at the mind
615
map in this study guide. From the mind map it is clear that public relations is
a process of activity that builds and maintains good relationships between
the enterprise and its interest groups.
just to market the products and services of the enterprise. Nowadays, it is important
that businesses market themselves in their environment. This means that the business
must build an image and a reputation for itself that will be acceptable to society so that
consumers and other interest groups will be eager to support it. This important task is
fulfilled by the external relations function. For this reason we can define external relations
as a process of communication between the enterprise and its environment in order to
build and maintain healthy relations with interest groups in this environment.
9.7 INTRODUCTION
yy The support of the public cannot be bought – it must be earned and maintained.
yy The success and survival of the enterprise depend on the goodwill of the public.
yy All enterprises, regardless their sizes, have a public relations function.
1 COMPONENTS OF THE DEFINITION
1. IMAGE
An image represents the perception that people have of the business.
The importance of the image
175 BSM1602/1/2014–2016
yy The better the image of the enterprise, the better the support from the interest
groups and vice versa.
yy The enterprise must be acceptable to employees and the public.
2. INTEREST GROUPS
yy Interest groups are all the people (publics) that have a direct or indirect influence
on the enterprise, such as the consumers, the community, the employees, the
media and the suppliers.
yy The groups of people with which the business must communicate in order for
it to be successful.
3. THE RELATIONSHIP
The relationship is affected by the following factors:
yy the way in which the enterprise employs and remunerates its staff
yy the attitude of the enterprise towards the utilisation of resources
yy the replacement and conservation of resources
yy the quality and prices of the enterprise’s products and service
619
Activity 9.1
Feedback
39
176
yy media – local newspapers
yy suppliers – businesses that supply you with stock and services
velop the business image in such a way that there will be a healthy relationship between
the business and all interest groups, so that these interest groups will regard the business
policy, products and/or services as acceptable.
Go back to your prescribed textbook and study these key components now.
621 Goal
yy To create and maintain mutual knowledge and understanding within the enterprise
and among the public.
1 1. EXPLANATION
624 Definition: Interest groups are the groups of people with which the business must com-
municate in order for it to be successful.
625 Meaning: It means all the people (publics) that have a direct or indirect influence on
the enterprise, such as the consumers, the community, the employees, the
media and the suppliers.
627 Internal publics: The word “public” normally refers to people outside the business.
In the context of public relations it also refers to the employees and
employers in the business. They are known as the internal public.
177 BSM1602/1/2014–2016
Therefore, the internal public is the people inside the business. It
is important to note that the business cannot function without the
internal public while, in turn, the internal public needs a place to
work and earn money. For this reason it is important for the internal
public that the good name and image of the business is protected.
628 External publics: External publics are those not directly connected with the business,
such as the press, government (the law), educators, customers,
shareholders, the community, suppliers and controlling bodies.
Go back to your prescribed textbook and study these key components now.
Activity 9.2
40 Feedback
Internal publics: People working in your business who have an interest in the business
External publics: All interest groups, such as consumers, businesses, government and so
on outside your business that have an interest in the business
629
178
(a) Internal interest groups
1. Employees
yy If employees are happy and their morale is high it will affect the way in
which they treat the enterprise’s customers and this will reflect a positive
image to the outside world.
yy Employees talk about their work and will tell their families and friends how
they are treated.
Financial
yy The financial function provides the funds for public relations programmes.
yy Public relations assists the financial function by applying budget control.
Marketing
yy Marketing works with the enterprise’s largest interest group, namely, the
consumers – the way in which the enterprise treats the consumers directly
influences its image.
yy Marketing and public relations should work together to plan promotions
and advertisements in such a way that this promotes not only the products,
but also the image of the enterprise.
Operations
yy The quality of the products, the way in which operations dispose of waste
and the working conditions on the factory floor all affect the image of the
enterprise.
yy Public relations should inform the operations function if they become aware
of negative perceptions in the community.
Purchasing
yy The way in which the purchasing function treats its suppliers affects the
image of the enterprise.
yy Public relations can assist the purchasing function by maintaining good
relations with the suppliers.
Human resources
yy The working conditions and general welfare of the staff determine the way
in which they represent the enterprise and treat the consumers.
179 BSM1602/1/2014–2016
yy Public relations assists the human resources function in its recruitment
campaigns and when industrial unrest occurs.
Information
yy The administrative function supplies information to the public relations
function.
yy Public relations supports the administrative function by designing let-
terheads and ensuring that receptionists and secretaries are friendly and
helpful when they communicate with the public.
Financial institutions
yy They provide the necessary capital for the business to enable it to manufacture
the products or to render its services.
yy A good relationship will improve the chances of the enterprise obtaining financing.
Suppliers
yy Suppliers supply the enterprise with raw materials or stock.
yy Good relations will ensure that suppliers will go out of their way to help the en-
terprise in times of need, for example to deliver stock at short notices.
yy This will also help the entrepreneur to obtain credit from suppliers to buy raw
materials or stock.
Media
yy The media may report positively or negatively on the enterprise.
yy A good relationship will ensure that the media will give the enterprise the benefit
of the doubt in times of crisis.
yy Negative reporting from the media carries more weight than any positive action
taken by the enterprise.
Community
yy If the community feels that an enterprise harms the environment, it may oppose
such an enterprise and force it to close its doors.
yy The enterprise should support the local community by being involved in commu-
nity activities, acting responsibly as far as pollution is concerned and contributing
financially through donations and sponsorships.
Government
yy The enterprise should comply with the legislation of the local and central govern-
ment, such as paying rates and taxes and applying labour laws.
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9.10 IMPORTANCE OF INTEREST GROUPS
yy The enterprise has an obligation towards the public – the public is today more informed
and will not stand for poor treatment, incorrect information or misunderstandings.
yy The enterprise has a duty to keep interest groups informed in order for them to un-
derstand the intentions of the enterprise.
yy In exchange, the enterprise will win a loyal public that will support it and buy its
products.
Activity 9.3
Why do you think interest groups are important for your business?
41Feedback
Interest groups play a great role in the profit and survival of any business. If the interest groups
related to your business are not in favour of your business, it could fail and close down.
the community. This belief of the community reflects its opinion on or attitude to a topic
such as environmental awareness, pollution, unemployment and crime. Once a certain
image of the business has been formed, it is not easy to change it.
2. A FAVOURABLE IMAGE
A favourable image will determine whether
181 BSM1602/1/2014–2016
yy new staff will want to join the enterprise
yy the business has an established and growing clientele
yy the media will give the enterprise the benefit of the doubt in times of crisis
yy the community will support them
yy suppliers will go out of their way to help them
632
(d) Communication
yy Telephone calls, letters or personal contact reflect what the enterprise
really thinks of its clients.
182
Telephone calls
yy When a call is made or received and the contact is pleasant, both caller
and receiver will react positively.
yy Telephone operators must promote positive feelings.
yy Telephone operators must know the enterprise, the products/services that
the enterprise offers and the employees in order to be able to supply the
correct information.
Letters
yy Written communication must be clear and correct.
yy Attention should be paid to grammar and spelling.
yy Personal contact
yy Know the public.
yy Give customers a lot of attention.
yy Treat everybody equally.
yy Be helpful and friendly.
yy Acknowledge mistakes made by the business.
yy Apologise for mistakes and correct them.
the enterprise’s success. It is therefore important that you understand what is meant
by communication and know which elements are involved in the method of communi-
cation used. A smaller enterprise will usually not be able to afford expensive advertising
and must make use of other methods to make their enterprises known to the public.
1 Examples of communication
(a) Networking
yy Where friends and acquaintances tell one another about the enterprise.
yy Join organisations and associations such as the local chamber of commerce.
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9.13 THE DIFFERENCE BETWEEN MARKETING AND PUBLIC
RELATIONS
Marketing Public relations
Activity 9.4
yy marketing
yy public relations
42 Feedback
yy Although these two functions work closely together, they should never be regarded
as the same.
yy As marketing works with the enterprise’s largest interest group, namely, the consum-
ers, its actions directly influence the enterprise’s image.
yy Marketing and public relations should work together to plan promotions and adver-
tisements in such a way that they promotes not only the products, but also the image
of the enterprise.
184
2. Five functional stages in the public relations campaign
(a) Identification stage
yy A logo or corporate colours by which the business can be identified.
Make sure that you know the different types of public relations campaign. You
should also be able to identify and apply the functional stages of a campaign.
Activity 9.5
43Feedback
185 BSM1602/1/2014–2016
yy Define the problem or opportunity.
yy Do planning and programming.
yy Take action and engage in communication.
yy Evaluate the campaign.
others you are helping yourself. Social responsibility as part of external relations includes
the environment in which the business operates and also the community, which includes
all the employees of the business as well.
635
Study
1. Employees
yy A good labour force is necessary to keep the enterprise functioning.
yy The enterprise must create a supportive climate to satisfy employees’ needs and
to ensure that employees perform at an optimum level.
Examples:
yy financial study aids for employees or their children
yy pay market-related salaries
yy provide fringe benefits
yy include them in decision making
yy provide training and opportunities for promotion
yy allow them to acquire skills
yy provide day care for their children
the business must ensure that there is always a good relationship between itself and the
public which affects its success. In other words, the “image” of the business actually refers
to more than just a good name.
Many people form an impression of a business before they even know it, merely on the
639
basis of its reputation and what they have heard about it from other people or have read
about it.
Study
187 BSM1602/1/2014–2016
(c) Creating and reinforcing an image
yy Promoting and improving the image of the enterprise
(d) Directly promoting a product/service
yy Articles about products can serve the same purpose as advertising.
(e) Counteracting negative publicity
yy Exercising damage control – providing accurate information about the problem
(f) Handling internal communication
yy This includes newsletters to employees to keep them informed about what is
happening in the enterprise – leads to higher morale.
(g) Promoting and planning events
yy Promoting events by means of press releases
EXERCISE 9
Read the case study and answer the following questions.
641
188
1 Case study: Pots for Africa
David Moloi and Tafita Motsami conducted market research and discovered that although
642
stainless steel cookware has been in use in South Africa since the early 1980s, all this cookware
is imported, making it expensive and affordable only to the higher income groups. People in
the lower income groups have traditionally used aluminium-based cookware. David and Tafita
therefore decide to start their own enterprise, Pots for Africa, to manufacture stainless steel pots
at lower prices so that ordinary South Africans can also afford them.
They decide to establish the enterprise in an industrial area of Roodepoort. They contribute
643
capital from their savings, but this only covers the costs of some of the equipment. They have
to make use of external capital to finance the factory building, the machinery and the rest of the
equipment, as well as the initial stock.
Although both of them have degrees in their respective fields, they are unable to manage the
644
enterprise effectively. This has led to the slow decline of the enterprise and a lack of coordina-
tion among the enterprise’s functions. As time passes, they experience a number of problems.
More borrowed capital has been used than necessary, because David and Tafita started to use
645
the enterprise’s capital for their own purposes. This has negatively affected their liquidity and
solvability ratios. However, they are not aware of the financial position of the enterprise, as there
are no processes in place for studying financial performance or for analysing financial statements.
It is only when the banks start to reject their applications for loans that they realise they will have
to improve the financial management of the enterprise.
Owing to the pressure of accumulate capital, Pots for Africa launches a mass production cam-
646
paign; however, this leads to pollution levels that are above the normal permissible standards.
Half of the population in the residential areas within a 10 kilometre radius of the enterprise, as
well as some of the employees, start experiencing chest problems.
When a community delegation approaches Pots for Africa to inform them of the problem, David’s
647
response is that they are ungrateful for the job opportunities that the enterprise has created,
and he dismisses the allegations as being absurd. He tells the delegation to complain to the city
council, since this is the council’s problem, not his. This leads to a negative image for Pots for
Africa and consumers start to boycott the enterprise, as a result of which sales decrease rapidly.
QUESTIONS
1 Multiple-choice questions
9.1 The … is an example of an internal interest group.
(1) employees of Pots for Africa
(2) suppliers of Pots for Africa
(3) community of Roodepoort
(4) consumers of Pots for Africa
9.2 If consumers are satisfied with the service or product that an enterprise offers, they
will tell other people about it. To which factor of forming public opinion does this
statement refer?
(1) The reception and atmosphere in the enterprise
189 BSM1602/1/2014–2016
(2) The type of relationship
(3) Communication
(4) Previous experience
9.3 The way in which employees treat the consumers will affect the attitude of the
public towards the enterprise. To which factor of forming public opinion does this
statement refer?
(1) The reception and atmosphere in the enterprise
(2) The type of relationship
(3) Communication
(4) Previous experience
9.5 Consumers started to boycott the enterprise. Pots for Africa had to exercise damage
control. To which task of public relations does this example refer?
(1) Promoting goodwill
(2) Counteracting negative publicity
(3) Marketing the image
(4) Promoting and planning events
9.6 There are five functional stages in a public relations campaign. During which stage
must David and Tafita show that they are actively involved in charity events?
(1) Identification stage
(2) Legitimacy stage
(3) Participation stage
(4) Penetration stage
9.7 The public relations process consists of four steps. Choose the correct steps that
must be followed during this process:
(1) Planning and programming, gathering information, evaluating alternatives,
taking action and communicating
(2) Identify the problem, gather information, taking action, evaluate the process
(3) Defining the problem or opportunity, planning and programming, taking ac-
tion and communicating, evaluating the campaign
(4) Defining the problem or opportunity, gathering information, planning and
programming, taking action and communicating
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9.8 Pots for Africa could have performed its social responsibility towards its employees
by …
(1) using the cookware to create jobs
(2) participating in the upliftment of the community
(3) including them in decision making
(4) giving financial donations to community projects
9.18 SUMMARY
Evaluate your answers to exercise 9 with the aid of the suggested solutions in the answer
648
book and calculate your percentage. If you are not satisfied with your results, revise the
topics in chapter 9 that presented you with problems. Study the theory again and contact
your tutor or the lecturer to help you to solve the problems.
Customer support cannot be bought, but must first be earned and then maintained.
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If an enterprise has a good image, employees will want to work for the enterprise, the
enterprise will have an established and growing clientele and the media will give the
enterprise the benefit of the doubt in times of crisis.
The primary objective of external relations is to promote the enterprise’s image in such
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a way that there is a healthy relationship between the enterprise and all interest groups,
so that its policy, products and/or services are acceptable to these interest groups.
Successful external relations are based on open, honest communication, ethical business
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principles, efficient external relations officials and regular monitoring. If the business is
untruthful, conceals errors or misleads the public in any way, this will adversely affect
the business’s public image. Communication with the public must therefore be open,
and the information conveyed must be true. Therefore, external relations revolve around
successful communication. For this reason it is very important that both verbal and writ-
ten communication take place effectively.
Public relations affect almost everyone who has contact with other human beings. All of
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us, in one way or another, practise public relations daily. For a business, every telephone
call, every letter, every face-to-face encounter is a public relations event.
Public relations is one of the eight organisational functions and, as has been seen in
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previous chapters, all these functions must be coordinated to enable the organisation
to function effectively.
The examination paper will be in the same format as the exercises. You will be given a
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case study on which all the questions will be based. Throughout the question paper you
will have to base all your answers on the case study.
191 BSM1602/1/2014–2016
9.19 SOLUTIONS
Question No. Solution
9.1 1
9.2 4
9.3 1
9.4 4
9.5 2
9.6 2
9.7 3
9.8 3
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