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CONTENTS

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PREFACE iv

1Chapter 1: Introduction to business management for the entrepreneur 1

2Chapter 2: General management 17

3Chapter 3: The financial function 41

4Chapter 4: The marketing function 65

5 Chapter 5: The operations management 85

6 Chapter 6: The purchasing function 109

7 Chapter 7: The human resources function 130

8 Chapter 8: Information management 152

9 Chapter 9: The public relations function 172

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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
11

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.

2 PURPOSE OF THIS MODULE


The purpose of this module is for you, as a student, to acquire foundational concepts in
12

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
14

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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eight functions, namely, general management, operations, finance, purchasing, market-


ing, information management, human resources and public relations. Together these
eight functions represent all the activities performed in the business. They also form the
guiding principle of the textbook and this study guide. Each of these functions will be
discussed later in detail.

(iv)
In a big business, departments are managed by functional managers. Functional man-
16

agement lies at the level of middle management. A functional manager is responsible


for a certain departmental function, for instance marketing, purchasing or operations.

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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outside person. Outsourcing is the process of transferring responsibilities for a specific


business function from an employee group to a non-employee group (Zhu, Hsu & Lillie
2001).

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.

The departments – or functions – of the business should be coordinated in such a way


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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.

24 The functional departments in a business can be represented diagrammatically:

25 Functional classification of a business

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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ensure your success in the examination.

3 LINK TO OTHER COURSES/MODULES


As you know, this module does not stand alone but is an integral part of Business Man-
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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-
29

ciples and skills to assist with the management of the different functions of an enterprise,
or to conduct business with identified support.

EXIT LEVEL OUTCOMES SPECIFIED OUTCOMES


1. Set up and execute business functions, 1.1 Use knowledge of business principles and
using support/experts as required and analytical and planning skills to design and
available resources structure the enterprise according to the
business functions
1.2 Apply management skills to manage a busi-
ness at an operational level
2. Develop oneself for improved perfor- 2.1 Use scanning and decision making to iden-
mance (engage in self-development) tify required needs and support structures

(vi)
5 ASSESSMENT CRITERIA
31 The assessment criteria for this module are as follows:

yy Identify and demonstrate an understanding of the place, purpose and objectives of


the functional areas of a business.
yy Demonstrate an understanding of the business functions and relevant business
principles.
yy Analyse a business situation and apply the appropriate business principles to it.
yy Demonstrate the ability to apply different operational skills in the different business
functions
yy Identify and analyse information regarding the business’s strengths, weaknesses, op-
portunities and threats to be able to make effective decisions.

6 FRAMEWORK FOR THIS MODULE


The following nine chapters of the prescribed textbook provide the framework for this
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module:

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(vii) BSM1602/1/2014–2016
7 A MIND MAP FOR GENERAL MANAGEMENT

34

8 HOW YOU WILL BENEFIT FROM THIS COURSE?


After completing this course, you should have the competence to apply business
principles and skills to assist with the functioning of an enterprise or to con-
duct business with identified support. You should also understand that it is quite
impossible for any business to function in total isolation. Without the interaction
of the different business functions, the business cannot continue to exist or grow.
Achieving the business objectives will remain a dream if this interaction does not
take place.

(viii)
9 USE OF ICONS
35 Icon 36 Description

Key concepts. TThe key concepts icon draws your attention to


37

certain keywords or concepts that you will come across in the


chapter concerned.

Learning outcomes. The learning outcomes indicate what


38

aspects of the particular chapter you have to master and dem-


onstrate your mastery of.

Study. The study icon indicates which sections of the prescribed


39

book or the study guide you need to study and internalise.

Activity. The activity icon refers to activities that you must do in


40

order to develop a deeper understanding of the learning material.

Assessment. When you see the assessment icon you will be re-
41

quired to test your knowledge, understanding and application


of the material you have just studied.

Feedback. The feedback icon indicates that comments have


42

been provided on the way the self-assessment activities could


have been answered.

Mind maps are provided to help you see the relationship between
43

various parts of the learning material.

Reflection. The reflection icon requires that you reflect on im-


44

portant issues or problems dealt with in the chapter.

Read. The read icon will direct you to certain sections of the pre-
45

scribed book which you should read for background information..

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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
47

a useful aid and that it will help you to complete this course successfully.

1 The study guide


48 The study guide consists of nine sections, one for each chapter in the textbook.

1 Mind maps
Before you start studying a chapter, it is very important that you know what that particular
49

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
50

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
51

own summary after you have studied the chapter.

1 Exercises
An exercise based on a case study has been provided for each chapter. As the examina-
52

tion will be based on a case study it is very important that you know how to approach
a case study.

53How 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
54

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.

59

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

1.1 Learning outcomes


1.2 Key concepts
1.3 A mind map for chapter 1
1.4 Overview
1.5 Introduction
1.6 Entrepreneurship and the business
1.7 Entrepreneur vs manager
1.8 Small business management
1.9 The environment in which businesses operate
1.10 The business environment
1.11 Self-assessment
1.12 Summary
1.13 Solutions

1.1 LEARNING OUTCOMES


After you have studied chapter 1, you should be able to
yy explain what an entrepreneur is
yy explain what a business manager is
yy explain the difference between an entrepreneur and a business manager
yy explain the interdependence between an entrepreneur and a business manager
yy list the four functions of management
yy explain the business management tasks for the self-employed entrepreneur
yy explain the business management tasks for the entrepreneur as an employer
yy explain the environment in which enterprises operate
yy explain the three aspects of the business environment that entrepreneurs should
be aware of
yy explain what the micro environment entails and indicate the degree of control that
an enterprise has over this environment
yy explain what the market environment entails and indicate the degree of control that
an enterprise has over this environment
yy explain what the macro environment entails and indicate the degree of control that
an enterprise has over this environment

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

1 The idea stage


An entrepreneur identifies a need for a product/service in the market. He or she then
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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.

1 The planning stage


The entrepreneur conducts a viability study – an in-depth investigation of the market
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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.

1 The implementation stage


The entrepreneur starts the enterprise by using the four factors of production (entrepre-
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neurship, capital, labour and natural resources) to provide products/services to satisfy


consumers’ needs. The primary objective of starting an enterprise in a free market eco-
nomic system is to make a profit.

1.6 ENTREPRENEURSHIP AND THE BUSINESS


In the context of the South African economy, the production factor of entrepreneurship
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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.

70 It is also important to note the difference between an entrepreneur and a manager.

To get a holistic view of chapter 1 (Introduction to business management for


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the entrepreneur), look at the mind map in section 1.3.

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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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manager and their roles.

Study the section on “Entrepreneur vs manager” in your prescribed textbook.

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.

Entrepreneur Business manager


Starts own enterprise Manages enterprise
Takes risks Does not need to take risks
Is creative and innovative No creativity or innovation
Responsible for growth Responsible for profit and survival

Although it may seem that the role of the entrepreneur is more important than that of the
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manager, management plays an extremely important role in the success of an enterprise.


Effective management ensures that tasks are accomplished and employees are satisfied.

75 The role of the manager

yy to manage all the functions of the enterprise on a day-to-day basis


yy to apply the four functions of management – planning, organising, leading, control
yy to ensure that the eight functions of the enterprise – general management, finance,
marketing, operations, purchasing, human resources, administration and public (ex-
ternal) relations – operate as a system

1 Business management tasks for the self-employed entrepreneur


yy general management – has to run the business on his/her own
yy financial function – must manage cash flow, accounts, budgets and bookkeeping
yy marketing function – must find markets for the products and sell the products
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yy operations function – needs technical expertise/product knowledge
yy purchasing function – must find suppliers of raw materials/stock
yy human resources – must recruit, employ and manage the employees
yy information management – must collect information and do the record keeping
yy public relations function – must do his/her own networking/marketing of the enterprise
Activity 1.2

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.

1 Business management tasks for the entrepreneur as an employer


yy The entrepreneur can appoint more people and divide the work according to indi-
vidual skills and expertise.
yy The functions of the enterprise will become more formal.
yy Leadership skills will have to be developed to solve problems, make decisions and
give the business direction.
yy A more formalised approach to ensure proper planning, organising, leadership and
control becomes essential.

1.8 SMALL BUSINESS MANAGEMENT


The entrepreneur’s primary responsibility in the small business is to bring together all the
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factors of production in a coordinated manner so that the business enterprise stands a


chance of realising its goals and maximising the profits.

77 The following factors of production can be identified:

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”.

1.9 THE ENVIRONMENT IN WHICH BUSINESSES OPERATE


The enterprise can be described as an independent institution established by an entre-
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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.

Every enterprise also functions in an environment (the business environment) in which


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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.

7 BSM1602/1/2014–2016
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.

Study the sections on the environment in which businesses operate in your


prescribed textbook.

1.10 THE BUSINESS ENVIRONMENT


84 Characteristics of the business environment:

yy The business environment changes constantly.


yy The enterprise must be in step with the changing environment.
yy The establishment, growth and continued existence/survival of the enterprise are
directly influenced by the business environment.
yy The business environment influences the future of the enterprise.
yy There are both opportunities and threats in the business environment.
yy The variables are interdependent.
yy The complexity of the influence of the business environment depends on the type
of enterprise.

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

88 Market and macro environments: Opportunities and threats

89

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

9 BSM1602/1/2014–2016
(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

10
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.

(d) Suppliers of resources and services


yy Includes all the people or enterprises that supply you with factors of production
yy Suppliers of raw materials or stock
yy Suppliers of capital
yy Suppliers of labour
yy Suppliers of services – electricity, water, telephones, etc

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

(b) Social and cultural


yy Needs and preferences of consumers
yy Geographic location – needs differ between regions
yy Changing role of women – more working women
yy Changing lifestyles – more health-conscious
yy Development level of the market – consumers more informed
yy Population growth in the market – increase/decrease

(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
91

decides that he wants to be his own boss. He subsequently resigns and starts his own enterprise,
Tony’s Garden Services.

12
Owing to the low start-up costs, there are a significant number of competitors offering garden
92

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.

93 The market research obtains the following findings:


•• The demand for garden services will never decline, as people prefer to use a formal service
than to hire someone off the street to do their gardens.
•• Although the demand for garden services declines during the winter months, it increases
again as soon as spring arrives.
•• Since Johannesburg is known as the city that has more trees than inhabitants, people usually
replace a tree once it has been cut down. This means that there will be a constant demand
for the pruning and felling of trees.
•• There are a number of new developments in the area that will need his landscaping expertise.

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.
96

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
97

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-
98

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
99

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
100

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

14
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.

1.5 Effective management means that Tony should …


(1) use other people to get the work done.
(2) save money wherever possible.
(3) do everything by himself.
(4) ignore the functions of management.

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

of chapter 1, you can proceed with chapter 2.

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
106

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,
109

with constant interaction occurring between the different sub-environments. In this chap-
ter we have investigated the following three components of the business environment:

yy the micro environment


yy the market environment
yy the macro environment
1.13 SOLUTIONS
Question No. Answer
1.1 2
1.2 2
1.3 3
1.4 2
1.5 1
1.6 1

16
Chapter 2
General management

Contents

2.1 Learning outcomes


2.2 Key concepts
2.3 A mind map for chapter 2
2.4 Overview
2.5 The new economy
2.6 Business functions: a perspective
2.7 Management principles
2.8 The role and functions of general management
2.9 The main functions of general management
2.10 Types of planning
2.11 The planning process
2.12 The additional functions of general management
2.13 Managerial competencies
2.14 Self-assessment
2.15 Summary
2.16 Solutions

2.1 LEARNING OUTCOMES


After you have studied chapter 2, you should be able to
yy list and explain the four components that reshape the world of the new economy
yy explain the term “functional perspective”
yy list the eight functions of an enterprise
yy explain the difference between general management principles and other func-
tional management principles
yy define management and explain the following aspects of this definition
−− resources
−− objectives
−− planning
−− control
−− organising
−− leading
yy list the three levels of planning and indicate the types of planning that are done
at each level and the types of objective that are set for each type of planning
yy explain the three types of planning
yy differentiate between a primary objective and secondary objectives
yy explain the four types of objective and give examples of each
yy list the requirements for setting objectives

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

2.2 KEY CONCEPTS


Key concepts

You will need to master the following key concepts in order to achieve the learning
outcomes for this chapter:
yy 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

18
2.3 A MIND MAP FOR CHAPTER 2

110

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.

To obtain a holistic view of the management process and to understand the


113

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.

114 The following components of the mind map are important:

yy Resources. Resources in an organisation refer to the human, financial, physical and


information resources. Resources are limited and the organisation must use them
wisely so that it achieves the greatest possible measure of prosperity.
yy Achieving objectives. Objectives refer to clear goals that the organisation must achieve
in order to be able to continue to exist.
yy Planning. Planning is chiefly concerned with the setting of objectives and with devis-
ing the necessary to achieve these objectives.
yy Control. By exercising control, a manager ensures that people carry out instructions
according to plan. If instructions are not carried out according to plan, a manager can
still exercise control by making the necessary corrections or adjustments.
yy Organising. Organising means the coordination of activities and the allocation of
work to certain people so that the objectives of the organisation can be achieved.
yy Leading. Leading refers to the way in which managers help people to achieve planned
objectives.

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.

2.5 THE NEW ECONOMY


The business world of the entrepreneur has changed completely from the way in which
115

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:

yy the rise of new communication technologies


yy globalisation
yy the importance of knowledge and ideas
yy alliances across business boundaries
Activity 2.2

Do you think the economy can cause a business to fail?

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
117

recognise the influence of these key components on your business.

(a) New communication technologies


yy The transformation to an electronic economy – from equipment to information

(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

(c) Knowledge management


yy Knowledge management can be defined as the process of discovering and har-
nessing the intellectual resource of a business.
yy The entrepreneur should use the knowledge and ideas of the people who work
for the business.
yy The entrepreneur should find, unlock and share his/her co-workers’ skills, wisdom
and the relationships between these people.

(d) Alliance across business borders


yy People in different departments of the business should work effectively together.
yy All the activities of a business should be aligned with each other – communica-
tion among different people in the business, departments, divisions and subunits
should be of a high standard

Go back to your prescribed textbook and study these key components now.

2.6 BUSINESS FUNCTIONS: A PERSPECTIVE


Every business deals with various business functions. Businesses generally consist of seven
118

functional departments, namely, operations, finance, purchasing, marketing, administra-


tion, human resources and public relations.

Study the different functional departments as explained in your prescribed


textbook and the summaries of the different functions in your study guide.
Make sure that you understand the role and function of each of these different
functional departments.

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

121 These functions operate as a system.

There is, and should be, constant interaction and coordination among these functions
122

to ensure that the enterprise operates successfully.

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 Human resources management


yy Responsible for the procurement, development, compensation, integration, mainte-
nance and effective use of a competent, motivated labour force.

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.

2.7 MANAGEMENT PRINCIPLES


It is important that you understand the definition of management. Management is a
126

process that consists of certain components.

Go back to the mind map of this chapter. See if you can identify the differ-
127

ent components of management as represented in the mind map.

1 The definition of management


Management is the process of utilising an enterprise’s resources to achieve specific objec-
128

tives through the functions of planning, organising, leading and controlling.

1 Important aspects of the definition


1 Resources
yy Human resources (personnel)
yy Financial resources (capital)
yy Physical resources (raw materials/stock)
yy Information resources
1 Objectives
yy The goals that the enterprise should achieve in order for it to continue to exist
25 BSM1602/1/2014–2016
Take care not to think that the different management tasks can function independently
129

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.

Study the different main functions of general management as explained in


your prescribed textbook and the summaries of the main functions in your
study guide. Make sure that you understand the role of each of these different
functions as a management tool. Under the planning function, pay attention
to the different levels of planning. It is important to understand the purpose
and the different activities of planning on the different levels.

26
131

Source: De Beer, Rossouw, Moolman, Le Roux & Labuschagne (1998)

2.8 THE ROLE AND FUNCTIONS OF GENERAL MANAGEMENT


132 The main functions of general management

133

These functions/elements are closely connected to form a unit – one cannot exist without
134

the other.

2.9 THE MAIN FUNCTIONS OF GENERAL MANAGEMENT


1 (A) PLANNING
135 Definition: Draw up objectives for the enterprise and work out a systematic plan for
achieving these objectives.

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.

2.10 TYPES OF PLANNING


1 Strategic planning
yy Development of broad general guidelines/strategies
yy Reflects the mission of the enterprise
yy Long-term planning
yy Time frame: 3 to 10 years or longer
1 Functional/tactical planning
yy Plans are drawn up for every function/department in the enterprise, such as for the
marketing department, the financial department, and so on
yy Focuses specifically on the enterprise’s activities
yy Medium-term planning
yy Time frame: 1 to 3 years
1 Operational planning
yy Involves the daily giving of instructions and carrying out of instructions
yy Short-term planning
yy Time frame: not more one year
Activity 2.5

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 Requirements for setting objectives


y Should be specific.
y Should have a time frame in which they must be achieved.
y The people responsible for achieving the objectives should be clearly identified.
y Should be measurable.
y Should be drawn up in order of priority.
y Should be consistent with the other objectives of the enterprise.
y Should be reasonable/attainable so as to be acceptable to staff.
y Should be flexible so as to adapt to changing circumstances.

2.11 THE PLANNING PROCESS


y Plans should be realistic and flexible.
y To ensure that plans are realistic, you need information.
y This information is obtained largely from past experience.
y Information from past experience is obtained from the business environment: the
micro environment, the market environment and the macro environment

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?

3. Make assumptions and draw up plans of action accordingly


y Study and analyse the information gained from the business environment.
y Make assumptions on the basis of this information.
y Adapt plans for each assumption.

30
4. Identify alternative plans of action
y Develop alternative plans for all the assumptions.

5. Analyse and consider alternative plans of action


y Weigh up the various plans against each other.
y Look at the advantages and disadvantages of each plan.

6. Choose a final plan


y Now decide on a plan of action.

7. Draw up a budget
y This will ensure that you have the necessary financial resources to carry out the
plan.

8. Implement the plan


y Execute 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.

1 THE CONTROL PROCESS


1 Steps of control
1. Set standards, draw up methods for measuring performance and announce the
standards
y Set standards or criteria for tasks in the enterprise.
y Staff must be aware of standards.
y Example: number of products that must be manufactured per day.

31 BSM1602/1/2014–2016
y Requirements with which performance standards must comply,
y Standards should be: realistic and clear
acceptable to staff

2. Measure actual performance


y Determine the actual output – the number of products manufactured.
y Measurement must be accurate.

3. Evaluate and compare actual performance with set standards


y Compare performance with standards.
y Determine deviations from standards.
y Determine the reason for deviations – why did they manufacture fewer products?

4. Take corrective action


y Eliminate reason for deviations – e.g. faulty machines
y Standards can also be lowered – if the original standards were too high, it may
have been impossible to manufacture the quantity of products in a certain time-
frame without jeopardising the quality of the products.

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.

1 THE ORGANISING PROCESS


1 Steps of organising
1. Gather the necessary information
y There should be complete clarity on the objectives, aims, policy descriptions,
plans and resources that the business may need.

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.

3. Divide the activities into meaningful units or divisions


y Group related tasks together.
y This ensures that the duplication of work is eliminated.

4. Divide the unit’s activities into meaningful tasks


y This enables management to determine how many and what type of employees
will be needed to execute the tasks in each division/team.

5. Assign responsibilities and authority


The employees should be informed about:
y what their duties and responsibilities are
y to whom they should report
y from whom they may receive orders

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

6. Obtain the necessary resources and announce the rules


y Everything the business needs should be available at the right time and in the
right place.

This includes all the resources that the business needs:


y Natural resources (raw materials or stock)
y Human resources
y Financial resources

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

Motivation can be done in the following ways:


yy Emphasise big-picture ideas. People want to think they are making a difference.
yy Stay above board. Ethical management keeps employees feeling engaged.
yy Educate yourself. Be sure you know what you are talking about.
yy Praise publicly. Reprimand privately.
yy Convey interest. Get to know your employees as people.
yy Don’t forget the magic words. Say “thank you” at least 10 times a week.
yy Be a coach, not a manager. Help team members grow.
yy Don’t sweat the small stuff. Focus on what employees contribute, not on how they do it.
Read more: http://business.time.com/2012/10/05/eight-ways-to-motivate-employees/
#ixzz2E9ZHNrSe

35 BSM1602/1/2014–2016
2.13 MANAGERIAL COMPETENCIES
(a) Communication
yy Informal communication
yy Formal communication
yy Negotiation

(b) Planning and administration


yy Information gathering, analysis and problem solving
yy Planning and organising projects
yy Time management
yy Budgeting and financial management

(c) Teamwork
yy Team design
yy Creating a supportive environment
yy Managing team dynamics

(d) Strategic action


yy Understanding the industry
yy Understanding the business
yy Taking strategic action
yy Visionary leadership

(e) Global awareness


yy Cultural knowledge and understanding
yy Cultural sensitivity

(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.

1 Case study: MaMa’s Clothes


Three years ago, Mary Maziko decided to start her own clothing manufacturing enterprise in
146

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

started her small business, her situation has changed drastically.

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.

2.8 Secondary objectives … of MaMa’s Clothes.


(1) are the main objectives
(2) determine the direction

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

of chapter 2, you can proceed with chapter 3.

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

tal to buy fixed and current assets to be able to manufacture/sell a product/service in


order to generate an income/make a profit. In chapter 3 we will discuss how the financial
activities of an enterprise should be managed in order to gain maximum return on the
capital invested in the enterprise.

156 The summary in your prescribed textbook states the following:

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

3.1 Learning outcomes


3.2 Key concepts
3.3 A mind map for chapter 3
3.4 Overview
3.5 What is financial management?
3.6 Understanding financial statements
3.7 Financial ratio analysis
3.8 Financial planning
3.9 The financial function
3.10 Financial planning
3.11 Self-assessment
3.12 Summary
3.13 Solutions

3.1 LEARNING OUTCOMES


After you have studied chapter 3, you should be able to
yy define the financial function
yy list and explain the four decisions on which financial management should be based
yy give the definition and an example for each of the following concepts:
−− fixed capital/fixed assets
−− operating capital/current assets

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

yy explain the meaning of the term “cost of capital”


yy give the definition of the following financial statements and indicate the time-
frame of each of them:
−− income statement

41 BSM1602/1/2014–2016
−− balance sheet
−− cash budget

yy explain the purpose of drawing up financial statements


yy explain what financial analysis entails
yy give a definition and an example for each of the following concepts:
−− profitability
−− liquidity
−− solvency

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

3.2 KEY CONCEPTS


Key concepts

You will need to master the following key concepts in order to achieve the learning
outcomes for this chapter:
yy 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

the study guide.

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

financial management, the different objectives to be achieved, important concepts in


financial management and some basic accounting concepts.

Remember that the financial manager is responsible for managing the financial function
163

and the financial activities.

3.6 UNDERSTANDING FINANCIAL STATEMENTS


Financial managers use various tools in carrying out their tasks. One of these tools is fi-
164

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.

Study the section “Understanding financial statements” in your prescribed


textbook. Make sure you understand the part explaining the calculation of
the cost of sales.

3.7 FINANCIAL RATIO ANALYSIS


One of the tasks of the financial manager is financial analysis. The financial performance
165

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

Do you think that a ratio in itself has meaning?

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.

3.8 FINANCIAL PLANNING


Financial planning involves determining the capital needs of the business, making deci-
167

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.

Study the section “Financial planning” in your prescribed textbook.

3.9 THE FINANCIAL FUNCTION


169 Definition: The financial function is responsible for determining the capital need of
the enterprise and for determining the best possible ways of providing for
the capital need.

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

Can you name a few examples of capital?

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

Do you know what an investment is?

11 Feedback

Investment is the commitment of money or capital to purchase financial instruments or other


assets in order to gain profitable returns in the form of interest, income, or appreciation of the
value of the instrument. Investment is related to saving or deferring consumption.

1 Fixed capital
172 Definition: Fixed capital is capital invested in fixed assets.

1 Examples of fixed assets


yy Land, buildings, machinery, equipment, vehicles
1 Operating or working capital
173 Definition: Operating or working capital is capital invested in current assets.

1 Examples of current assets


yy Money invested in stock, cash and debtors.
yy The enterprise requires current assets to be able to use the fixed assets – raw materials
and stock are needed to use machines and equipment.
yy Current assets can be converted into cash quickly

1 (b)  Determine the extent of the capital need


1 What is capital?
174 Definition: Capital is the money available to the enterprise for the purchasing of goods
and services, with a view of generating an income for the enterprise.

1 What is the capital need?


175 Definition: The capital need refers to the need for money to obtain goods and services
with which the enterprise can generate an income.

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.

1 The capital need

176

1. Once-off capital need


yy This refers to capital that is needed to start the enterprise.
yy Capital for doing a viability study, for registering the enterprise and for buying
the building, equipment and initial stock/raw materials.

2. Permanent capital need


yy This is the part of the capital need the enterprise needs constantly in order to
function profitably.
yy The need for fixed assets and current assets without which the enterprise can-
not function.
yy Fixed assets such as machinery and equipment
yy Current assets such as stock for manufacturing use or for sale, and cash to pay
wages, rent and other accounts.
Examples
yy Grocery store – needs permanent capital to buy stock that is sold every day, such
as basic groceries like bread, milk, coffee, sugar, vegetables.
yy Furniture manufacturer – needs wood on a constant basis to manufacture the
furniture.

3. Variable capital need


yy This is that part of capital that the enterprise can do without from time to time.
yy Sometimes an enterprise needs more capital and sometimes less.
yy The enterprise will sometimes need more raw materials to manufacture more
products for seasonal production, will need to buy more stock for seasonal sales
and will need more cash to pay overtime wages.

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

sales, growth of the enterprise, quantity discounts and so forth.

Activity 3.4

Can you give you own examples of variable capital needs?

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

1 2.2  Financing decision


yy How are you going to make the necessary funds available to finance these assets?
yy From what sources, in what forms and at what cost are the assets going to be financed?
1 (a)  What sources of capital will be used?
There are two types of source from which the business can obtain capital, namely, inter-
178

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

two main groups:

Study the section “Sources of capital” in your prescribed textbook.

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.

(b) Financial statements

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

1 How do we determine the cost of sales?


There are different ways to calculate the cost of sales, based on the type of enterprise.
190

We distinguish between a commercial enterprise and a manufacturing enterprise.

1 (a)  Commercial enterprise


191 Opening stock (at beginning of the period)
192 +  Purchases (during the period)
193 –  Closing stock (at the end of the period)
194 =  Cost of sales

1 (b)  Manufacturing enterprise


195 Finished products (difference between opening and closing balance):
196 + Work in progress – half finished products (difference between opening and closing
balance)
197 + Raw materials (difference between opening and closing balance plus purchases
during the period)
198 +  Direct labour
199 +  Direct factory overheads
200 =  Cost of sales

Activity 3.5

Can you name a few commercial enterprises in your area?

13 Feedback

An easy way to remember what a commercial enterprise is is by referring to it as a shop, be-


cause it is a place where things are sold. Depending on where you live, commercial enterprises
could include:

yy Shoprite, Checkers, Pick n Pay, Edgars, PEP and Ackermans

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.

202 Main entries on a balance sheet


203 Capital employed
yy Own capital
yy Long-term liabilities (loans)
yy Short-term liabilities (creditors and short-term loans)
204 Employment of capital
yy Fixed assets – buildings, machinery, equipment, vehicles
yy Current assets – cash, stock, debtors
205 Please note:
206 The capital employed and the employment of capital must balance!
207 Total assets = Owner’s equity + Total liabilities

1 3.  Cash budget


208 Definition: The cash budget shows all the cash receipts and the cash payments over
a period.

209 Main entries on a cash budget


210 Total cash receipts
211 –   Total cash payments
212 =  Net cash flow
213 +  Beginning cash flow (the ending cash flow of the previous period)
214 =  Ending cash flow

53 BSM1602/1/2014–2016
1 (c)  Purpose of financial statements

215

1 (d)  Financial analysis

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.

220 (a)  Current ratio


Current assets
221

222Current liabilities

223 (b)  Acid test (quick) ratio

224 Current assets – inventory


Current liabilities
225

226 (c)  Working capital

227 Working capital = Total current assets – Total current 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.

1 2.  Profitability ratios


228 Definition: Profitability ratios show the relationship between the net income earned
over a certain period and the capital used/invested to generate the income.

229 (a)  Gross profit margin


230 Gross profit
Sales231

55 BSM1602/1/2014–2016
232 (b)  Net profit margin
233Net profit after tax
Sales 234

235 (c)  Profitability of the enterprise


236 Definition: The profitability, that is, the net income before interest, earned during
a specific period on total capital invested – borrowed capital plus own
capital.

237Net income before interest


Total capital 238

239 (d)  Profitability of own capital

240 Definition: The profitability net income after interest, earned during a specific period
on own capital invested – total capital minus borrowed capital.

241 Net income after interest


Own capital 242

243 Why do we deduct interest?

yy Because we only pay interest on loan capital, not on own capital.


yy We exclude borrowed capital from our calculations.
1 3.  Solvency (debt) ratios
244 Definition: Solvency is the ability of the enterprise to pay its debts, even if the enter-
prise ceases to exist.

245 Meaning: Total assets must exceed total liabilities (loans).

246 (a)  Debt ratio


Total assets – total equity
247

Total assets 248

249 (b)  Gearing ratio


Long term 250

251 Long-term debt + Total equity

252 (c)  Interest coverage ratio


253Net income before interest and tax
Interest expense 254

56
255 (d)  Debt to equity ratio
Total assets – Total equity
256

Total equity 257

1 4.  Activity ratios


258 (a)  Stock (inventory) turnover rate
Cost of sales
259

260 Average inventory

261 (b)  Accounts receivable turnover rate (debtors collection period)


Credit sales262

Accounts receivable
263

1 5.  Break-even analysis


264 Break-even point
265 Definition: The number of units that must be sold in order for the income and expen-
diture to be equal.
266 Meaning: The point where the net profit is equal to R0, that is, neither a profit nor a
loss is shown.

267 Break-even point in units


Fixed costs
Units =
270

Price per unit – Variable cost per unit


268 269

271

272 (a)  Break-even point in rand value


Fixed costs
Rand = x 100
275

Gross profit margin %


273 274 276 277

278

3.10 FINANCIAL PLANNING

3.10.1 OBJECTIVES OF FINANCIAL MANAGEMENT

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.

1 (b)  Secondary objectives


1. Best use of scarce resources
yy Use capital as effectively as possible.

2. Maintain a healthy position of liquidity


yy The ability of the enterprise to pay monthly accounts regularly and on time.

Maintain an effective working capital cycle


yy Try to free capital tied up in working capital, such as stock and debtors, as soon
as possible.
yy This will allow the enterprise to use the capital for other needs.

3. Apply effective cash management


A positive cash flow can be ensured by
yy collecting debtors as soon as possible
yy eliminating unnecessary stock and overstocking
yy eliminating products that are not profitable
yy leasing fixed assets, such as buildings, instead of buying them
yy using discounts offered by suppliers, such as bulk discounts
yy keeping operating costs as low as possible
yy drawing up a cash budget on a monthly basis

4. Negotiate the best loan conditions and interest rates


yy Ensure lowest cost of capital.
yy Be in a position to make interest payments regularly.
yy Keep to loan conditions.

5. Implement an effective budgeting system


yy Determine how much capital you need.
yy Determine how you should use the capital.

6. Manage growth in the small business


Why should growth be managed?
yy Growth means that the enterprise will need more fixed assets.
  More machinery and equipment will be needed.

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.

How can growth be managed?


yy Consider additional need for capital.
yy Investigate the business’s access to sources of capital.
yy Monitor the current ratio of the business (liquidity).

3.10.2 FINANCIAL POLICY


The financial policy formulates the guidelines for the granting of credit and the deter-
281

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

283 Purpose of a budget

yy Determines expected income and expenditure for a future period.


yy This will enable the enterprise to determine its capital needs.
yy It is an aid to financial planning and control.
3.10.4 DECISIONS ON CREDIT AND COLLECTION METHODS
(a) Managing credit
yy Make credit evaluations before credit is granted.
yy Ensure that accounts are correct and sent out on time.

(b) Credit evaluations


How do we do credit evaluations?

1. Judge creditworthiness of each consumer


Consider the following factors:
yy employment history of applicant – current position, income, job security
yy monthly obligations – accounts
yy bank balance
yy personal assets (collateral)
yy credit history
yy amount of credit desired

2. Decide on what terms credit will be granted


yy The credit period
yy Discounts on early payments
yy Interest on late payments

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.

Therefore credit can be described as a medium of exchange that makes it possible to


285

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”.

3.10.5 CASH PLANNING


(a) Importance of cash
yy The enterprise needs cash on a daily basis.
yy It is needed to perform day-to-day activities.
yy And to maintain a healthy position of liquidity.

(b) The cash budget


yy Preparing a cash budget will give the entrepreneur an idea of future receipts and
payments of cash.

3.10.6 TOOLS FOR FINANCIAL PLANNING AND FORECASTING


yy Pro forma financial statements
yy Ratio analysis
yy Break-even analysis
yy Pricing formulas and policies
1 CASH-FLOW PLANNING
Cash is a four-letter word that has become a curse for many small businesses. Lack of
286

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.

1 Case study: Nyems Electrical Appliances


Eskom’s decision to provide thousands of houses in the rural areas with electricity has created
289

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.

61 BSM1602/1/2014–2016
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.

3.5 Makwetsa must draw up a financial plan for a future period.


This refers to …
(1) an income statement.
(2) a balance sheet.
(3) a budget.
(4) a pro-forma income statement.

62
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

of chapter 3, you can proceed with chapter 4.

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

63 BSM1602/1/2014–2016
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.

Financial management cannot function in isolation. To manage the financial function


300

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

64
Chapter 4
The marketing function

Contents

4.1 Learning outcomes


4.2 Key concepts
4.3 A mind map for chapter 4
4.4 Overview
4.5 The marketing function
4.6 The nature of marketing
4.7 The marketing activities
4.8 Relationship marketing
4.9 The marketing process
4.10 The marketing plan
4.11 Self-assessment
4.12 Summary
4.13 Solutions

4.1 LEARNING OUTCOMES


After you have studied chapter 4, you should be able to
yy define the marketing function
yy define the term “marketing concept”
yy list the four principles on which the marketing concept is based
yy list the five conditions that are required in order for any kind of exchange to take
place
yy explain the five gaps that exist between production and consumption
yy explain the activities that are needed to bridge the gaps between production
and consumption
yy explain the marketing process
yy define the marketing environment
yy list the three sub-environments of the marketing environment
yy list the three variables in the micro environment and give examples of each variable
yy list the three variables in the market environment and give an example of each
of them
yy list the six variables in the macro environment and give two examples of each
variable
yy explain the meaning of the term “market segmentation”, list the four segments
and give an example of each of them
yy explain the meaning of the term “target market”
yy list the four elements of the marketing strategy (mix) and give a practical explana-
tion and an example of each element

65 BSM1602/1/2014–2016
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

yy list the requirements of objectives and give examples of marketing objectives


yy define an action plan and explain what it entails
yy explain why it is important to draw up a budget for the marketing plan
yy explain the importance of control in the marketing plan

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

of the management process and to understand the different management


functions.

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?

67 BSM1602/1/2014–2016
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.

4.4 THE MARKETING FUNCTION


304 Definition: The transfer of products/services to the consumer, as well as the activities
that make this transfer possible.
Meaning: This function is responsible for selling the products/services of the enter-
305

prise to the consumers.

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.

68
Activity 4.2

What does the marketing strategy or marketing mix refer to?

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.

4.4.2 The marketing concept

307

(a) Consumer orientation


yy Concentrate on the needs and wants of consumers
(b) Profitability
yy The primary objective of the enterprise should be realised over the long term and
should not become such an obsession that it endangers the short-term survival
of the business
(c) Integration
yy Integration refers to cooperation between the functions of the enterprise to en-
able it to function as a whole in order to market the products/services successfully.
(d) Social responsibility
yy If a business is socially responsible it will comply with legislation and realise its
responsibility to the community.

Study the section “The nature of marketing” in your prescribed textbook.


In this section, marketing is dealt with under the following headings:

yy Exchange and marketing


yy Gaps between production and consumption

69 BSM1602/1/2014–2016
yy Marketing activities
yy Relationship marketing
yy Defining marketing
yy The marketing process
yy The marketing environment
yy Market segmentation
yy The marketing strategy

4.5 THE NATURE OF MARKETING


4.5.1 Marketing
Marketing is the process of planning and executing the conception, pricing, distribution
308

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?

4.5.2 Exchange and marketing


Every deal involves some form of exchange – exchange between the enterprise (the place
309

of production) and the consumer (the place of consumption).

4.5.3 Gaps between production and consumption


(a) Space gap
yy A geographical space (distance) exists between the manufacturer and the
consumer.
(b) Time gap
yy Refers to the gap between time of production and the time of consumption.
(c) Information gap
yy Clients should be informed about the products (marketing communication).
(d) Ownership gap
yy The product only becomes the property of the consumer once the consumer
has paid for it.
(e) Value gap
yy The seller and buyer should agree on an acceptable exchange rate (price).
yy If the buyer (consumer) does not feel that the price is acceptable, he/she does
not attach the same value to the product as the seller does.

70
4.6 THE MARKETING ACTIVITIES
The following marketing activities are needed to bridge the gaps between production
310

and consumption:

4.6.1 Primary activities

1 Transport
yy Transport is needed to deliver the product to the consumer in the quickest and safest
way.
yy Bridges the space gap

4.6.2 Auxiliary activities


(a) Sourcing and supplying information
yy The seller needs information on who and where the buyers are.
yy The seller supplies information to the buyers – marketing communication.
yy Bridges the information gap

(b) Standardisation and grading


yy Products should conform to specific norms or standards.
yy Bridges the value 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

4.6.3 Exchange activities


yy Buying and selling – the ownership is transferred from one person to another.
yy Bridges the ownership gap
4.7 RELATIONSHIP MARKETING
yy This relates to long-term relationships between the enterprise and stakeholders or
interest groups.
yy These groups include the current and potential consumers, the public, the govern-
ment, the suppliers and the employees.
yy Everybody in the business should cooperate to ensure that there is the highest con-
sumer satisfaction with product quality and service excellence.

71 BSM1602/1/2014–2016
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

(c) Compile a SWOT analysis

72
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.

1 Strengths and weaknesses: micro environment

Activity 4.4

Can you do a SWOT analysis on your favourite shop or a restaurant that you visit regularly?

1 Opportunities and threats: market and macro environment

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.

4.8.2 Market segmentation


313 Definition: Market segmentation is the division of the total market into smaller seg-
ments with certain similarities or common characteristics.
314 Meaning: The total consumer market, which consists of consumers who are all dif-
ferent (heterogeneous), is divided into groups of people that are all similar
(homogeneous).

315 How do we do market segmentation?

316

317

73 BSM1602/1/2014–2016
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

at which you will direct your product or service.

4.8.3 Determine the target market


324 Definition: A target market is the specific market segment or segments at which you
will direct your product or service.
325 Meaning: The people to whom you are going to sell your products; that is, that por-
tion of the total market that you can reach with your product or service.

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

328 The marketing strategy consists of four elements

74
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
75 BSM1602/1/2014–2016
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

What is the deciding element when you buy something?

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.

4.9 THE MARKETING PLAN


330 Definition: The marketing plan is a detailed plan of how a product or service will be
marketed and the time-related details for carrying out the plan.

4.9.1 Advantages of drawing up a marketing plan


331 A marketing plan will help the entrepreneur to

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

76
Study the section titled “The marketing plan” in your prescribed textbook. It is
important that you know the steps in the marketing plan.

STEPS OF THE MARKETING PLAN


1 Step 1: Executive summary
y The executive summary is a summary of the marketing plan and indicates what you
intend to achieve.
y It includes information about the product or service you are going to offer, who your
target market is, what income you expect to earn and who the competitors are.
y It should be short and concise and should be easy to read.

1 Step 2: Market analysis


(a) Market research
y This should include a summary of the findings of the market research.
(b) Market demand/attractiveness
The market can be evaluated according to the following criteria:
y size of the market
y growth potential
y how easy it is to reach the consumers
y affordability of the product
y how easy it is to enter the market
y what the level of competition is
(c) Product life cycle
Four phases
1. Introduction
y The product is new and you have few if any competitors.
y High prices can be charged and a limited range of products can be offered.

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.

77 BSM1602/1/2014–2016
(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.

1 Step 3: Market segmentation and target market selection (customer analysis)


(a) Target market selection criteria
y Determine whether a need exists in a specific area; determine the potential of
the idea.

(b) Customer characteristics


y Evaluate the customers according to the geographic, demographic, psychographic
and behavioural criteria.

1 Step 4: Set objectives


y What you want to achieve in the marketing of your product.
y Objectives should be realistic, quantifiable and linked to a certain period.

1 Step 5: Marketing strategy


y Discuss the product, price, distribution and marketing communication.
y How the current market segment can be expanded.

1 Step 6: Action plan


Definition: An action plan is a written plan setting out how an objective in the marketing
332

plan will be achieved.

333 Plan of action includes


y steps to be followed
y persons responsible for carrying out the steps
y expected completion date of each step and expected duration of each step
y how the success of the steps will be measured

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.

1 Case study: Isiphiwo Guest Lodge


For many years John Black worked as a plant supervisor at a large manufacturing plant. During
335

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.

79 BSM1602/1/2014–2016
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

81 BSM1602/1/2014–2016
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

of chapter 4, you can proceed with chapter 5.


By marketing your products or services you generate an income for your business. The
351

marketing function is responsible for offering a need-satisfying product/service of an


acceptable quality at an affordable price and the distribution of that product/service to
the consumers, as well as for making the consumers aware of the product/service.
Before you can sell a product or service, you must have a product or service to sell. In
352

any business, whether it manufactures a product or renders a service, a transformation


process occurs. The operations function is responsible for the transformation of inputs
(the four factors of production) into outputs (the final products and/or services). In chapter
5 we will discuss the transformation process and all the systems or processes that must
be used to manufacture a product or to create a service.
This chapter in your prescribed textbook explained the marketing function. The market-
353

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.

83 BSM1602/1/2014–2016
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

84
Chapter 5
The operations management

Contents

5.1 Learning outcomes


5.2 Key concepts
5.3 A mind map for chapter 5
5.4 Overview
5.5 Introduction
5.6 Operations management defined
5.7 The dynamics of operations management
5.8 The transformation process
5.9 Operations strategy and operations design
5.10 Operations planning and control
5.11 Operations improvement
5.12 Self-assessment
5.13 Summary
5.14 Solutions

5.1 LEARNING OUTCOMES


After you have studied chapter 5, you should be able to
yy define the operations function
yy explain the dynamics of operations management
yy list and explain the factors that must be considered when you decide on the
design of your product/service
yy explain the important concepts regarding value and time
yy list and explain the three steps in the transformation process of a manufacturing
enterprise with the aid of practical examples
yy list and explain the three steps in the transformation process of a service enterprise
with the aid of practical examples
yy list and explain the six elements of lead time
yy list the six performance objectives
yy explain the difference between lean supply and agile supply
yy list the four types of operations system, explain how each of these systems works
and give a practical example of each
yy list and explain the four types of layout and give a practical example of each
yy distinguish between long-term operations planning and medium- to short-term
operations planning
yy define the term “capacity planning”
yy explain the meaning of aggregate planning and master scheduling, indicate the
time frame of each of them and give a practical example of each

85 BSM1602/1/2014–2016
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

5.2 KEY CONCEPTS


Key concepts

You will need to master the following key concepts in order to achieve the learning
outcomes for this chapter:
yy 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.

To obtain a holistic view of chapter 5 on operations management, look at the


355

mind map that follows.

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

87 BSM1602/1/2014–2016
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

5.6 OPERATIONS MANAGEMENT DEFINED


Operations management in a business is concerned with conversion or transformation
362

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.

363 Definition: Operations management is the management of systems or processes that


produce products or services.
364 Meaning: This function is responsible for the physical manufacturing of the products
or the physical rendering of the services.

Study this section in your prescribed textbook. You will note that your textbook
discusses the following aspects:

yy t he transformation process (your workbook provides diagrams of the process,


which will aid your understanding)
yy planning and control of the transformation process
yy process management inherent in operations management
yy performance objectives of operations management
yy the centrality of operations productivity
yy macro-productivity
yy micro-productivity

Activity 5.2

What formula would you use to obtain an accurate quotient for productivity?

89 BSM1602/1/2014–2016
21Feedback    

           Output income
Productivity = 
Input expenses

5.7 THE DYNAMICS OF OPERATIONS MANAGEMENT


Operations management in a business can be described as the business’s ability to be
365

an innovator. In other words, operations management is closely linked to the creative


attitude of the entrepreneur. Although it is important for the entrepreneur to think of as
many small business ideas as possible, only one idea can eventually be used to create a
small business. This idea is about change, creativity, productivity and adding value.

Your textbook describes, under the following headings, the creative process technologies
366

that assist the transformation process:

yy Creative designs inherent in operations


yy Technology and innovation
yy Value and time are of the essence for any operation
5.7.1 Primary functions of operations management
yy Product and service design
yy Demand and capacity planning
yy Operations system design
yy Production planning and control
yy Improvement, problem solving and maintenance
5.7.2 Three important factors
(a) Creative designs
yy Designs must be cost-effective.

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.

1 Factors to consider when designing a product:


367 Sales appearance
yy Products must look good in order to sell.
yy Appearance is more important than function itself, for example clothes.
yy Appearance includes packaging and presentation on shelves.
90
368 Design effectiveness

yy Ensure that product is user-friendly.


yy Ensure that it is fit for the purpose for which it is sold – for example, if you design a
handbag, you should be able to use it as a handbag.

369 Raw materials

yy Choice between expensive and inexpensive raw materials


yy The cost of raw materials directly influences price of products.
yy Price and quality of raw materials will be determined by the consumers that will buy
the products – they will decide on the quality of the end product.

370 Determining costs

yy Manufacturing costs directly influence selling price of products.


yy Price must not be too high – must be affordable to consumers and competitive in com-
parison with similar products.

371 (b)  Technology and innovation

yy Technology is associated with new gadgets, devices, machines or processes

372 (c)  Value and time

yy The essence of any transformation process is to add value and eliminate waste.

1 Important concepts regarding value and time


373 JIT

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

yy This refers to total quality management.


yy It focuses on all resources, processes, products and functions.
yy Quality chains and quality circles
yy A value chain is the ideal series of transformational processes whereby each step
increases the value of an item.

91 BSM1602/1/2014–2016
5.8 THE TRANSFORMATION PROCESS

375

1 Example:  Manufacturing of furniture

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
93 BSM1602/1/2014–2016
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.

5.9 OPERATIONS STRATEGY AND OPERATIONS DESIGN


During the transformation process, the entrepreneur is often expected to make decisions
379

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”.

5.9.1 Operations design


Characteristic Lean supply Agile supply

Product variety Low variety High variety


Product life style Long Short
Forecasting mechanism Algorithmic Consultative/qualitative
Profit margin Low High
Market Predictable Volatile
Stock demand Stable and long term Immediately available and
volatile

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

(b) Job system


yy Manufacture according to the needs or specifications of consumers
yy On an order basis
yy Once-off job, carried out on a small scale
yy Nature of job remains the same, but requirements differ from job to job
yy Complete production process to be adjusted to manufacture one product
yy Production time longer

(c) Batch system


yy Limited range of products in large quantities
yy Manufacturing takes place in batches
yy The size of each batch and the type of product in each batch are determined by
the number of orders

(d) Project system


yy Once-off job, carried out on a large scale
yy Each project has a specific lifespan and the project is unique – it cannot be repeated
yy Special equipment is often necessary
yy Example: Building a house, bridge, etc

95 BSM1602/1/2014–2016
5.9.3 The relationship between the operations system and the type of
layout

383

(a) Product layout


yy Mass processes or purely continuous/repetitive systems
yy When the same steps are carried out in the same sequence.
yy The work centres are organised according to the steps in the operations process.

(b) Process layout


yy Job and batch systems
yy Employees and equipment are organised around the operations process.
yy All people and machinery involved in the same aspect of operations are placed
in one area.

(c) Cell layout


yy Large batches and small continuous/repetitive systems

(d) Fixed-position layout


yy Project systems and large job systems
yy The product cannot be transported from one work station to another.

5.10 OPERATIONS PLANNING AND CONTROL


From an entrepreneur’s viewpoint, the planning and control part of operations manage-
384

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

Can you give examples of long-term planning?

97 BSM1602/1/2014–2016
23Feedback

Long-term planning can include the following:

yy new design of office plan


yy new product to be launched
yy new premises to be acquired
yy layout of a new factory line

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.

390 How do we determine the capacity?


yy The operations manager must calculate the maximum output of the various opera-
tions units.
yy A unit can be a machine, a group of machines, or a group of workers with or without
a machine.
yy The size of the enterprise, the amount and type of equipment and the number of
workers will influence the capacity of the enterprise.

98
1 OPERATIONS PLANNING

391

392 Aggregate planning

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.

395 Master scheduling


396 Definition: Indicates the planned production per time interval, for example per month/
week.
397 Meaning: The planned production of each individual product in the range of prod-
ucts; how many of each must be manufactured per week or per month.

398 Operations scheduling


399 Definition: Operations scheduling is the determination of the sequence in which jobs
and activities are to be completed in the manufacturing plant.

400 Five scheduling techniques

yy First-in-first-out
yy Last-in-first-out
yy Shortest processing time
yy Longest processing time
yy Due-date principle
99 BSM1602/1/2014–2016
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

yy based on judgement rather than on actual calculations


402 Time series analysis/quantitative
yy do calculations
403 Causal methods
yy to determine the cause-and-effect relationship
404 Examples of forecasting techniques:
yy multi-period pattern projections
yy single-period patternless projections
5.10.3 The Ms of capacity
yy Methods
yy Machines
yy Manpower
yy Money
yy Material
5.10.4 Fixed-capacity planning
405 Elements of fixed-capacity planning
yy occupational safety
yy identifying a suitable location
yy determining the size of the operations unit
yy the layout of the operations unit
yy the choice, design and specifications of machinery and equipment
5.10.5 Adapting capacity to a change in demand
If the capacity is smaller than the demand, the operations unit can consider the follo­wing
406

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.

5.10.6 The activities of operations scheduling

408 Operations scheduling comprises of four activities:

(a) Timing and routing

yy Timing – when a specific activity will take place


yy Routing – where or on which machinery the operation will be performed

(b) Dispatching

yy Issuing a shop order so that the operation can take place

(c) Control

yy Establishing the status of the shop order

(d) Expediting

Effective scheduling entails:

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

5.10.7 Forward and backward scheduling

409 Forward scheduling

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

5.10.8 Gantt charts and other techniques

yy Includes techniques such as Gantt charts and the Johnson’s algorithm


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5.10.9 Inventory management

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.

5.10.11   Determining inventory quantities


415 Lot-for-lot approach

yy Orders must be placed frequently which results in high order costs


416 Economic ordering quantity

yy As soon as the stock reaches a certain level, a fixed order is placed.


417 Break-even analysis

The volume at which total revenues are equal to total costs


418

419 Break-even point in units


420 Formula

Fixed costs
Units =
423

Price per unit – Variable cost per unit


421 422

424

5.11 OPERATIONS IMPROVEMENT


Today entrepreneurs live in challenging and stimulating times. Technologically the entre-
425

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.

103 BSM1602/1/2014–2016
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

Study the section on operations improvement in your prescribed textbook and


look at the core notes in at section 5.11 in the study guide.

Activity 5.6

Do you think leaders have a big impact on the business?

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.

5.11.1 Total quality management (TQM)


yy TQM is concerned with the improvement of all aspects of operations performance.
yy A holistic approach to quality
430 Consumers want the following:
yy Products and services that are value for money.
yy Products and services that are reliable and meet their requirements.
yy Products and services that are available on time.
yy Products and services that improve their quality of life.
104
5.11.2 Maintenance and replacement
431 Defective machinery and equipment can cause the following:
yy reduced production capacity
yy increased production costs
yy lower quality products and services
yy threats to safety
yy customer dissatisfaction
5.11.3 Preventative management
yy Training of maintenance teams
yy Determining the possible time of failure
yy Implementing Japanese principles
5.11.4 Total productive maintenance and improvement
432 The objective is to
yy improve plant and equipment effectiveness
yy create a sense of ownership for operators
yy promote continuous improvement
5.11.5 Safety, health and environmental management
yy The increase in production should not be the only concern – the operations function
should also consider the wellbeing of the employees

5.11.6 Process technology improves health and safety


yy This refers to technology that can assist the value-adding process.
5.11.7 Good housekeeping
433 Principles

yy Keep floors clean.


yy Stack materials neatly.
yy Keep doors and drawers closed.
yy Return equipment and tools to their proper place.
yy Dispose of waste regularly.
5.12 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 5 in your prescribed textbook.

105 BSM1602/1/2014–2016
EXERCISE 5
434 Read the case study and answer the following questions.

1 Case study:  Paardedood Farm


Paardedood Farm is situated near Duiwelskloof, 90 kilometres from Polokwane. After owning
435

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.

Operations management requires the integration of various activities and processes to


442

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.

It is clear that operations management is a dynamic discipline of business management.


443

Operations management requires the integration of various activities and processes to


ensure that the business produces and delivers products or services of high quality to
satisfy the consumers’ demand. If the operations management of the business is based
on effective and efficient operations management principles, it will give the business
a competitive advantage. This competitive advantage means that the business will be
superior to its competitors in that is will provide its consumers with valuable products
and services and, by doing so, maximise its profit.

If you are satisfied with your results and are sure that you have a thorough knowledge
444

of chapter 5, you can proceed with chapter 6.

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

108
Chapter 6
The purchasing function

Contents

6.1 Learning outcomes


6.2 Key concepts
6.3 A mind map for chapter 6
6.4 Overview
6.5 The purchasing function
6.6 Importance of the purchasing function
6.7 The influence on the other functions
6.8 The cost of purchasing
6.9 Management of the purchasing function
6.10 Planning
6.11 Organising
6.12 Control
6.13 Activities of the purchasing function
6.14 The purchasing cycle
6.15 Purchasing quality
6.16 Purchasing quantity
6.17 Selection of suppliers
6.18 Purchasing prices
6.19 Timing of purchases
6.20 Self-assessment
6.21 Summary
6.22 Solutions

6.1 LEARNING OUTCOMES


After you have studied chapter 6, you should be able to
yy define the purchasing function
yy explain the role and importance of the purchasing function
yy explain what the management of the purchasing function entails
yy list and explain the six objectives of the purchasing function
yy explain why it is so important that the operations, marketing, financial and pur-
chasing functions work together closely
yy explain what a purchasing policy entails
yy explain the process of drawing up the purchasing budget
yy explain the difference between centralised purchasing and decentralised purchas-
ing and give one advantage and one disadvantage of each method
yy explain the areas that will be included in the performance evaluation of purchas-
ing management

109 BSM1602/1/2014–2016
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

6.2 KEY CONCEPTS


key concepts

You will need to master the following key concepts in order to achieve the learning
outcomes for this chapter:
yy 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

this study guide.

6.5 THE PURCHASING FUNCTION


468 Definition: The purchasing function must ensure that production means of the right
quality are supplied in the right quantities, at the right time, to the right
place, and obtained from the right suppliers at the right price.
469 Meaning: The purchasing function is responsible for supplying the raw materials or
stock that the enterprise needs to manufacture the products or to render
its services.

6.6 IMPORTANCE OF THE PURCHASING FUNCTION


As you can see, the purchasing function plays a really important role in a business in terms
470

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.

473 All enterprises need a purchasing function.

yy Manufacturing enterprises need to buy raw materials, machinery and equipment.


yy Commercial enterprises need to buy furniture, stock and equipment.
yy Service enterprises need to buy office furniture, equipment and stationery.
474 We distinguish between
yy regular purchases – the enterprise needs stock and raw materials on a daily basis
yy irregular purchases – machinery and equipment that need to be replaced
6.7 THE INFLUENCE ON THE OTHER FUNCTIONS
If the purchasing function does not fulfil its responsibilities by supplying the right quality
475

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.

479 Public relations


yy This would have a negative effect on the image of the enterprise.
480 General management
yy This would also have a negative influence on the survival or existence of the enterprise
in the long term.

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.

6.8 THE COST OF PURCHASING


yy The cost of raw materials and stock has a direct influence on the cost of final products,
the selling price and, ultimately, on profit.
yy Purchasing costs are a business’s greatest expense.
yy Commercial enterprises spend up to 90% of each rand on buying new stock to sell.
yy Manufacturing enterprises spend about 60% of each rand on buying raw materials to
manufacture more products.

6.9 MANAGEMENT OF THE PURCHASING FUNCTION


The role of general management is to utilise the scarce resources available, and through
483

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.

If deliveries are late:


yy production cannot produce in time
yy marketing cannot deliver in time – dissatisfied consumers
yy workers have to work overtime – higher costs, less profit

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.

5. Good relations with suppliers


yy Will ensure that suppliers will go out of their way to help in crisis situations.

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.

6. Good relations with other functions of the enterprise


The operations, marketing, financial and purchasing managers must work closely
together.

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 (b)  Formulate policy and procedures


488 Definition: The purchasing policy determines the guidelines according to which suppli-
ers are identified and selected and the basic principles according to which
they are treated.

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?

(b) Criteria for measuring performance


yy Price
yy Supplier performance
yy Timeliness
yy Cost savings
yy Inventory holding
yy Relationship with suppliers
yy Relationship with other functions
yy Workload

6.13 ACTIVITIES OF THE PURCHASING FUNCTION


These activities form a logical cycle, and you will notice that your textbook refers to this
489

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

6.14 THE PURCHASING CYCLE


(a) The development and description of the need
y Determine purchasing needs

Steps to determine purchasing needs:


1. Forecast expected sales
The marketing function does research on the expected sales, the needs and
preferences of consumers and their purchasing behaviour.
2. Compare forecast with current stock levels and production schedules.
3. Decide what means of production must be bought, when they must be bought,
what quality is required in what quantities.
y Complete a requisition form which describes the needs.

(b) Choice of suppliers


The choice of suppliers will depend on
y whether it is a new purchase or a repurchase
y whether a new contract needs to be drawn up or a contract already exists
y whether standard or specialised materials are required

(c) Determine prices


Get quotations from suppliers
y Cost of raw materials/stock is very important – it affects the cost of final products,
and this affects the selling price and the profit.

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.

(e) Expediting and follow-up


y Determining whether materials will be received on time to prevent late deliveries
y Supplier makes out an invoice stating the information on the ordered materials
and the amount due.

(f) Receive, inspect and distribute the goods


y Person who receives raw materials must inspect quality and quantity.
y Deviations must be noted on delivery note.
y Sign delivery note and compile inspection reports.

(g) Handling errors and discrepancies


y If defective materials have been received, the purchasing function should com-
municate with the supplier to prevent future defective consignments.

(h) Paying the order


y The delivery note, inspection report, invoice and order should be checked to
confirm that the quantity, quality, price, discounts and calculations are correct.
y Requests money from the financial function.

(i) Closing the order


y File all documents pertaining the specific transaction.

Activity 6.5

Complete the purchasing cycle.

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.

(b) What is the right quality?


Definition: The right quality is the minimum acceptable quality with which produc-
tion means must comply to ensure that the final product is acceptable
to the consumers.
Meaning: It is the highest quality that can be supplied at the price the client
is prepared to pay. The right quality is therefore not necessarily the
highest quality, but the quality that fulfils the specifications of the
operations function.

(c) The influence of quality


yy The quality of the purchased materials has a direct influence on the quality of
the final products.
yy The quality of the final products influences the consumers and the image of the
enterprise.
yy This will influence the sales and ultimately the profit of the enterprise.

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

(e) The quality control process

1 Steps of quality control


1. Set standards of quality

y Operations manager must specify the minimum standards for a specific means
of production.

2. Compare quality of production means with set standards


y On delivery, the means of production must be inspected to ensure that they com-
ply with set standards.

3. Report deviations

y Purchasing must inform operations about the deviations and explain the extent
of the deviations.

4. Take corrective action

y Return the order.


y Replace the order.
y Accept the order at a lower price.

6.16 PURCHASING QUANTITY


(a) The importance of having stock available

y Production cannot continue without stock.


y Needs of clients cannot be satisfied.
y Keeping stock on hand is a costly exercise.

122
(b) Inventory costs

1. Inventory ordering costs


yy Includes the administrative costs incurred in ordering, receipt and inspec-
tion of stock.

2. Inventory carrying costs


yy Storage costs include costs of renting warehouses to keep the stock
yy Electricity of warehouse
yy Salaries of warehouse staff
yy Insurance against fire and theft
yy Opportunity costs refer to the fact that money could have been invested
elsewhere to earn more income or that storage space could have been used
better, for example to expand the factory or shop.
yy Cost of obsolete stock refers to the ageing of stock which can no longer
be used.

3. Cost of insufficient stock


yy The cost of running out of stock – refers to the lack of production resulting
from a shortage of stock and the buying of emergency stock at higher prices.

(c) Inventory control


1. How much stock should be kept?
  Determine optimum stock levels
yy Weigh up costs of keeping stock versus costs of running out of stock (insuf-
ficient stock).
yy Determine from this how much “safety stock” must be kept to provide for
unforeseen circumstances.

123 BSM1602/1/2014–2016
2. Ordering systems

492

6.17 SELECTION OF SUPPLIERS


1 Four steps
1. Compile a list of potential suppliers
yy Get the names of various suppliers from sources such as trade magazines, busi-
ness chambers, etc.

2. Set criteria for evaluating suppliers


Examples of criteria
yy geographic location
yy reputation – reliability
yy quality, price, features of products

3. Evaluate and select suppliers


yy Choose suitable suppliers.

4. Monitor suppliers
yy Follow up – did they keep to the terms of agreement?

6.18 PURCHASING PRICES


yy The cost of raw materials and stock has a direct influence on the cost of final products,
the selling price and ultimately on profit.
yy Purchasing costs are the largest expense of a business.
yy Commercial enterprises spend up to 90% of each rand on buying new stock to sell.
yy Manufacturing enterprises spend about 60% of each rand on buying raw materials to
manufacture more products.
yy Standard products of low value
yy Prices can be obtained from price lists, catalogues, brochures and advertisements.
yy Less standard products
yy Get quotations from suppliers.

124
6.19 TIMING OF PURCHASES
yy The timing of purchases influences the continuity of the operations and marketing
functions.

1 Factors that influence the timing of purchases


(a) Internal factors
yy The availability of funds
yy Marketing and operations plans and forecasts
yy Physical facilities – storage space
yy Internal policies

Internal policies include


1. Scheduling purchases according to needs
yy Purchasing materials when the business needs them, regardless of the price
and market conditions.

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.

(b) External factors


yy Market conditions
yy Government regulations
yy Seasons
yy Reliability of suppliers

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.

125 BSM1602/1/2014–2016
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.

What will the next logical step be?


(1) Manage, expedite and follow up the order.
(2) Receive the goods.
(3) Handle any errors.
(4) Pay the suppliers.

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

of chapter 6, you can proceed with chapter 7.

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

enterprise cannot function at optimum levels. It is the responsibility of the purchasing


function to ensure that goods and services of the right quality are supplied to the business
at the right place, in the right quantities, at the right time and at the right price. If this does
not happen, the activities of the other functions of the business are negatively affected.

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).

In chapter 7 we will discuss the recruitment, selection, employment, orientation, training


506

and remuneration of an efficient labour force.

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

7.1 Learning outcomes


7.2 A mind map for chapter 7
7.3 Overview
7.4 The human resources function
7.5 Introduction
7.6 Provision of human resources
7.7 Human resource planning
7.8 Recruitment
7.9 Selection
7.10 Employment and placement
7.11 Orientation (induction)
7.12 Compliance with legislation
7.13 Human resource training and development
7.14 Human resource maintenance
7.15 Labour relations
7.16 Personnel administration
7.17 Working conditions
7.18 Self-assessment
7.19 Summary
7.20 Solutions

7.1 LEARNING OUTCOMES


After you have studied chapter 7, you should be able to
yy define the human resources function
yy list and explain components of human resources provision
yy explain what a job analysis entails and list the two components of a job analysis
yy explain what a job description is, how it is compiled and what it entails
yy explain what a job specification is, how it is compiled and what it entails
yy explain the purpose for which a job description and a job specification can be used
yy list the two sources of recruitment and give examples of each source
yy give examples of information that should be included when an advertisement
for a post is compiled
yy list and explain the nine steps in the selection process
yy explain the difference between employment and placement
yy give examples of activities that must take place during the first two weeks of
orientation
yy explain how the labour laws influence human resources provision
yy explain the difference between training and development
yy list and discuss the five steps of the training programme
yy explain what human resource maintenance entails

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

relating to the provision, development and maintenance of a competent and motivated


workforce.

If you analyse the description of the human resource function, you will see that it consists
528

of three primary tasks:


yy the provision of personnel (human resource provision)
yy the training and development of personnel (human resource development)
yy the maintaining of personnel (human resource maintenance)
132
529 However, it is important to note that each of these tasks also contains sub-activities.

To obtain a holistic view of the human resource function, look at the mind
530

map in this study guide.

7.4 THE HUMAN RESOURCES FUNCTION


531 Definition: Human resources are responsible for the procurement, development, com-
pensation, integration, maintenance and effective use of a competent,
motivated labour force.
532 Meaning: This function must ensure that the enterprise employs the right number
and type of employees on a continuous basis, by performing activities such
as planning the need for personnel, as well as the recruitment, selection,
employment, orientation and maintenance of an efficient labour force.

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.

7.6 PROVISION OF HUMAN RESOURCES


The provision of human resources involves finding the right people for the positions that
533

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

1 Human resource planning


Human resource planning refers to all the activities involved in methodically forecasting
535

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.

1 Selection, employment and placing


Once the possible candidates have been recruited, the entrepreneur uses the job specifica-
537

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.

1 Orientation, human resource provision and the law


Often the concepts of orientation and induction are confused. Orientation is the process
538

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.

Study the section on “Provision of human resources” in your prescribed textbook.

7.7 HUMAN RESOURCE PLANNING


(a) How do we decide on the right number and type of employees?

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

541 The type of recruitment that will be used will be determined by

yy the current labour force


yy the type of post
(a) Internal recruitment
yy This can only be used if employees with suitable potential are available in the
enterprise.
yy The job is advertised internally among the current personnel.
yy Proficiency surveys can be done – the training, experience and qualifications of the
employees are recorded and updated on file and when a post becomes available,
the job specification is compared with the surveys to identify a suitable candidate.

(b) External recruitment


yy The job description (type of post/work) will determine the job specification of
the particular post.
yy This will determine the source of external recruitment – whether you, for example,
will advertise the post in the local newspapers or recruit from training institutions.

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.

1 Nine steps of selection


1. Conduct a preliminary selection interview.
y Determine whether the qualifications and interests of the applicant suit the
requirements of the post
y To get an overall impression of the candidates and to give them an overview of
the business

2. Complete application form


y Compare information with job specifications.

3. Selection tests
y The type of test will depend on the type of job – intelligence, skills, personality.

Activity 7.3

Do you know what a selection interview is?

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.

5. Conduct employment (final) interview


y Determine whether the person will be suitable for the post and will get along
with the other employees.

6. Medical examination
y Candidate must be physically suitable for the job.

7. Final employment decision (choice)


y Decide on applicant.
y The one whose qualifications, experience and personality correspond with the
job specification and who would be able to do 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.

7.10 EMPLOYMENT AND PLACEMENT


544 Employment

y Finalise administrative matters – complete forms for unemployment insurance, tax


and medical aid and obtain any outstanding information from the employee.

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.

1 Four stages of orientation


1. Before employee arrives
yy Send general information regarding working hours and dress code
yy Get their office or workspace in order
yy Inform other employees about the newcomer

2. On the first day


yy Introduce them to co-workers
yy Show them their offices and the enterprise environment

3. During the first two weeks


The employee is introduced to

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

4. During the first six months


yy Monitor employees
yy Identify training needs

547 Please note:


548 Orientation is not the same as training

yy Orientation teaches the employee what to do.


yy Training teaches the employee how to do it.
7.12 COMPLIANCE WITH LEGISLATION
549 Should be aware of the contents of
yy the Labour Relations Act
yy the Basic Conditions of Employment Act
yy the Employment Equity Act
139 BSM1602/1/2014–2016
yy Policies and procedures should be adjusted and applied fairly and consistently to all
applicants.

Activity 7.4

Visit the Department of Labour website at www.labour.gov.za to get the latest updated
information on legislation.

7.13 HUMAN RESOURCE TRAINING AND DEVELOPMENT

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.

552 Aim of training (purpose)

yy to orientate new employees with regard to new tasks


yy to maintain a performance level in spite of changes in the work or technology
yy to improve performance and increase productivity
1 DEVELOPMENT
553 Definition: Development refers to preparing employees with potential for certain
management posts.

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.

555 Aim of development

yy to equip the employees with managerial skills to function successful as managers


yy to prepare the employees for further career development
yy to prepare employees for promotion
140
Activity 7.5

In your own words, write down why training and development are not the same thing
and should not be confused

32 Feedback

In general conversation we often use “training” and “development” as synonyms. Although


training is also a type of development, the focus of training differs from that of development.

Study the section on “Human resource training and development” in your


prescribed textbook.

1 FIVE STEPS IN DRAWING UP A TRAINING PROGRAMME


1. Determine the training needs.
Ways to identify training needs:
y employee suggestions
y interviews
y questionnaires
y management by objectives

Other circumstances or problems:


y low productivity, high staff turnover, poor quality, grievances, high absenteeism

2. Establish objectives for training programme.


y Write down what you want to achieve with the training.
y Use standards to ensure that the objectives are measurable.
y Decide on the type of training – basic or specific training.

3. Determine suitable training methods.


y How are you going to present the training – lectures, videos?
y Who will present the training?
y Internal or external?

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.

7.14 HUMAN RESOURCE MAINTENANCE


The concept of human resource maintenance can be described as all those activities of the
556

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

Remuneration is what an employee in a business receives in exchange for labour and


558

other input.

Study the diagram on remuneration below and note the difference between
direct and indirect remuneration.

142
559

1 SALARIES AND WAGES


1. How to decide on a salary
(a) Guidelines
1. Look at salaries of similar posts in other enterprises.
2. Do a job appraisal – compare the value of posts in other enterprises with
the value of posts in your enterprise.
3. Arrange posts in sequence from lowest to highest level (top level).
4. Draw up a remuneration policy and attach a salary scale to every level.

(b) Other factors to consider


yy Supply and demand of labour
yy The ability of the enterprise to pay
yy Prevailing minimum wages

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.

(b) The contract


  The contract should include
yy details of service (description of job) or product to be provided
yy who will provide the resources – machines, materials, stock and maintenance
yy fee structure – how the payment is determined
yy commencement and completion dates
yy breakdowns and other hold-ups
yy indemnity, guarantees, liability and insurance

(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.

7.15 LABOUR RELATIONS


Labour relations has to do with regulating and maintaining the relationship between the
560

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

7.16 PERSONNEL ADMINISTRATION


Personnel administration refers to keeping records of the personal information and ser-
561

vice record of every employee.


yy The quality of decisions taken by management with regard to employees depends
on the availability and accuracy of information.
yy Human resources is responsible for record-keeping relating to human resource data
and the service records of the employees.
yy Employees should be familiar with the policy of the business.

562 The policy documents include


yy conditions of service
yy leave codes
yy rights and privileges
yy grievance procedure
yy disciplinary procedure
7.17 WORKING CONDITIONS
The working conditions of employees have a substantial impact on their motivation,
563

morale, attitude and productivity.

(a) Importance of good working conditions


yy Pleasant and safe working conditions increase motivation and productivity.
yy Unsafe, unhygienic and unpleasant conditions can cause accidents and diseases.
yy Bad working conditions can cause an increase in absenteeism, a decrease in
productivity and lower profits.

(b) Unsafe conditions and unsafe practices


Unsafe conditions
yy refers to accidents caused by technical failures

Examples of unsafe conditions


yy unsafe constructions
yy sharp or slippery surfaces
yy too many people in work areas
yy lack of protective clothing
yy inadequate ventilation, poor lighting and too much noise

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

(c) The causes of accidents


1. Personal factors
yy Lack of knowledge or skills
yy Physical or psychological distractions
yy Incorrect attitude or motivation

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

Study the section on “Human Resource Maintenance” in your prescribed text-


book in detail.

146
Activity 7.6

What is the meaning of collective bargaining?

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.

1 Case study: Power for the nation


Power cuts have become a real problem for all South Africans, as we suddenly have to schedule
565

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
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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

of chapter 7, you can proceed with chapter 8.

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.

An enterprise needs information in order to make informed decisions. The information


577

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

8.1 Learning outcomes


8.2 Key concepts
8.3 A mind map for chapter 8
8.4 Overview
8.5 The information management function
8.6 Introduction
8.7 Components of the information systems
8.8 Information systems
8.9 The stages of processing information
8.10 Types of information systems
8.11 The information needs of the enterprise
8.12 Information systems and sub-systems
8.13 Records management system
8.14 Financial record-keeping system
8.15 Postal mailing system
8.16 Telecommunication
8.17 Use of the computer
8.18 Self-assessment
8.19 Summary
8.20 Solutions

8.1 LEARNING OUTCOMES


After you have studied chapter 8, you should be able to
yy define the information management function
yy explain the importance of information in an enterprise
yy explain the difference between data and information
yy list the six main stages of information processing and give a short explanation
of each stage
yy list and explain the three steps of the information processing system
yy give two examples of information needed by each of the other seven functions
of the enterprise
yy list five external interest groups (decision makers) that will need information from
the information management function and give two examples of information
that each group would need
yy list and explain the four subsystems of the information management function
yy explain what filing entails
yy explain the five aspects that you must keep in mind when you have to decide on
a specific method of filing

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

8.2 KEY CONCEPTS


Key concepts

You will need to master the following key concepts in order to achieve the learning
outcomes for this chapter:
yy 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

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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

formation management function deals with the establishment of systems, procedures


and techniques to collect, classify and process information, and to make it available in
a useable form, such as in a report to people who require the information for decision
making and planning.

154
To obtain a holistic view of the information management function, look at
581

the mind map in this study guide.

8.5 THE INFORMATION MANAGEMENT FUNCTION


582 Definition: The information management function is responsible for the collection,
processing, analysing, storage and distribution of information.
583 Meaning: This function is responsible for providing information to all internal and
external decision makers to enable them to make informed decisions.

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

Incomplete or insufficient information leads to


yy wrong decisions
yy loss of money, time and labour
yy employees not knowing exactly what is expected of them
yy consumers not receiving the information they need in order to support your business
yy the potential failure of the enterprise

8.7 COMPONENTS OF THE INFORMATION SYSTEM


A business can only be properly run if accurate, reliable and timely information is available
584

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

8.8 INFORMATION SYSTEMS


(a) THE IMPORTANCE OF INFORMATION
yy Incomplete or insufficient information leads to wrong decisions, loss of money,
time and labour and even the failure of the enterprise.
yy The provision of the right information at the right time and in the right form is
essential for the survival and success of the enterprise.

(b) THE DIFFERENCE BETWEEN DATA AND INFORMATION


Data
Definition: Data refers to facts in an unprocessed form, which cannot be used in
decision making.

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

(a) Collection of data


Three aspects to consider:
yy activities on which the data must be collected
yy the format in which to collect data
yy methods for collecting data

(b) Processing
The information processing system

586

Example: Calculation of year mark

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.

Study the stages of processing information in your prescribed textbook:

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.

(c) Storage of information


yy Manually – by using cabinets, shelves or files
yy Electronically – by using a computer

(d) Distribution of information


yy Information must now be made available to the users – the people who requested
the information.
yy This can be done by means of conversations, letters, telephones, faxes, e-mails.

(e) Retrieval of information


yy This refers to locating the stored information when it is needed.

(f) Discarding of information


yy This refers to throwing away (physical destruction) files that no longer have any
value to the users.

8.10 TYPES OF INFORMATION SYSTEM

Go back to your prescribed textbook and study this section.

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

Do you know what a SCM system is?

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.

8.11 THE INFORMATION NEEDS OF THE ENTERPRISE


The information manager plays a very important role in the coordination of all the dif-
588

ferent functions in the business. It is the responsibility of the administrative manager to


ensure that the information required by the various functions in the business reaches
them at the right time. To ensure this, it is essential that the various functions send their
data to the administration section in good time to allow sufficient time to process the
data into information and to ensure that the right information reaches the other func-
tions at the right time.

Study this section in your prescribed textbook under the following headings:

yy External information needs


yy Internal information needs

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.

1. INTERNAL INTEREST GROUPS (DECISION-MAKERS)

(a) The other functions of the enterprise


Owner/general management
yy The general financial position of the enterprise
yy Profitability
yy Liquidity and solvency
yy The performance of the other functions

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

2. EXTERNAL INTEREST GROUPS (DECISION-MAKERS)

(a) Capital providers


yy Profitability
yy Liquidity
yy Solvency

(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

(e) Trade unions


yy The financial position of the enterprise to negotiate salary increases
yy Conditions of employment

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.

8.12 INFORMATION SYSTEMS AND SUB-SYSTEMS


The information system consists of various subsystems. These subsystems are discussed
589

in your textbook under the following headings (make sure that you can distinguish be-
tween these subsystems):

yy record management systems


yy financial record-keeping systems
yy postal mailing systems
yy telecommunication
Study this section in this study guide. Pay attention to the core notes.

162
590

8.13 RECORDS MANAGEMENT SYSTEM


yy Responsible for creating and maintaining systematic procedures and control of all the
records in the business
yy Filing is the way in which all documents and files are systematically stored.

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

(b) Methods of filing

163 BSM1602/1/2014–2016
(c) Filing equipment
Includes
yy files such as concertina files, box files and book files
yy filing cabinets

(d) Classifying and arranging files


Filing systems
yy alphabetical – names
yy numerical – numbers
yy alphanumerical – combination of letters and numbers
yy chronological – date order
yy geographical – area
yy subject – topic or category

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.

(e) Preparation of records before filing


yy Inspecting records – remove staples, place related records together
yy Indexing records – decide where a record needs to be filed
yy Coding records – marking the record with the name, location, etc.
yy Cross-reference – make copies if record needs to be filed in another place as well
yy Sorting – arrangement of records in the order in which they are to be filed

(f) Tips for effective filing


yy Do filing on a regular basis.
yy Sort records before filing them – group documents that belong together.
yy Replace files that are too full and put old documents in the archive.
yy Ensure that confidential letters and documents are kept safe.

8.14 FINANCIAL RECORD-KEEPING SYSTEM


(a) Purpose and importance of financial record keeping
yy It gives you the information needed to help you manage the finances of your
business.
yy The information acts as a permanent record of completed transactions.
yy Acts as evidence for the auditors that the accounting entries are correct.
yy The law obliges you to keep financial records.

164
(b) Financial registers
All businesses must start with
yy a cash book
yy a petty cash book
yy a general ledger

When the business expands, additional accounting books can be used:


yy sales journal
yy debtors ledger
yy wages and salaries journal
yy stock register
yy purchases journal
yy creditors ledger
yy general journal
yy asset register

8.15 POSTAL MAILING SYSTEM


(a) Incoming mail
yy All incoming mail should be opened and stamped with a date and number stamp.
yy Money received should be recorded in a remittance register.
yy Mail should be sorted into relevant groups.
yy Record mail in a letters register.

(b) Outgoing mail


yy Reply to all letters received as soon as possible.
yy Indicate the date on which the letter was answered in the mail register.
yy Send out accounts on a regular basis.
yy File all letters and correspondence in chronological order.

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

(b) The extranet


yy External communication – between the enterprise and consumers, suppliers, etc

(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

(i) Wireless transmission


Includes
yy Paging systems
yy Cellular phones
yy Personal communication services
yy Personal digital assistants
yy Bluetooth

8.17 USE OF THE COMPUTER


The application of computer technology in order for the small business manager to man-
591

age information and the administrative task is increasing at a tremendous rate. This will

166
require that the small business manager keep abreast of, and anticipate, further advance-
ments and applications in the continuing computer revolution.

592 Advantages

yy Cheaper for storing and distributing information.


yy Speeds up commercial transactions – assets can be used more productively and clients
can react more swiftly.
yy Makes information easily available.

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.

1 Case study: Leather for Africa (Pty) Ltd


Oudtshoorn is a town in the Little Karoo that is well known for its ostrich farms. Freddy Fredericks
594

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
596

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.

167 BSM1602/1/2014–2016
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
604

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

8.7 The difference between data and information is that information …


(1) is processed data that can be used in decision making.
(2) contains figures and all transactions recorded and data is summarised.

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(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

of chapter 8, you can proceed with chapter 9.

Information is essential for decision making. Incomplete or insufficient information can


607

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.

Therefore the information management function can be summarised as those activities


610

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

9.1 Learning outcomes


9.2 A mind map for chapter 9
9.3 Overview
9.4 Defining public relations
9.5 The public relations function
9.6 Introduction
9.7 Objectives of public relations
9.8 The interest groups (publics)
9.9 Importance of interest groups
9.10 Shaping public opinion
9.11 Methods of communication
9.12 The difference between marketing and public relations
9.13 The public relations campaign
9.14 Social responsibility
9.15 What does public relations involve?
9.16 A public relations checklist
9.17 Self-assessment
9.18 Summary
9.19 Solutions

9.1 LEARNING OUTCOMES


After you have studied chapter 9, you should be able to
yy define the public relations function
yy explain the importance of the image of the enterprise
yy explain the factors that affect the relationship between the enterprise and certain
interest groups
yy explain the objectives of public relations
yy explain the meaning of the term “interest groups’
yy discuss the internal interest groups with which an enterprise must maintain good
relations
yy discuss the external interest groups with which an enterprise must maintain good
relations
yy explain the importance of interest groups
yy list four factors that can influence the opinions of your clients
yy explain how a favourable image would influence an enterprise
yy list and explain the four factors that determine public opinion
yy explain how telephone techniques, letters and documents, and personal contact
can be used to improve the image of an enterprise

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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

9.2 KEY CONCEPTS


Key concepts

You will need to master the following key concepts in order to achieve the learning
outcomes for this chapter:
yy 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

612

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.

9.5 DEFINING PUBLIC RELATIONS


In our modern society, competition has become so fierce that it is no longer sufficient
616

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.

9.6 THE PUBLIC RELATIONS FUNCTION


617 Definition: The public relations function aims at creating a good image for the enter-
prise with all the interest groups.
618 Meaning: This function establishes and maintains good relationships with all the
people and businesses that have an interest in the enterprise.

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

Give your own examples of the following interest groups:


yy consumers
yy the community
yy the employees
yy the media
yy the suppliers

Feedback
39

Examples of the interest groups are


yy consumers – people who buy your products from you
yy community – the people residing in the area in which your business is located
yy employees – the people working in your business

176
yy media – local newspapers
yy suppliers – businesses that supply you with stock and services

9.8 OBJECTIVES OF PUBLIC RELATIONS


In view of what has been said above, the primary objective of external relations is to de-
620

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.

622 Primary objective


yy To promote and improve the image of the enterprise among the public in order to
establish and maintain a healthy relationship between the enterprise and the interest
groups.

623 Secondary objectives


yy To promote the prosperity of the business.
yy To establish goodwill among the public.
9.9 THE INTEREST GROUPS (PUBLICS)

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.

1 2.   THE DIFFERENT PUBLICS


626 The different publics can be divided into internal and external publics.

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

What is the difference between internal and external publics?

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

1 3.  KINDS OF INTEREST GROUPS (PUBLICS)

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.

2. The other functions of the enterprise


General management
yy The members of general management influence the image through their be-
haviour in public as they represent the enterprise at functions and gatherings.
yy Public relations helps general management by providing information and
assisting in writing their speeches.

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.

(b) External interest groups


Consumers
yy They buy the products/services of the enterprise.
yy The quality and prices will influence consumers, as well as the appearance of the
shop, the reception and atmosphere in the enterprise and the way in which they
are treated by the employees.

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.

180
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.

9.11 SHAPING PUBLIC OPINION


Public opinion is the view held by a large group of people on a certain issue affecting
630

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.

1 How is public opinion formed?


Various factors affect the formation of the public opinion about your business. The fol-
631

lowing aspects are discussed briefly in your prescribed textbook:


yy type of relationship
yy previous experience
yy reception and atmosphere
yy communication
1. THE CLIENT’S OPINION
Factors that form the opinions of clients
yy promotions, for example advertisements
yy appearance of the shop
yy packaging and quality of the products
yy after-sales service
yy the way in which they are treated

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

3. FACTORS THAT FORM PUBLIC OPINION

632

(a) The type of relationship


yy The type of relationship that interest groups have with the enterprise will
determine whether public opinion is favourable or not.
yy For example, if something goes wrong with the products, the enterprise
can warn the consumers and withdraw the products and compensate
consumers – then its image will not be damaged in any way.

(b) Previous experience


yy Consumers share their experiences with one another.
yy Positive experiences will be good advertisements.
yy Negative experiences will be bad publicity.
yy Negative publicity lasts longer than positive publicity

(c) Reception and atmosphere


yy The reception areas and the behaviour of employees can create a good or
bad impression of the enterprise.
yy Employees must be informed about the way in which they should receive
and treat clients.
yy A visitor to the business will form an immediate impression of it just by
looking at the reception area.
yy If the reception area is neat, clean and friendly, the visitor will form a posi-
tive impression of the business.
yy Receptionists should be friendly and helpful.

(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.

9.12 METHODS OF COMMUNICATION


The basis of external relations is good communication with all the publics that influence
633

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.

(b) Inviting journalists


yy Invite journalists from the local newspaper to the opening of the business.

(c) Sending articles and photographs


yy Send articles and photographs if the press cannot be present at an important
occasion such as the launch of new products or the anniversary of the enterprise.

(d) Ask for an article to be written


yy Ask the newspaper to write an article about your enterprise when you place
advertisements.

183 BSM1602/1/2014–2016
9.13 THE DIFFERENCE BETWEEN MARKETING AND PUBLIC
RELATIONS
Marketing Public relations

Sells the products of the Sells the enterprise itself/


Product sold
enterprise makes the enterprise known

Public reached Consumers Broad public/all interest groups


To improve the image of the
Objective To increase sales/increase turnover
enterprise

Activity 9.4

In your own words, briefly distinguish between the following:

yy marketing
yy public relations

42 Feedback

Key words that distinguish between marketing and public relations:

yy marketing – focuses on the sales of a product or service


yy public relations – focuses on the image of the business, not the product

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.

9.14 THE PUBLIC RELATIONS CAMPAIGN


1. Six types of public relations campaign
yy The public awareness campaign – to make people aware of something
yy The information campaign
yy The public education campaign – educates the market about something
yy Campaigns aimed at reinforcing the attitude and behaviour of the market
yy Campaigns aimed at modifying the behaviour of the publics
yy Campaigns aimed at changing the behaviour of the market or publics
yy The type of campaign that will be followed will depend on what situation the
enterprise is in and what it aims to achieve with launching the campaign.

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.

(b) Legitimacy stage


yy The business must show that it is actively involved in charity events.

(c) Participation stage


yy The business tries to involve those who were previously not involved.

(d) Penetration stage


yy The group at which the campaign is aimed becomes aware of the cause.

(e) Distribution stage


yy Shows the publics that action will occur – the business needs to show that
it is living up to its promises.

3. The four steps in the public relations process


(a) Define the problem or opportunity
yy Research on opinions, attitudes and behaviour

(b) Planning and programming


yy Decisions on what should be done and why

(c) Taking action and communicating


yy How it must be done

(d) Evaluate the campaign


yy Evaluate the effectiveness of the campaign – did you achieve the objective
of the campaign?

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

Apply the four-step public relations process in your business.

43Feedback

Apply the following steps in your business:

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.

9.15 SOCIAL RESPONSIBILITY


The basic principle of social responsibility as part of external relations is that by helping
634

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

Study the following aspects of social responsibility as part of external relations in


your prescribed textbook:
yy employees
yy the environment

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

9.15.1 The community


yy The enterprise has a responsibility towards the local community.
yy Contributions should be made to benefit the inhabitants of the area.
186
636 Examples:
yy financial donations to the community
yy donations in the form of the enterprise’s products
yy sponsorships
yy participate in the upliftment of the community
9.15.2 The environment
yy The enterprise also has a responsibility towards the environment in which it functions.
yy Should contribute to the creation of better social, ecological and aesthetic environments.
637 Examples:
yy support for nature
yy environmental conservation activities
yy anti-pollution campaigns
9.15.3 WHAT DOES PUBLIC RELATIONS INVOLVE?
The image of a business has a major effect on its success and survival. For this reason
638

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

Now study the following sections in your prescribed textbook:


yy Promoting goodwill
yy Releasing information to the public
yy Creating or reinforcing an image
yy Directly promoting a product or service
yy Counteracting negative publicity
yy Handling internal communications
yy Promoting and planning events

1 The tasks of public relations


(a) Promoting goodwill
yy The enterprise should promote goodwill by donating to charity organisations.
(b) Releasing information to the public
yy Press releases about crises in the business

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

9.16 A PUBLIC RELATIONS CHECKLIST


yy The enterprise must determine what kind of public relations it needs.
yy Certain questions can be asked to assist the entrepreneur in his/her decision.
640 Questions that can be asked:
yy Do we need local, regional or national publicity?
yy Is it important that we reach a certain group?
yy How important is goodwill to us?
yy What kind of information do we want to communicate?
yy Are there specific programmes or services that we want to emphasise?
yy To whom must our work ultimately appeal?
yy Are we trying to offset a bad image?
yy Is it more important for us to do a good job or to prove that we are doing a good job?
yy Do people confuse us with other businesses?
9.17 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 9 in your prescribed textbook.

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

9.4 What is the primary objective of public relations in any enterprise?


(1) To make a profit and establish goodwill with the public
(2) To establish goodwill with the public and promote the prosperity of the business
(3) To create and maintain mutual knowledge and understanding in the enterprise
and in public
(4) To promote and improve the image of the enterprise with the public in order
to establish and maintain a healthy relationship between the enterprise and
its interest groups

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

190
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
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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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