Ebook Business Functions - An Introduction

BUSINESS
FUNCTIONS
An Introduction 2nd
ed
A van Noordwyk, NMJ Fernandes & JH van Zyl (editors)

Business Functions
BUSINESS FUNCTIONS
AnAnIntroduction
Introduction
Second Edition
Consulting editors
Consulting editors
J. van Zyl,Noordwyk,
A van A. van NNoordwyk
Fernandes & &Dr R. du
J van ZylToit
Business_Functions.indb 3 2012/01/18 12:53 PM

Business Functions: An Introduction
First published 2012

Second edition 2015
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CONTENTS
Preface vii
About the Consulting Editors viii
Chapter 1: Introduction to Business Management – Prof Tersia Brevis &
Andreas de Beer 1
Learning outcomes 1
1.1 Introduction 1
1.2 Nature of management 2
1.3 Definition of management 5
1.4 The additional management functions 6
1.5 Management skills 8
1.6 Managerial levels 9
1.7 A perspective on business functions 10
1.8 The difference between the general management function and the
other functions of a business 11
1.9 Interaction of general management with other business functions 13
1.10 Summary 13
Self-assessment questions 13
Endnotes 14
Chapter 2: The Business Environment – Andreas de Beer 15

Learning outcomes 15
2.1 Introduction 15
2.2 The business environments 15
2.3 Characteristics of the business environment 17
2.4 The internal and external environments 18
2.5 The micro-environment 19
2.6 The market environment 20
2.7 The macro-environment 26
2.8 Summary 37
Endnotes 38
Chapter 3: Marketing Management – Prof Mike Cant 39
3.1 Introduction 39
3.2 An overview of marketing 41
3.3 Consumer behaviour 49
3.4 Market segmentation and target marketing 55
3.5 The marketing mix 56
3.6 Product life cycle 61
3.7 Marketing control and implementation 65
3.8 Relationship between the marketing function and the other business
functions 65
3.9 Summary 66
Endnotes 69
Chapter 4: Public Relations Management – Prof Mike Cant, A Meyer & L Fourie 71
4.1 Introduction 71
4.2 Public relations defined 72
4.3 Online PR 74
4.4 Marketing and PR 75
4.5 The functions and characteristics of PR 75
4.6 The PR process 77
4.7 The tools and techniques of PR 78
4.8 Difference between traditional and online media 83
4.9 Different forms of media 84
4.10 Controlled and uncontrolled media 85
4.11 Different types of traditional mass media for PR 86
4.12 Online media tools for PR 93
4.13 Social media monitoring 103
4.14 The place of PR in the organisation 104
4.15 Public relations in society 104
4.16 Summary 109
Endnotes 109
Chapter 5: Financial Management – Dr Willie Conradie 114
5.1 Introduction 114
5.2 The financial function in any enterprise or organisation 116
5.3 Defining financial management 117
5.4 The managerial functions of financial management 119
5.5 Important elements in financial management 121
5.6 Forms and sources of finance 128
5.7 Choosing sources and forms of finance 135
5.8 Typical problems in obtaining finance 138
5.9 Summary 141
Chapter 6: The Human Resource Function – T Amos & Prof H Schenk 144
6.2 Definition and scope of human resource management (HRM) 145
6.3 Human resource management in the business context 147
6.4 The human resource management process 148
6.5 Human resource management strategy and planning 149
6.6 Staffing 153
6.7 Training and development 163
6.8 Career and performance management 164
6.9 Compensation and rewards 166
6.10 Human resource maintenance 168
6.11 Interaction of human resources with other business functions 172
6.12 Summary 173
Endnotes 174
Chapter 7: Purchasing Management – Prof Hannie Badenhorst-Weiss 175

7.2 The concepts of supply chain management and purchasing 177
7.3 Suppliers – the most important responsibility of purchasing 181
7.4 The formation and management of strategic supplier alliances 190
7.5 Summary 198
Endnotes 199
Chapter 8: Operations Management – Prof Rigard J Steenkamp 201

8.2 Operations management is dynamic 203
8.3 Operations management defined 209
8.4 Operations strategy and operations design 216
8.5 Operations planning and control 222
8.6 Operations improvement 237
8.7 Operations and the other functions of the business 243
8.8 Summary 244
Endnotes 247
Chapter 9: Administrative Management – Prof E Ferreira 248

9.2 The role of the administrative function within an organisation 250
9.3 The role of the administrative manager in an organisation 253
9.4 The information needs of the organisation 257
9.5 The relationship between the administrative function and the other
functions in an organisation 263
9.6 Summary 264
Endnotes 265
Bibliography 266
Additional sources consulted 271
Legislation 273
Index 275
PREFACE
It is not the strongest of the species that survives, nor the most intelligent. It is
the one that is the most adaptable to change. — Charles Darwin
The world we live in today is characterised by inevitable and fast-paced change, increased
demands and stronger competition. These factors have not only transformed the way we
live, but also the manner in which businesses function. To remain relevant, businesses
have to evolve.
This textbook has been developed to take future managers and industry game-changers
on a journey of understanding of how they can ensure that the business functions to its
maximum potential. To empower managers, the textbook begins by explaining what it
takes to be a manager. Thereafter, we dive into the business environment, which explains
the impact of various micro-, market and macro-trends, on businesses. After reviewing
the business environment, readers will begin to realise that it is important to stay updated
and informed as, according to Charles Darwin, only the most adaptable survive.
Furthermore, the reader will experience an in-depth review of the business functional
areas – including marketing, public relations, finance, human resources, purchasing,
operations and administrative management. This provides a big-picture understanding
of how each of the functional areas plays a pivotal role in sustaining business success.
We hope you enjoy the journey.
The Consulting Editors

2015
ABOUT THE CONSULTING EDITORS
Annemarie van Noordwyk is a lecturer in the Department of Business Management at

the University of the Free State, where she teaches business functions, entrepreneurship
and small business management at undergraduate level. Financial management and
general management are her core interests in adult learning programmes, which are
presented at the Business School of the University of the Free State. Her research interests
are small business management development and entrepreneurship.
Naquita Fernandes is a junior lecturer in the Department of Business Management at

the University of the Free State. She has been involved in presenting various business
modules, including business functions, strategic marketing management, consumer
brand relationships as well as retail management, at undergraduate and postgraduate
level respectively. She has a passion for business and teaching and her research interests
include consumer behaviour, e-commerce and mobile marketing.
Dr Johan van Zyl is the director at the Centre of Development Studies at the University
of the Free State. He taught various modules for undergraduate and postgraduate
students in marketing, strategic marketing, services marketing, entrepreneurship and
small business management at different institutions. He is also involved in various
adult learning programmes with the main focus on entrepreneurial development and
small business development. During his academic career, he has presented a number of
scientific papers at various national and international conferences.
Chapter 1
INTRODUCTION TO BUSINESS MANAGEMENT
Learning outcomes
After you have studied this chapter, you should be able to:
• define the term management
• differentiate between the concepts efficient and effective
• discuss the various resources needed for an organisation
• illustrate the physical transformation process
• explain the four fundamental management functions
• explain the six additional management functions
• describe each of the management skills required by the different levels of management
• distinguish between the different levels of management
• briefly distinguish between all the functions of a business
• discuss how general management interacts with other business functions.
1.1 Introduction
What is the key focus of business management? The answer to this question in South
Africa is embedded in the free market system principle. In countries that function
according to the free market system, business plays a key role in satisfying our multiple
human needs. Management must combine the correct portions of the factors of
production (entrepreneurship, natural resources, labour and capital) available to them
to ensure the effectiveness and efficiency of the business, to make a profit and to satisfy
society’s multiple needs.
For managers to navigate businesses in today’s turbulent environment, they require

various skills and qualities. The field of management is undergoing a revolution that
asks managers to do even more with less, to engage employees, to see change rather
than stability as the nature of things, and to possess vision and cultural values that
allow people to create a truly collaborative workplace. Making a difference as a manager
today and tomorrow requires managers to integrate solid management skills. Successful
businesses and departments don’t just happen; they are managed to be that way. Every
BUSINESS FUNCTIONS: An Introduction
day, managers solve difficult problems, turn businesses around and achieve excellent
results. To be successful, every business needs skilled managers.
This chapter introduces the process of management by focusing on the four fundamental
functions, namely planning, organising, leading and controlling.
1.2 Nature of management

The business world is a complex system of individuals and businesses, which, in a market
economy, transforms limited resources into products and services in order to meet the
unlimited needs and wants of people. These products and services are offered to the
market in exchange for a profit. The resources, which we can also refer to as the inputs of
an organisation, can be human resources, financial resources, physical resources, natural
resources, information resources and entrepreneurship.
• Human resources
These are the people who perform the activities necessary to achieve organisational
goals. They include skilled and unskilled workers, managers and their subordinates.
No business can function without people. Humans have the knowledge (technical and
academic), physical capabilities and skills to transform goods into products, provide a
service and take leadership.
• Financial resources
This refers to the capital that is needed to start and operate new businesses, as well
as to grow them successfully over the long term. Capital may come from the owners of
the organisations (such as owners’ equity) as well as from non-owners (such as loans
from the bank, creditors and selling debentures).
• Physical resources
This refers to buildings, equipment, assembly plants, computers, tools, vehicles and so
on, which are needed to perform the activities of an organisation.
• Natural resources
This refers to all the means provided by nature. A characteristic of natural resources
is that they are scarce and limited. Examples include crude oil, water, minerals, etc.
• Information resources
Information technology has revolutionised businesses, making it possible to
determine wants and needs quickly and to respond with desired goods and services.
Information resources could be data on the management environment, annual
2
Chapter 1 Introduction to Business Management
financial statements of the business, statistics of the business and so on.
• Entrepreneurship
This refers to the special skills and abilities to start up a new business venture,
expand it and manage it successfully. It is the process through which the individual
takes human, financial, information, natural and physical resources and combines
them, with the risk linked to the provision of goods and services.
An organisation’s resources, or inputs, should be transformed into certain outputs. These

include achieving organisational goals, delivering products and/or services that satisfy
the needs and wants of customers, achieving certain productivity levels, generating jobs
for the community and realising a profit for all stakeholders of the organisation.
In order to transform inputs into various outputs, a process is necessary. This process
basically refers to two types of processes. First, a physical transformation process is
necessary, where inputs are transformed physically into products and/or services.
Secondly, a management process is necessary, the task of which is to combine, allocate,
co-ordinate and deploy resources or inputs so that organisational goals are achieved in
an effective and efficient manner. By efficient, we mean using resources wisely and in a
cost-effective manner. By effective, we mean making the right decisions and successfully
implementing them. It is important to note that, on the one hand, the resources available
to a business are limited and scarce. On the other hand, customers have unlimited
needs and wants. Business goals can also be very challenging, which places even greater
importance on effective and efficient management processes.
Figure 1.1 (on page 4) illustrates the transformation of inputs to outputs in a business
and the role of the physical transformation and the management processes.
All managers engage in certain interrelated activities to achieve desired business goals.
These entail four fundamental management functions, namely planning, organising,
leading and controlling. It is important to know that the four fundamental management
functions need to be performed in sequence. Since managers cannot decide to do
something before they know what has to be done, they cannot order a job to be done
before they have decided how it should be done and they certainly cannot control the
results before the order has been given.
3
1.2.1 Planning
Planning is typically the starting point in the management process. In its simplest
form, planning means determining the future position of the business and deciding on
the strategies needed to reach that position. Planning is chiefly concerned with setting
objectives and with devising the necessary schemes to achieve these objectives. During
the planning phase, the vision, mission and goals are determined as well as the resources
needed for the task.
Business Functions
Inputs Transformation Output

(resources) (performance)
Human Physical transformation Achievement of goals

process
Financial Products
Management process
Physical Services
Information Productivity
Entrepreneurship Job creation
Profit
Figure 1.1:Figure
The transformation of inputs to outputs
1.1: The transformation in to
of inputs outputs in a business1
a business
Source: Nieuwenhuizen & Rossouw (2008:40)
1.2.2 Organising
1.3.1 Planning
Organising is the second step in the management process. A manager must design
Planning
and developis an
typically the starting
organisational system point in the management
to implement the plans that process. In its
were formulated
simplest form, planning means determining the future position of the business
during planning. Organising can therefore be defined as the process of delegating and
and deciding on the strategies needed to reach that position. Planning is chiefly
co-ordinating tasks and allocating resources to achieve goals and objectives. Organising
concerned with setting objectives and with devising the necessary schemes to
also involves
achieve developing
these objectives.a framework
During theor organisational
planning phase, structure to indicate
the vision, howand
mission and
when people and other resources should be deployed in order
goals are determined as well as the resources needed for the task. to achieve goals. The
success of a business lies in directing the different resources towards achieving a common
set of goals.
1.3.2 Organising
Organising is the second step in the management process. A manager must
design and develop an organisational system to implement the plans that were
formulated during planning. Organising can therefore be defined as the process
of delegating and coordinating tasks and allocating resources to achieve goals
and objectives. Organising also involves developing a framework or organisational
4
structure to indicate how and when people and other resources should be
deployed in order to achieve goals. The success of a business lies in directing the
different resources towards the achievement of a common set of goals.
1.2.3 Leading
Leading refers to directing the human resources of the organisation and motivating them
so that they will be willing to work productively to reach the organisation’s mission and
goals. Managers are responsible for getting things done through other people. They
collaborate with their superiors, peers and subordinates, with individuals and groups, in
order to reach the goals of the organisation. Leading the organisation means making use
of influence and power to motivate employees to achieve organisational goals.
1.2.4 Controlling
Not all employees do the things they say they will do and the things that they are supposed
to do. Therefore, goals will not be met without follow-up processes. Controlling is the
process of establishing and implementing mechanisms to ensure that goals are achieved.
An important part of controlling is measuring progress towards the achievement of
an objective and taking corrective action when necessary. Feeding back results is an
important aspect of control and it serves as an input for the planning process.
The functions of management do not occur in a tidy step-by-step sequence. Managers do

not plan on Mondays, organise on Tuesdays, lead on Wednesdays, control on Thursdays
and take corrective action on Fridays. At any given time, a manager is likely to be engaged
in several management functions simultaneously. However, in order to simplify the
complex process of management, it is depicted in a model, shown in Figure 1.2 on page 6.
The solid lines indicate how, in theory, the functions of management are performed. The
dotted lines represent the true reality of management.
1.3 Definition of management

Following from the above remarks about (1) how organisations try to satisfy the ever-
changing needs of society by (2) utilising scarce resources as productively as possible
and (3) through fundamental functions performed by managers, management can now
be defined as follows:
Definition
Management is the process of utilising an organisation’s resources to achieve specific objectives

2
through the functions of planning, organising, leading and controlling.
5
Managers do not plan on Mondays, organise on Tuesdays, lead on
Wednesdays, control on Thursdays and take corrective action on Fridays. At
any given time, a manager is likely to be engaged in several management
functions simultaneously. However, in order to simplify the complex process
of management, it is depicted in a model, shown in Figure 1.2. The solid lines
BUSINESS FUNCTIONS:
indicate how, in An Introduction
theory, the functions of management are performed. The
dotted lines represent the true reality of management.
Planning
Managers determine the organisation’s
vision, mission and goals and decide
on a strategy to achieve them.
Controlling Organising
Managers monitor Managers group
progress and take activities together,
steps to reach the establish authority,
mission and goals. allocate resources
and delegate.
Leading
Managers direct and motivate
members of the organisation to
achieve the mission and goals.
Figure 1.2: Definition of management3

Figure 1.2: Definition of management
Source: Smit, Cronjé, Brevis & Vrba (2011:8)
5
To carry out the management functions of planning, organising, leading and controlling,
managers rely on multiple additional management functions as well as a number of
management skills or competencies.
1.4 The additional management functions

There are six additional management functions that support the four fundamental
management functions. The six additional management functions are co-ordination,
decision-making, communication, motivation, delegation and discipline.
1.4.1 Co-ordination
Co-ordination is the process in which the various functions in the business are treated
as a functional unit so that the objectives of the business can be achieved successfully.
Among other things, it includes balancing and distributing tasks so that the best possible
co-operation is achieved.
1.4.2 Decision-making
During decision-making, various possible solutions are considered for problems and the
6
best solution is chosen. A large number of different problem-solving techniques are used
in practice.
Some problem-solving techniques are:4
• fishbone diagrams
• brainstorming
• research
• the nominal group technique
• the Delphi technique.
1.4.3 Communication
Although we usually see and study people as individuals, we should not lose sight of
the fact that people are social beings. People can only exist within social institutions
and through contact and interaction with other people.5 This interaction takes place by
means of communication. Communication involves the transfer of messages between the
business and its external and internal environment.
1.4.4 Motivation
Motivation is the process in which the owner and manager persuade the employees that
they should voluntarily do their work as well as possible. Motivation is a driving force
that develops spontaneously in a person, but the owner and manager must strive to
stimulate this driving force.6
1.4.5 Delegation
Delegation is the process by which tasks are allocated to employees with the necessary
power and responsibility to enable them to do the tasks.
1.4.6 Discipline
Discipline shapes the behaviour of employees so that their conduct helps to ensure the
successful operation of the business.
7
1.5 Management skills

The most fundamental management skills that a manager should have are technical,
interpersonal, conceptual, diagnostic, communication, decision-making and time
management skills.
• Technical skills
These are necessary to accomplish the specific kind of work being done in a business.
Although all levels of management need to have technical skills, it is especially
important for first-line or supervisory levels of management. These managers spend
most of their time training subordinates and answering questions about work-related
problems.
• Interpersonal skills
This refers to the ability of a manager to communicate with, understand and motivate
both individuals and groups. Managers spend a lot of time interacting with people,
such as subordinates, peers, superiors, suppliers, customers and investors. Therefore,
interpersonal skills are needed by managers on all managerial levels, but especially
by middle levels of management.
• Conceptual skills
This refers to the manager’s ability to see and understand the business as a whole, as
well as how all the parts fit together. This skill allows managers to think strategically,
to see the big picture and to make decisions that affect the business as a whole.
Conceptual skills are especially important for top managers.
• Diagnostic skills
This enables a manager to visualise the most appropriate response to a situation. A
medical doctor diagnoses a patient’s illness by analysing symptoms and determining
their probable cause. Similarly, a manager can diagnose and analyse a problem in the
business by studying its symptoms and then developing a solution.
• Communication skills
This refers to a manager’s ability to convey ideas and information to others effectively
and to receive ideas and information effectively from others.
• Decision-making skills
This refers to the manager’s ability to recognise and identify problems and
opportunities, to formulate alternative courses of action, to select the best course of
action and to implement it in order to solve problems and capitalise on opportunities.
8
• Time management skills

They consist of the manager’s ability to prioritise work, to work efficiently and
effectively and to delegate responsibility effectively.
Each of the managerial skills discussed above are needed on certain levels of management.
The various levels of management are the focus of the following section.
1.6 Managerial levels

The term ‘manager’ usually includes any person who carries out the four fundamental
functions of management. Although these functions must be performed in all businesses,
managers are responsible for different departments and they often work at different
managerial levels of the business. Three levels of management are normally distinguished,
namely top managers, senior/middle managers and first-line (supervisory) managers.
These are also called strategic, functional and operational management.
1.6.1 Top management

Top managers (strategic managers) are people in executive positions and they normally
have titles such as chief executive officer (CEO), president, vice-president or managing
director (MD). Most businesses have relatively few top management positions. Top
managers are responsible for managing an entire business or major parts of it. They
develop and define the purpose, goals, strategies and long-term plans of the business.
They report to other executives and the board of directors, and they supervise the
activities and performance of senior/middle managers.
1.6.2 Middle management

Senior/middle managers (functional managers) have titles such as marketing manager,
operations manager or human resources manager. They are responsible for implementing
the top manager’s strategy by developing medium-term goals, strategies and plans. They
generally report to top management and supervise the work of lower management.
1.6.3 First-line management

First-line managers/supervisors (operational managers) have titles such as sales
manager, section head or office manager. They are responsible for implementing the
plans and strategies formulated by senior/middle managers over the short term. They
9
generally report to senior/middle management and they supervise operative employees.

Operative employees are the workers in a business who do not hold managerial positions.
They report to first-line managers/supervisors.
1.7 A perspective on business functions

Every business deals with various business functions. Normally, businesses consist of
seven functional departments, namely operations, finance, purchasing, marketing,
administration, human resources and public relations.
Together, the seven functional departments represent all the activities performed in
the business. These functions form the guiding principle of this textbook. Each of these
functions will be discussed in further detail throughout various chapters in this textbook.
In large organisations, a functional manager will manage a department. Functional

management lies at the level of middle management. A functional manager is responsible
for a certain departmental function, for instance, marketing, purchasing or production.
Effective functional management requires that the objectives of each functional

department be achieved and that policy be effectively executed. The long-term, medium-
term and short-term aspects of the functional department are addressed here. Medium-
and short-term planning and control are particularly important.
If the functional managers could each manage their own departments independently of
the business, co-ordination would not be necessary. However, this is not possible, because
each function in a business is like part of a machine. The machine will function only if all
the parts work correctly. If one or more parts do not function, are missing or 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 must be co-ordinated in such a way that
they all move in the same direction and support one another, so that the overall objectives
can be achieved.
The functional departments in a business can be represented diagrammatically as seen

in Figure 1.3.
10
parts do not function, are missing or 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 must be coordinated in
such a way that they all move in the same direction and support one another,
so that the overall objectives can be achieved.
The functional departments in a business can be represented diagrammatically:
Strategic
level
Functional
level
Operational
level
Human Public
Operations Finance Purchasing Administration Marketing resources relations
Figure 1.3: Functional classification of a business

Figure
Source: Smit, Cronjé, Brevis &1.3: Functional
Vrba (2011:10) classification of a business7
1.8 The difference between the general management

function and the other10functions of a business
1.8.1 General management
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
to the very important task of management on all levels throughout the entire business.
The first part of this chapter focused on the various activities of general management.
These include the fundamental management functions, additional management functions,
management levels and management skills needed to manage effectively.
1.8.2 Operations management

Operations management refers to the management process used in manufacturing
businesses as well as in service businesses. Operations management can be described
as those management activities that take place so that products and services can be
provided to satisfy the needs of the consumer.
11
1.8.3 Financial management

Financial management refers to the management of the business’s financial activities.
The financial function, therefore, includes all the activities in the business that involves
obtaining capital and the efficient use of capital. The financial manager is responsible for
controlling all the financial activities in the business.
1.8.4 Purchasing management

The purchasing function deals with acquiring all the resources that a business needs
to achieve its objectives. This includes, among other things, determining purchasing
needs, establishing alternative suppliers who can satisfy these needs and negotiating
agreements with them to the long-term advantage of the business.
1.8.5 Administrative management

The administrative function is concerned with the service of obtaining, recording and
analysing information and communicating the results to management, who can then
safeguard these assets, promote the activities and achieve the objectives of the business.
1.8.6 Marketing management

Marketing is the process of transferring goods and services to customers in order to
satisfy their needs, as well as the activities that make the transfer possible. Marketing,
therefore, entails more than just advertising products and services, as it includes a variety
of activities across all functions of the business.
1.8.7 Human resource management

Human resource management includes all the activities concerned with procuring,
developing, compensating, integrating and retaining personnel.
1.8.8 Public relations management

This is the management function that evaluates public attitudes, promotes the policies
and procedures of a business to the public and plans and executes programmes of action
to earn public acceptance and understanding.
12
1.9 Interaction of general management with other

business functions
General management entails the management process as a whole, namely the planning
that management has to do, the organisation that management has to establish in order
to carry out the plans necessary to achieve the goals and objectives of the business, the
leadership that management has to perform to get things done and the control that
management needs to exercise on all levels.
These four fundamental functions of management are performed on all levels of

management: top management, senior/middle management and first-line (supervisory)
management levels. Furthermore, these management functions are also performed by
managers in each functional area of management, such as marketing, finance, operations
and so on.
1.10 Summary
The development of management principles has provided us with a framework under
which we can study the purpose and functions of a business. This chapter has dealt with
the general principles of management. Management is an indispensable part of any
business, without which resources cannot be deployed effectively and efficiently in order
to reach the goals and objectives of the business.
What management is and the various skills that a manager should have were defined.
Three managerial levels were distinguished and creative problem-solving and decision-
making as well as the role that information plays in these processes were examined. In
addition, the four fundamental functions of management – planning, organising, leading
and controlling – were explained.
Self-assessment questions
1. In every business a manager has to perform four fundamental management functions.
Name and explain these functions.
2. Identify the additional management functions a manager should perform.
3. Managers need different management skills to perform their tasks. Name and briefly explain
each of these management skills.
4. Name the three levels of management and provide a practical example for each of the
levels.
13
Endnotes
1. Nieuwenhuizen, C & Rossouw, D. (eds). 2008. Business Management: A Contemporary Approach.
Cape Town: Juta. p. 40.
2. De Beer, A & Rossouw, D. 2005. Focus on Management Principles: A Generic Approach. Cape
Town: Juta. p. 4.
3. Smit, PJ, Cronjé, GJ de J, Brevis, T & Vrba, MJ. 2011. Management Principles: A Contemporary
Edition for Africa. 5th ed. Cape Town: Juta. p. 8.
4. De Beer & Rossouw, Focus on Management Principles, p. 87.
7. Smit et al, Management Principles, p. 10.
14
Chapter 2
THE BUSINESS ENVIRONMENT
Learning outcomes
• explain what the business environment is
• explain the main characteristics of the business environment
• distinguish between the internal and external environment
• explain how each of the business environments impact each other
• illustrate by means of a diagram and discuss the macro-, market and micro-environments, and
the variables that comprise each of these.
2.1 Introduction
When looking at a business and the functioning of the business, it is important for
managers to remember that the business does not operate in isolation or within a
vacuum. In fact, a business operates within a particular context referred to as the
business environment. This environment consists of all the factors and forces outside
the business’s boundaries which influence the business’s goals, objectives and strategies.
This chapter will investigate the various business environments as well as concepts and
factors related to these environments.
2.2 The business environments

The environment in which a business functions may be defined as the sum total of all the
factors and variables which influence the establishment, growth and continued existence
of the business positively and/or negatively. These factors and variables promote or
hinder the achievement of the business’s objectives.
The business environment is usually divided into three components, namely the micro-,
market and macro-environments. These three business environments each have several
Business Functions
The business environment is usually divided into three components, namely the
micro-, market and macro-environments. These three business environments
variables that influence the business positively or negatively. Figure 2.1 gives an overall
each have several variables that influence the business positively or negatively.
picture
Figureof2.1
thegives
business environment.
an overall picture of the business environment.
The organisation has a limited effect on the

macro-environment.
Micro-environment Market Macro-environment

• Mission statement environment • Economic
and goals of the • The market environment
business • Competition • Social environment
• The business’s • Suppliers • Technological
functions environment
• The production • Natural environment
factors • Political environment
• International
environment
The macro-environment influences the

business directly.
Figure 2.1: The composition of the business environment

Figure 2.1: The composition of the business environment1
Source: Smit, Cronjé, Brevis & Vrba (2011:64)
The following example contains a summary of the most important variables in

The
thefollowing
business example contains a summary of the most important variables in the
environment.
business environment.
Example
Environmental variables
Example
A countrywide drought will have a significant influence on the owners of stock
farms and wheat farms (primary sector), but it will not influence the manufacturers
of sporting equipment. If the needs of consumers should change with regard to
Environmental variables
recreation, however, this will have major implications for the manufacturers of sports
A countrywide
equipment, but will will
drought nothave a significant
affect the wheat influence on the owners of stock farms and wheat
farmers.
farms (primary sector), but it will not influence the manufacturers of sporting equipment. If the
The effect that environmental variables have on a business is determined, therefore,
recreational needs of consumers should change, however, this will have major implications for
by the place and role of the business in the total national economy of a country.
the manufacturers of sports equipment, but will not affect the wheat farmers. The effect that
environmental variables have on a business is determined, therefore, by the place and role of the
business in the total national economy of a country.
16 16

Chapter 2 The Business Environment
2.3 Characteristics of the business environment

To understand the complexity of the business environment (macro-, market and micro-
environments) one needs to understand its principal characteristics. These characteristics
include the following:
• Interrelatedness of environmental factors or variables

Because of this interrelatedness, a change in one external factor may cause a change in
the micro-environment or internal factors and, similarly, a change in one external factor
may influence other external environmental variables. For example, a drastic fall in the
value of the rand means that imported goods such as medicines, cars and fuel become
more expensive. This initially results in inflationary pressures, which are followed by
high interest rates to contain the inflation. This in turn means that consumer spending
declines and that certain industries suffer.
• Increasing instability
The interdependence between environmental factors results in increasing instability
and change in the environment. Even if there is a general increase in the rate of change
in the environment, environmental fluctuations are greater for some businesses than
for others.
• Environmental uncertainty
Uncertainty about the environment is a function of the amount of information available
on environmental variables, as well as of the confidence that management has in that
information. If little information is available or the value of the information is suspect,
uncertainty about the environment increases, and vice versa.
• Complexity of the environment

This characteristic indicates the number of external variables to which the organisation
must react, as well as fluctuations in the variables themselves. A baker has to cope
with far fewer environmental variables than an electronics manufacturer and therefore
functions in a less complex environment. Organisations in less complex environments
have the advantage in that they require less critical information for decision-making. It
follows that not all aspects of the environment are equally important to all organisations.
• Unpredictability of the environment

The current business environment is revolutionary, which is profoundly different from
the evolutionary environment of the 1990s and before. Evolutionary environments
change gradually, which makes them predictable. Revolutionary environments are
unpredictable and are characterised by discontinuous change.
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The aforementioned characteristics emphasise how important it is for management to

understand and have knowledge of the environment in which they operate. Now that you
know the characteristics of the business environment, you can take a closer look at each
of these environments.
2.4 The internal and external environments

2.4.1 The internal environment
Business Functions
This is the business itself and is generally described as the micro-/business environment.
The aforementioned characteristics emphasise how important it is for
management
2.4.2 The externalto understand
environmentand have knowledge of the environment in
which they operate. Now that you know the characteristics of the business
This is the area you
environment, of the business
can environment
take a closer look atoutside
each ofthe business,
these which affects the
environments.
growth and existence of the business. The external environment consists of the market
environment and macro-environment.
2.5 The internal and external environments
• The internal environment
This is the business itself and is generally described as the micro-/business
environment.
Macro-environment
External environment
Market environment
Micro-environment
Internal environment
Figure 2.2: The internal and external environments

Figure 2.2: The internal and external environments2
Source: Nieuwenhuizen & Rossouw (2008:12)
• The external environment

This is the area of the business environment outside the business, which
18
affects the growth and existence of the business. The external environment
consists of the market environment and macro-environment.
2.6 The micro-environment

2.5 The micro-environment

The micro-environment (internal environment – see Figure 2.2) is the sum total of all
the factors and variables that occur internally in the business and that are influenced in a
direct or indirect way by the decisions of management. These factors and variables have
a fundamental influence on the establishment, growth and continued existence of the
business.
2.5.1 Variables in the micro-environment
• Mission statement and goals of the business

This is what the business hopes to achieve and the way in which it can be achieved. The
mission statement and goals of the business must correspond with the demands of the
external environment.
• The business’s functions

These include the general management, operations, purchasing (supply chain),
marketing, financial, administrative, human resources and public relations functions.
• The production factors

Production factors refer to those resources available to a business. The production
factors or resources include labour, raw materials (natural resources such as minerals,
timber and water), capital, information and entrepreneurship. Using these resources,
the business must utilise opportunities or ward off threats in the external environment.
For example, if a business has sufficient capital available, new markets and new
products can be explored. On the other hand, a lack of capital may constitute a threat
to the business because, unlike its competitors, the business is placed in a weaker
position in the market.
2.5.2 The influence of management on the micro-environment

The management of a business exerts a direct influence on the mission statement and
objectives of the business. Management itself decides where the business is going and
what it will do to get there.
Management decides on guidelines to which the business’s functions will be managed. In

other words, management decides how the human resources function will be operated
and how the business will execute its management function. Management can also decide
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how the available production factors should be combined. For example, is the business
capital-intensive, as in the construction industry, or is it labour-intensive, as in the case
of nurseries and vegetable farms?
The micro-environment is the heart of a business. It also indicates to what extent a

business is able to utilise opportunities or oppose threats in the external environment.
Although the business can influence the internal environment by means of decision-
making, it does not possess all the internal resources needed to handle opportunities
and threats from the external environment. This confirms our point of departure that a
business cannot function, grow or survive in a vacuum.
2.6 The market environment

The market can be defined as the link between the business and the macro-environment
in which the business functions. It surrounds the micro-environment (see Figure 2.2).
The market environment is the sum total of all the factors and/or variables which exist
externally in the business industry and which can positively or negatively influence the
growth and existence of the business.
The market environment is surrounded by the macro-environment (see Figure 2.2).

However, the business’s management has little or no influence on the market environment.
It is possible for the business to influence the market on occasion, for example if the
business markets a successful product that is popular everywhere. The business can also
create a need in the market that did not exist before. A need for cell phones, for example,
arose in the marketplace after they were introduced for the first time. The market
environment therefore does not exist in isolation, but is in fact influenced by both the
micro- and macro-environments.
We can explain this interaction by means of the following examples.
Examples
How the micro-environment influences the market environment

If one business introduces a new product on the market, for example a cell phone, this influences
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consumers. In many cases, the new product is preferred to existing products on the market. (In
other words, it is preferred to the products of competitors.)
A business’s credit and collection policy can also influence the consumer in the market
environment. For example, the consumer may prefer to buy from a business where credit facilities
are available in difficult economic times, even if he or she knows that the prices of the products are
inflated to provide for credit risks (the possibility of bad debts). A consumer may prefer, therefore,
to buy clothes from Edgars rather than Erica Fashions, because Edgars offers credit facilities, whilst
Erica Fashions only sells goods on a cash basis.
The market environment is also influenced by the macro-environment. During a

downward trend in the economy, for example, consumers have less money to spend on
luxury items and this leads to a reduction in the sale of products such as imported dinner
services, clothing and luxury cars.
After 1994, the trade sanctions which had been imposed on South Africa were lifted.
This has made a greater variety of imported products available in the country. Imported
ceramics from countries like Italy, Spain and Portugal are commonly available in chain
stores, whereas before 1994 they were available only at exclusive shops.
The variables in the market environment and the emphasis placed on certain variables at
specific times differ from business to business. However, the branch of industry in which
the business operates dictates, to a large extent, the influence the market variables will
have on the business’s activities (for example the shoe industry versus the construction
industry). Three variables are particular to the market environment, namely the market,
the competition and the suppliers of resources and services.
2.6.1 The market

The term ‘market’ refers in an abstract sense to the market that concerns the consumer
and his or her needs, rather than the physical marketplace.
The business manufactures or buys products and/or provides services with the idea of
selling these to consumers. This refers not only to individual consumers, but also to other
businesses and institutions. However, before consumers can become active in the market,
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they must have financial means (for example money). These financial means are used to
acquire the available goods and/or services in the market. The consumer has to choose
between different goods and services because he or she has limited financial means. It
can also happen, however, that although the consumer has the necessary financial means,
he or she is not prepared to spend them on the available goods and services in the market.
Examples
Different types of markets

The market for a retail shop such as Edgars includes all people with a need for clothing. These
people are prepared to spend the money they have available on these items. Their activities are,
therefore, directed at satisfying their clothing needs.
The market for South African Airways includes all those with a need to travel domestically or
internationally and who have the financial means to pay for the air ticket. These people must,
therefore, be prepared to spend money on an air ticket in order to satisfy a need (to travel).
The market for those manufacturing businesses that do not trade directly with the general public
may include, for example, all wholesalers. In these cases, the market does not consist of individuals,
but of other businesses. For example, you cannot buy a writing pad directly from Sappi; you have
to obtain it from a retailer who sells stationery. The retailer, in turn, buys it from its manufacturer, for
example Croxley.
From the point of view of a business, it should be noted that the market, therefore,
includes all individuals, groups and institutions who have specific needs for goods and
services and who are prepared to use the available financial means to acquire them.
From the above examples it is clear that we can identify more than one type of market:
• The consumer market

This market consists of the end consumers who carry out transactions in order to buy
and consume items, such as clothing, food or cars.
• The industrial market

In this market, goods and services are purchased and used for manufacturing products
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or providing services to end consumers. Croxley, for example, buys paper from a paper
and pulp business, such as Sappi, in order to manufacture writing pads, envelopes and
cards. A business such as Discount Kitchens also utilises the industrial market when
it buys pressed wood panels from Sappi Novaboard for the manufacturing of kitchen
cupboards.
• The resale market

In this market, manufactured goods are purchased by businesses or individuals with
the sole purpose of reselling them to individuals or other businesses at a profit. Pick
n Pay, for example, buys canned vegetables and fruit (such as Koo and All Gold) from
Tiger Brands to sell at a profit to its customers. Another example would be a material
shop that buys tracksuit material and woollen cloth from a material manufacturer in
Cape Town to sell it at a profit to the end consumer.
• The international market

International markets exist outside the borders of a country and include all foreign
consumers, manufacturers, retailers and authorities. For example, if European traders
buy South African fruit, these transactions take place on the international market.
In the same way, transactions between South African mohair farmers and Japanese
clothing manufacturers take place on the international market.
• The government market

This refers to the goods and services which are purchased by the various authorities
with a view to providing certain services and carrying out certain activities. These
include the purchases made by the central government, municipal authorities and
regional services councils. Examples of purchases taking place on the government
market are:
◊ the purchase of furniture and equipment for use in government schools
◊ the payment of salaries of teachers, the police and so on
◊ the purchase of firefighting equipment and mobile clinics by municipalities.
The business must be geared towards satisfying consumers’ needs, while at the same
time trying to achieve the objective of profitability. A fine balance between these two
objectives is essential, especially in the light of the current emphasis on marketing
oriented business management. It is important for the business to handle its market,
which is actually the consumer, in the right way.
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2.6.2 Competition
The fact that the business does not function in a vacuum has already been emphasised.
Competition is an important variable in this regard. A certain business, for example, is
probably not the only one to offer a specific product or service to the customer. There are
various businesses that compete with one another to sell the same product or service to
the same consumers.
Competition, therefore, boils down to the fact that each business tries to convince a
consumer that its products and services are the best and that the consumer should buy
products and acquire services from that business. One only has to consider the large
number of businesses that manufacture and sell cars. The consumer may choose which
product to buy and from whom to buy it. The choice between different products is
indicative of the presence of competition in the market.
The business must take full account of the influence and force of competition in the
business environment, because the actions of competitors may constitute definite
threats to the business. For example, a business may make a loss if the demand for a
product declines. Here we can refer to the example of video machines, music tapes and
vinyl records.
Businesses are continually forced to make adjustments, including strategic adjustments,

to counteract the threats of competitors. It is, therefore, fundamentally important to be
informed about competitors in the external business environment. Each business must
know who its competitors are, where they are situated, their geographic distribution,
the products they offer the market, the quality of the products, the specific markets they
serve, what their share of the market is, their financial resources and their general image
in the marketplace.
Businesses try to influence consumers in various ways so that they prefer their products
and services to those of competitors. This is one of the reasons why businesses advertise
their products and services: to persuade the consumer to buy their product.
Over and above the fact that businesses compete with one another’s products and
services, we can also distinguish between four types of competition:
1. Competition between the needs of consumers
A person may consider going to a new shopping complex and be prepared to spend a
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certain amount of money. The person considers either buying new clothes or having
something to eat in the shopping centre. This is called competition for the limited
disposable income of the consumer.
2. Competition between the ways that a need can be satisfied
Let us suppose that the person decides to buy some new clothes. There are different
kinds of clothes he or she can buy to satisfy his or her clothing needs. For example,
the person can choose between formal clothes (a suit), casual wear (jeans, a jersey or
a leather jacket) and sportswear (a tracksuit).
3. Competition between product forms
Suppose the person wants to buy a new suit. He or she must now choose between
woollen, cotton and linen items.
4. Competition between different trademarks
The consumer decides to buy a woollen suit and must choose between trademarks,
such as Daisy Style, Jigsaw Clothing and Rochelle Mawona.
2.6.3 Suppliers of resources and services

A business decides for itself which products it is going to manufacture and market, in
what quantities, and how much capital will be invested in the specific projects. However,
the business remains dependent on certain institutions in the external environment in
order to commence and continue its activities. The business does not necessarily have the
raw materials to manufacture its products and therefore uses the products or services of
other businesses and individuals in the external business environment to carry out its
activities.
Consider the following examples:
Examples
Resource and service suppliers

• A manufacturing business buys land and resources from other businesses in the interests of
further development. A commercial business will purchase products, such as toiletries, beauty
products and cereals, from suppliers in order to resell them to various chain stores.
• Businesses need resources, such as electricity, water and communication services. These services
are purchased from suppliers in the external business environment. Electricity, for example, is
obtained from Eskom and communication services from Telkom, at a specific rate.
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• It is almost impossible to run a business without the help of financial institutions in the money
and capital markets (for example commercial banks and the stock exchange). It is important
for the business to have access to external sources of capital for acquiring long- and short-term
capital. Here, one can cite commercial banks that make loans available over different periods. In
the case of a public company, the JSE constitutes an external source of capital.
• The business must have labour in order to be able to function properly. Labour is obtained from
the external business environment. Pick n Pay, for example, employs people in a wide variety of
posts (including store managers, sales staff and cashiers). When vacancies occur, the posts are
advertised on the open labour market (part of the external environment).
• The business uses intermediaries to make products available to the target market(s). For example,
a manufacturing business may sell its products to a wholesaler (an intermediary) who, in turn,
sells them to a retailer (an intermediary). The retailer then sells the product to the end consumer.
In the same way, the business makes use of an advertising agency (an intermediary) to advertise
its products.
2.7 The macro-environment

The macro-environment surrounds the business and its market environment (see
Figure 2.2). It is made up of a wide variety of variables that can affect the business either
positively or negatively.
The macro-environment consists of all the variables and factors outside the business
which have a positive or negative influence on the growth and continued existence of the
business and which encourage or hinder the achievement of objectives.
The individual business has no control over this environment or the variables that operate
within it. For example, a business has no control over a rise in interest rates or a change
in the exchange rate. The macro-environment, therefore, influences all businesses, even
the competitors of the individual business.
The constitution of the macro-environment is characterised by the existence of a number

of sub-environments which cannot be controlled by the business but which can exert a
significant influence over it. These sub-environments may also be described as variables
or forces in the macro-environment. Here we refer to economic, sociocultural, political,
technological, physical and international influences and forces.
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These sub-environments influence one another to the extent that they cannot be regarded
as being distinct from one another. The effect that these sub-environments have on a
business differs from business to business and from time to time. At a specific time, for
example, the economic environment, if interest rates are very high (which influences the
availability of external capital), may constitute a much greater threat or influence than
variables operating in the technological area.
Each sub-environment is characterised by various factors peculiar to that environment.

When services talk about the economic environment, for example, we immediately think
of interest rates, upward or downward trends in the economy and the growth rate of the
country.
We will now briefly discuss each of the sub-environments already identified and illustrate
the variables of each with the aid of examples.
2.7.1 The economic environment

The economic environment is that part of the macro-environment consisting of factors
which influence the personal disposable income of consumers as well as their purchasing
behaviour. (The term ‘consumer’ is used here in its widest sense: it also includes other
businesses.) Consumers have limited financial means to satisfy all their needs and are
therefore forced to make choices.
The consumer’s disposable income is influenced by many economic factors, for example
interest and exchange rates, inflation, trade cycles and the economic growth rate.
Interest rates
An interest rate is an indication of the price at which money can be bought, in other
words, the price at which money is available on the money and capital markets. If
the interest rate is 20% per annum for a long-term loan of R100 000, this means that
the borrower must pay R20 000 per year (20/100 X R100 000) to secure the loan of
R100 000. This is the price which borrowers must pay for the money they wish to borrow.
A rise in interest rates usually results in a decrease in spending. If someone does not
have the money to buy a new car, for example, they will have to pay more to borrow
the money and, ultimately, more to buy the car. Suppose the buyer buys a car through
hire purchase financing and interest rates subsequently rise. This means that the buyer’s
27
monthly installments will also increase and that they will pay even more for the vehicle.
The bond on a home loan works in the same way: as soon as the interest rates rise, so do
the monthly loan installments. The opposite is also true.
Inflation
Inflation results in a continual rise in the prices of products and services. This has
a depressing effect on the economy because the purchasing power of the rand, and
therefore that of the consumer, decreases as inflation rises. The consumer buys fewer
products for the same amount because the value of the money has decreased as a result
of inflation. Since the late seventies, South Africa has continually had to deal with the
negative influence of inflation. For many years, the economy has had to contend with
double inflation figures. The influence of inflation is clear from the following examples:
Example
The influence of inflation

In 1980, we paid 30c for a loaf of white bread. Today, we pay R10.49 for the same loaf of bread.
In 1980, we paid 76c for a dozen eggs. In 1985, we paid R1.31 and today we pay R18.98 for six
free-range eggs.
Trade cycles
All economies are subject to certain cyclical changes. During the trade cycle, different
phases in the economy can be distinguished, namely a period of prosperity, followed by
a period of recession and depression and then a period of recovery. A business should
always take note of the phase through which the economy is moving, as this influences
the management, growth and continued existence of the business. Each phase makes its
own demands on the business:
• During a phase of prosperity in the economy, the business (the marketing and
operations divisions) has the opportunity to manufacture and market new products.
The business, therefore, has the opportunity to explore new markets and to expand
its current market share.
• By contrast, consumers’ disposable incomes are less during a recession than during a
phase of prosperity and they buy less. This has a direct influence on the demand for
products and services and, therefore, on the growth of a business.
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• During the recovery phase, the business must prepare itself for the economic growth
which will take place. It should, for example, pay attention to personnel training
programmes and the development of new products and means by which the business
can increase its sales and its income.
2.7.2 The social environment

The social environment is linked to the demographics of the market and the social
and cultural aspects which may influence the market. One can distinguish between
various demographic variables, such as the size and composition of the population, the
geographic location and the development level of the market, among other things.
Size and composition of the population

The size and composition of the population consist of the following variables:
• Population growth
The size and composition of the market are directly influenced by the population
growth of the country. With regard to population growth and composition, it is
important to bear in mind that families have grown smaller over the past few years.
Certain countries in Europe now have a negative growth rate.
• Market composition
The composition of the market in terms of different ethnic groups is another variable
which must be taken into consideration by the business. The needs and preferences of
the various population groups differ and the business should take this into account. To
a greater or lesser degree, each group has a distinctive culture and lifestyle.
• The changing role of women

The market is influenced today by the larger percentage of women working in the labour
market than previously. The role of women in the labour market has also changed
drastically over the last few years. Increasing numbers of women are employed and
hold senior management positions, and therefore new needs have been created in the
market, for example the establishment of créches and nursery schools. This has also
resulted in a larger disposable income. The type of product that the working woman
buys may also differ from that bought by homemakers. The clothing needs of a woman
in the labour market differ from those of a homemaker, and the working woman may
also prefer to buy ready-made foods.
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• Life expectancy
Life expectancy has increased as a result of better medical services and healthier
lifestyles. This has a direct influence on the market: many people in our society are
over 60 and represent definite marketing opportunities. For example, in the tourist
industry there are many opportunities for travel agents to develop tour packages for
this target group.
Geographic location
In South Africa, markets are spread over the entire country. However, the markets in the
metropolitan areas are more concentrated. This means that larger markets with a wider
variety of products and services are found in and around the cities. Urbanisation and the
depopulation of the rural areas have a direct influence on the demographic distribution
of the market.
Development level of the market

The level of development of the consumer has a direct influence on the business. In South
Africa today, great emphasis is placed on training. Consumers are more informed as a
result of training, which means that they know precisely what they want and therefore
make great demands on businesses. The consumer is aware of, and stands up for, his or
her rights. In order to continue to exist and grow, the business has to focus on the needs
of consumers.
Other variables
Social and cultural forces from the macro-environment which must be taken into account
by the business are the following:
• Changing lifestyles
Consumers today are quality conscious. In other words, there is a change in their
lifestyles and therefore in their needs. The quality of a product is important to the
consumer. How safe it is to use a particular product and whether that product is
environmentally friendly are important considerations. Here, aspects such as pollution,
products affecting the ozone layer and optimal utilisation of scarce resources are
pertinent issues.
• Time
Convenience and time are important to the consumer. Modern consumers do not wish
to spend much time on shopping. Available products should help the consumer to save
time. The laptop computer, used by people to do their work while they travel from one
30
destination to another, is an example of a product that allows for the best use of time.
Pre-prepared convenience foods are another example.
A further example is the appearance of successful supermarkets in residential areas.

Someone returning home from work does not want to waste time buying milk and
bread at large retail stores. The convenience and longer opening hours of the smaller
supermarkets in suburban areas satisfy this need. The same applies to one-stop
shopping centres – everything the consumer wants is available under one roof, for
example a bank, grocery shop, clothes shop, bookseller and so on.
• Healthier lifestyles
The current trend towards fitness and a healthier lifestyle is a further force with
which businesses must contend. As a result, there is a greater need for foods without
colouring agents and preservatives. The demand for products linked to fitness, such
as bicycles, running shoes and gymnasium apparatus, is now also greater. This change
in the consumer’s lifestyle offers great opportunities to some businesses, but it may
constitute a threat to others. For example, greater emphasis is placed on the dangers of
smoking and this constitutes a threat to cigarette manufacturers.
2.7.3 The technological environment

The technological environment embraces numerous aspects that give rise to new products
and services being made available on the market. The microwave oven, today a common
convenience appliance in the average household, did not even exist 30 years ago. This
product is the result of technological development and it has given many businesses the
opportunity to add a new product to an existing product. In the music industry, compact
discs also constitute a new development which did not exist 20 years ago.
New technological developments or improvements create definite opportunities for

the business, but they may also constitute certain threats. The development of compact
discs means that long-playing records are no longer manufactured. Factories that
used to manufacture long-playing records have been forced to change their strategies
because of developments on the technological front. In addition, think of the continual
changes in computer technology and the influence this has on banking, for example. New,
technologically improved products are constantly being introduced into the market.
If a business does not keep abreast of changes taking place on the technological front, it
will soon find that the products it sells are obsolete. The consumer is not interested in
31
obsolete products; businesses which do not keep abreast of technological change will
have to relinquish their share of the market in the long term. A further influence of the
technological environment on the business is that provision should be made for research
and development by means of funds allocated for this purpose. Technological changes
do not always result in new products – they can also result in improvements to existing
products. A good example of this is the cell phone industry.
2.7.4 The natural (physical) environment

The natural environment is related to the natural resources of a country and therefore
incorporates the total management of these resources. Natural resources include gold,
coal, diamonds, water, natural forests and so on. In this context we can also refer to the
natural beauty of the country, as this influences the tourist market. Natural resources
include the air that we breathe as well as the scenic beauty around us. Variables in the
physical environment include limited, expensive resources and environmentalism.
Limited and expensive resources

Natural resources are not unlimited; it is essential to manage them efficiently. For
example, South Africa has limited water resources and the management of the available
sources of water must therefore be handled with great care. In South Africa, the mining
industry is a good example of limited and expensive mineral resources. Many gold mines
have already closed down because it is not profitable to mine them any more or because
they are depleted. In South America, the rain forests are being wiped out to meet the huge
demand for timber. This has harmful consequences for the ecology of the area.
The world’s sea life is also threatened and certain practices, such as the hunting of whales,
have been banned. It is the responsibility of every business to achieve a balance between
its activities and the variables in the physical environment. In executing its activities and
in striving to achieve its objectives, the business should be in harmony with the natural
environment.
Because natural resources are limited and many of them are becoming scarcer, technology
is brought into play in order to find cheaper alternatives. An example of a cheaper
alternative is the hydroelectric power station, where electricity is generated by means of
water or, similarly, the use of wind to generate electricity. Another example is using solar
energy for heating water.
32
Environmentalism and pollution

The business must be fully aware of the effect its decisions will have on the natural
environment in which it functions. Businesses are often guilty of air, water and noise
pollution resulting from their manufacturing processes.
The effects of pollution and the role played by businesses in combating pollution are
currently receiving attention worldwide. Packaging products in plastic or glass is
very convenient, but this has definite disadvantages for the environment, as this type
of packaging is not biodegradable. Because of the imperishability of plastic and glass,
movements aimed at recycling these waste products have come into existence.
Some businesses also try to combat pollution through the packaging of their products.
Colgate-Palmolive, for example, claims that the new packaging of Sta-soft fabric softener
contains 80% less plastic. Waste paper is recycled and reused for the manufacturing of
paper. Sappi’s ‘War on Waste Paper’ is a good example of this.
From time to time poisonous waste products, which are extremely harmful to water and
plant life, flow into rivers. The mining of minerals sometimes elicits strong opposition
from conservationists – take, for example, the polemic on the mining of minerals in
the Saint Lucia area of KwaZulu-Natal. The construction of roads can harm the natural
scenery, and conservationists were strongly opposed to the building of a tar road which
would bypass the Knysna CBD and lagoon in the Western Cape.
2.7.5 The political environment

The political variable in the macro-environment is linked to the influence which
authorities (for example the government, regional services councils and municipalities)
are able to exert on the business by means of legislation and regulations.
It also refers to the effect that specific institutions and pressure groups in the macro-
environment exert on the business. This variable influences the way in which the business
carries out its activities and, in some cases, can even limit its activities.
The government of the day influences businesses through the fiscal and monetary policies
of the country. The interest rates applicable to the business also have a direct effect on its
net income after interest and taxes. In the same way, current municipal rates affect the
property tax which is paid monthly by the business.
33
The annual budget drawn up by the government influences the individual business and
the total economy of the country. Apart from the fact that the government indicates, by
means of the budget, how income will be generated, likely future spending is also laid
out. Some of the government’s income is obtained from taxes paid by individuals and
businesses.
Variables that influence the business include statutory provisions, trade unions and
other associations or institutes.
Statutory provisions
There are various statutory provisions with which the business must comply. These
include the following:
• The business must have a trading licence before it can do business.
• The business must register as a taxpayer at the local Receiver of Revenue.
• The Companies Act 71 of 2008 contains detailed prescriptions on how a company

should be established and managed.
• The business cannot conclude contracts unless it complies with the provisions of
the closed contract. This means that the business is limited during the concluding of
contracts by certain statutory provisions under contract law.
Certain businesses, for example a restaurant, a home industry concern or a butchery,

must comply with certain health requirements as laid down by the municipality. Such
businesses must first obtain approval from the municipality before they can commence
trading. Inspections are carried out regularly to determine whether these businesses are
complying with the necessary requirements.
There are also a variety of statutory provisions aimed at protecting the consumer:
• When advertising a product, a business may not mislead the consumer, and its
advertising message may not contain any falsehoods. The Advertising Standards
Authority controls this aspect strictly.
• The consumer must be properly informed about the product and its composition.
• If applicable, the consumer must be shown how to use the product. For example,
instructions for use must be included with all electrical products.
34
• The consumer must be properly informed about the safety requirements that should
be complied with while using the product.
Product approval granted by the South African Bureau of Standards (SABS) is aimed at
protecting the consumer against inferior, poor and dangerous products.
Trade unions
Every business has a responsibility towards its employees. We have already seen that
there are various laws which help to maintain a smooth relationship between employer
and employee. Although statutory provisions and regulations protect the rights of
the employee, the existence of trade unions is an important variable in the macro-
environment. Without them, the voices of individual employees can be ignored by a
business’s management.
Trade unions fight for the rights of workers who are in the same branch of industry. The
employee acquires bargaining power through the trade union, which enables him or her
to negotiate, for example, for higher salaries or better working conditions. In South Africa
there is a wide variety of trade unions, representing for example mine workers, the motor
and steel industries and bank officials.
Associations and institutes

In the same way that trade unions look after the interests of organised labour, many
business associations and institutes campaign for the interests of businesses in their
fields. Earlier, we emphasised that a business has little, if any, influence over the macro-
environment. By means of associations and institutes, a business can promote its
interests in the branch of industry in which it functions if it works with other businesses
in the same sector.
Examples of institutes and associations that are well known and active in the macro-
environment are:
• the Afrikaanse Handelsinstituut (AHI)
• the South African Chamber of Business (Sacob)
• the Chamber of Mines
• the Motor Industries Federation.
35
2.7.6 The international environment

We have seen that the variables influencing individual businesses originate from the
local sphere (the business itself) and the national sphere (the market and macro-
environments). Over and above these forces, the business must also keep abreast of
variables operating in the international sphere – the environment outside the country’s
borders.
Factors in the international environment that play a role in the growth and continued
existence of the business are explained next.
International technology
Although South Africa is technologically developed in certain areas which can make a
special contribution to the development of the country, there is also a need to import
technology and knowledge. For example, in the fields of synthetic fuels, mining
and veterinary science, South Africa makes valuable contributions to technological
development – take Sasol, for example, which contributes in the field of synthetic fuel.
However, South Africa also imports technology from other countries, for example
computer technology from the US and engineering technology from Germany and Japan.
This is a phenomenon common to all developing countries.
International politics
South Africa felt the effect of international politics with the trade sanctions imposed in
the mid-1980s. The country did not have access to foreign loan capital, for example, and
this had a negative effect on the economic growth rate and job creation in the country.
The current political situation in Zimbabwe, from where people have fled to South Africa,
also has a negative influence on the labour market in South Africa.
International economies
Economic factors and variables, such as interest and exchange rates, the gold price, the
economic growth rate, inflation, the availability of capital and a scarcity of resources
occur worldwide and influence the economic conditions of all countries. For example,
think of the effect inflation has had on the economies of Zimbabwe, Russia and Argentina.
In Zimbabwe, amongst other things, this resulted in very high food prices.
The rand/dollar and dollar/euro exchange rates have a significant influence on the
import and export activities of South African businesses. If the rand/dollar exchange
36
rates are weak, the cost of importing goods is much higher for a South African business.
The price of petrol is notably influenced by the rand/dollar exchange rate and when the
price of petrol price rises, it puts pressure on the inflation rate.
2.8 Summary
In this chapter, we examined the business environments, namely the micro-, market,
and macro-environments. The micro-environment refers to the internal environment
– the organisation itself. The market environment refers to the ‘buffer’ between the
organisation and the macro-environment; it is the field in which organisations in the
same industry compete. The macro-environment comprises the following variables:
economic, sociocultural, political, technological, physical and international. A change
in any of these variables can create an opportunity for an organisation or can pose a
threat to the organisation. The characteristics of the business environments were also
identified.
Question 1
Mambo’s Plastic Warehouse
Mambo’s Plastic Warehouse is a business started by three European friends who saw a gap
in the South African market for affordable plasticware. Today the company has expanded
to seven stores countrywide and is considered to be larger than most national chain store
retailers in southern Africa.
To secure their place in the market, the business aims to continually update their range of
products and maintain competitive prices. To achieve this, the company has strategically
developed long-term relationships with their national and international suppliers including:
USABCO, Wham and Sistema, who provide Mambo’s Plastic Warehouse with high volumes of
high quality plastic products, ready to be sold to South African consumers.
Since starting operations in 2000, the company has also built up solid relationships with its
various clients, including governments, schools, and hospitality businesses. To continually
nurture these relationships, the company invests in various local charities, which are
nominated by staff members, and shares news on these relationships in their quarterly staff
newsletters.
1. Identify the type of market that Mambo’s Plastic Warehouse can be classified as. Justify your
answer by referring to the case study.
37
2. Indicate one micro-environmental variable that has impacted Mambo’s Plastic Warehouse.
Motivate your answer by referring to the case study.
3. Identify one macro-environmental variable that triggered the creation of Mambo’s Plastic
Warehouse. Justify your answer by referring to the case study.
Question 2
Hello Oral Care Line makes its debut

The Hello® company manufactured the first ever line of Seriously FriendlyTM oral care
products, which bring a distinctive touch to the oral hygiene industry through their unique
flavours, such as supermint, mojito mint, pink grapefruit mint and sweet cinnamint, as
well as their beautifully designed packaging.
The Hello company’s initial product line includes toothpastes, mouthwashes and breath
sprays that promise a healthy mouth, without harmful ingredients such as alcohol, artificial
sweeteners or dyes. The company believes in developing products that work with your body’s
natural defences to wash away germs. The products are priced at market value, in line with
competitors such as Listerine, Colgate and Aquafresh, and are available at all leading retail
outlets.
The Hello company received a lot of positive attention from the public and made a strategic
decision to use this positive attention to their advantage, by linking various press releases
and blog referrals to their official website. In addition, the company also created unique and
interactive product displays to exhibit their various product lines in the various retail stores.
1. Indicate one market-environmental variable influencing the Hello company. Motivate your
answer by referring to the case study.
2. Identify one macro-environmental variable which has impacted the existence of the Hello
company. Justify your answer by referring to the case study.
3. Classify the type of competition that exists between the Hello company and their identified
competitors. Justify your answer by referring to the case study.
Endnotes
1. Smit, PJ, Cronjé, GJ de J, Brevis, T & Vrba, MJ. 2011. Management Principles: A Contemporary
Edition for Africa. 5th ed. Cape Town: Juta. p. 64.
2. Nieuwenhuizen, C & Rossouw, D. (eds). 2008. Business Management: A Contemporary Approach.
38
Chapter 3
MARKETING MANAGEMENT
Learning outcomes
• explain the five gaps that a market offering should bridge to be successful
• give the definition and provide examples of auxiliary marketing activities
• explain the concept of pure marketing
• identify and distinguish individual and group factors that influence consumer buying decisions
• explain the steps in doing marketing research
• indicate how a marketer can segment a market
• explain what is meant by the term ‘target marketing’
• discuss the impact of the product life cycle and the corresponding response in the marketing
strategy
• describe the positioning methods that marketers can pursue in practice.
3.1 Introduction
There is no denying the importance of marketing to organisations and even to the
consumer. The consumer, without noticing, forms part of the marketing process, as
about half of every rand that we spend on products and services pays for marketing. This
includes marketing research, product development, packaging, transportation, storage,
advertising and sales. Through understanding marketing and the marketing process we,
the consumer, will understand the purchasing process and through this, communicate
and negotiate more effectively with sellers. More importantly, we will be better equipped
to demand products and services that meet promised standards.
All activities of marketing – including the decision of which product or service to offer,
the price, marketing communication and distribution of the product or service – should
result in a mutually satisfying exchange between all parties involved. The role marketing
plays and the character of marketing activities in any organisation is determined by its
philosophy and orientation.
A production-oriented business focuses on the internal capabilities of the company,

rather than on the desires and needs of the marketplace. A sales orientation is based
on the belief that people will buy more products if aggressive sales techniques are used,
and that high sales volumes produce high profits, while a marketing-oriented business
focuses on satisfying customer wants and needs and, in the process, meeting company
objectives. A societal marketing orientation goes beyond a pure marketing orientation
to include preserving or enhancing individuals’ and society’s long-term best interests.1
Management needs to embrace, believe and stand behind the chosen orientation fully
for it to be implemented successfully by the rest of the organisation. If an organisation
chooses to change its orientation, for example from a sales orientation to a marketing
orientation, management’s authorisation and change in behaviour is essential.
Marketing is one of the core functions of an organisation, but all marketing activities
need to be implemented in alliance with other functional departments and comply with
the specific direction set out by top management. This direction includes the mission,
vision, objectives and overall strategies formulated by top management to be pursued
and supported by all the functional departments, including the marketing department.2
For marketing activities to be managed successfully, managers also need to be aware

of the internal and external variables that can affect the marketing efforts and strategy,
and adapt these efforts and strategies on an ongoing basis through internal and external
scanning. Through internal scanning, the company’s strengths and weaknesses will be
known, and through external scanning, opportunities and threats will be clear. This
process is known as the strengths, weaknesses, opportunities and threats analysis, also
referred to as the SWOT analysis. In essence, environmental scanning should form part
of formulating the marketing strategy, and is done to use strengths and opportunities to
satisfy the needs of the market and minimise the effect of threats and weaknesses.3
Information is not only power, but also the engine that drives today’s global marketplace.
It is important to gather information to stay competitive in local and international
markets. Information is gathered to understand what the wants and needs of customers
are, as well as where and when customers want the product or service, so as to fulfil these
needs and wants. Equally important is to understand what competitors are doing to
satisfy customer’s needs and wants. A sophisticated database of marketing information
is a vital component in the strategy of cutting-edge companies that pull ahead – and stay
ahead – in the race for customers.4
40
Chapter 3 Marketing Management
The use of the Internet has increased all over the world and marketing researchers
realised the impact and the benefits this holds for them. The Internet has nearly replaced
printed media, as information can now be distributed instantaneously at a very low
cost. The Internet ensures easy data collection, distribution of reports and effective
communication between team members of a project.5 The use of the Internet has also
enabled marketers to better understand consumer behaviour, which is in essence, how
individuals, groups and organisations select, buy, use and dispose of goods, services,
ideas or experiences to satisfy their needs and desires.6 Understanding the behaviour
of consumers is not an easy task. Consumers explain their wants and needs in one way
but act in another, as they do not know the influence that external variables can have
on their actions. Nevertheless, marketers must study their target markets to understand
their wants, needs, perceptions and buying behaviour.
Each customer has unique preferences and demands, but they all follow a similar decision-
making pattern and are all influenced by the actions of others with whom they come in
contact. The marketing concept states, amongst others, that the market offering must be
focused on optimally satisfying customer needs, demands and preferences.7 This means
that – ideally – the marketer would provide every customer with a customised offering,
price and promotional activity that satisfies their individual needs.
This chapter will start by providing an overview of marketing and discussing all the
fundamental principles of marketing.
3.2 An overview of marketing

So far, marketing has not been clearly defined. This is by design, as it is imperative to first
have a good understanding of the nature and extent of the marketing process. Whilst it
is true that no two writers agree on the exact formulation of a good definition for this
complicated process, the following will serve as a good foundation.
3.2.1 Defining marketing

The term ‘marketing’ means many things to many people. Some people think it means
personal selling, whilst others consider marketing to be the same as advertising. Others
believe that marketing means making products available in shops, arranging displays
and maintaining inventories of products for future sales. In reality, marketing includes all
of these activities and more.
41
Marketing has two facets. First, it is a philosophy, an attitude, a perspective or a

management orientation that stresses customer satisfaction. Secondly, marketing is
the range of activities used to implement such a philosophy.8 The American Marketing
Association’s definition encompasses both perspectives:
Definition
Marketing is the process of planning and executing the conception, pricing, marketing
communication and distribution of ideas, products, and services to create exchanges that satisfy
9
individual and organisational goals.
3.2.2 Marketing orientation, or the concept of pure marketing

It was only after the Second World War that a change in management’s approach to the
market occurred. The production plants producing war material could now be used
to satisfy the demand for all sorts of consumer products. Because of the widening gap
between the producer and the consumer, management needed reliable information
on how best to satisfy consumer needs. A change from sales-oriented management to
marketing-oriented management resulted in an emphasis not only on the sales message
and the price, but also on the quality of products, packaging and methods of distribution,
and the necessity of providing information by means of advertising.
At that time, consumers also developed more sophisticated needs and were financially in
a better position to satisfy them. There were a large variety of competing products from
which they could choose. This led management to realise the importance of the marketing
function. Production could begin only after management obtained market information
on what consumers wanted, how much they were willing to pay and how they could
best be reached by means of advertisements, sales promotion methods, publicity and
personal selling.
A marketing orientation, which is the foundation of contemporary marketing philosophy,

is based on an understanding that a sale depends not on an aggressive sales endeavour,
but rather on a customer’s decision to purchase a product. What a business thinks it
produces is not of primary importance to its success. Instead, what a customer thinks he
or she is buying – the perceived value – defines a business.
42
Business perceived value also determines a business’s products and its potential to
prosper. To marketing-oriented firms, marketing means building long-term relationships
with customers.10
This orientation has led to what is commonly called the pure marketing concept. The
marketing concept can be regarded as an ethical code or philosophy according to which
the marketing task is performed. Many writers agree that the marketing concept serves
as a guideline for management decision-making. Pride and Ferrell11 view the marketing
concept as ‘a way of thinking about an organisation’s entire activities.’
The essence of the marketing concept lies in three principles, namely:
• long-term maximisation of profitability
• consumer orientation
• the integration of all business activities directed at profitability and the satisfaction of
consumer needs, demands and preferences.
The so-called ‘pure marketing concept’, consisting of these three basic principles, has
been severely criticised as being short-sighted because it disregarded environmental
changes and problems and focused more on short-term consumer satisfaction, rather
than on the long-term wellbeing of society.
3.2.3 The need for marketing

In the modern business environment, the place where a product is produced is not
necessarily the place where it is consumed. This means that gaps exist between production
and consumption, which can be identified by considering some core marketing aspects.12
Figure 3.1 (overleaf) shows that the core marketing aspects are linked, with each aspect
building on the one before it. Bearing in mind the principles illustrated in Figure 3.1,
consider the situation of a young consumer who wants to buy a new computer. Although
her current computer is still working, the new computer is equipped with the latest
operating system, has a better graphics card and more USB portals. These advanced
features created a need for a new computer. For this transaction to take place the
consumer must be able to obtain the specific model and must have a medium of exchange
– that is, money. The gaps that can be identified here lie in the technology development
of the product, features, size, transportation of the product, availability of the model,
availability of finances, and so on.
43
10.2.3 The need for marketing
In the modern business environment, the place where a product is produced
is not necessarily the place where it is consumed. This means that gaps exist
between production and consumption, which can be identified by considering
some core marketing aspects12.
Figure 10.1 show that the core marketing aspects are linked, with each aspect
building on the one before it.
Needs and wants
Exchange
Core marketing
transactions and Products
aspects
relationships
Value satisfaction and

quality
13
Figure 3.1:
Figure 10.1: The core marketing The 13core marketing aspects
aspects
Bearing in mind the principles illustrated in Figure 10.1, consider the situation
of a young consumer who wants to buy a new computer. Although her current
Acomputer is still
proper market working,
offering the newmarketing
and successful computer is equipped
is possible only ifwith the latest
the following five
operating
gaps have beensystem, has bridged.
effectively a better graphics card and more USB portals. These
14
advanced features created a need for a new computer. For this transaction to take
place the consumer must be able to obtain the specific model and must have a
Space gap
medium of exchange – that is money. The gaps that can be identified here lie
South
in theAfrican vineyards
technology are mostly of
development located in the Western
the product, Cape,
features, size,but wine drinkers
transportation
are spread all over South Africa, and even over the world, leaving a geographical
of the product, availability of the model, availability of finances, and so on. space
A proper
(distance) market
between the offering
manufacturerand and
successful marketing is possible only if the
the consumer.
following five gaps have been effectively bridged.14
Time gap
10.2.3.1
Wheat Space gap
is harvested in the summer months, mainly in the Western Cape, but consumers
want wheat
South products
African throughout
vineyards are the year, located
mostly and all over South
in the Africa. Therefore,
Western Cape, butwheat
wineis
drinkers are spread all over South Africa, and even over the world,
harvested in summer months and stored in silos to be available all year round.leaving a
geographical space (distance) between the manufacturer and the consumer.
Information gap
A young graduate who just started his or her first job may not have all the needed
333
information to choose medical cover that will satisfy his or her needs, and may end up
with inappropriate cover due to a lack of information.
Business_Management.indb 333 2014/10/30 5:55 PM
44
Ownership gap
When a consumer buys a new house, he or she will only be the owner once the house is
registered in his or her name.
Value gap
An acceptable exchange rate (price and product) is deemed necessary between the seller
and buyer, before a purchase or exchange can take place. If buyers perceive a price to be
unacceptably high, they will not buy; if sellers cannot get the price they want, they will
not sell. The value the buyer attaches to the product should, ideally, be the same as that
attached by the seller. If a buyer considers R5 000 for a designer handbag as acceptable,
they will purchase it.
3.2.4 Marketing activities15

There are a number of marketing activities involved in the transfer of goods and services
between the place of manufacture and the place of consumption. These are categorised
as primary, auxiliary and exchange activities.
Primary activities
The primary marketing activity is transport. From donkeys and camels, transport
methods have developed to pipelines and land, water and air traffic, each with its own
unique advantages and disadvantages. The purpose of these forms of transport is to
deliver the product to the consumer in the quickest and safest way.
Auxiliary activities
Nieuwenhuizen16 identifies the following auxiliary marketing activities.
• Obtaining and supplying information

The seller must know who and where potential buyers are. He or she can find this
out by conducting market research. Thereafter, he or she can supply information to
potential buyers by using marketing communication methods, such as advertising
and personal selling.
• Standardisation and grading

Manufactured products must be designed to conform to specific norms or standards.
Agricultural products are graded according to certain qualities. Meat, for example, is
graded according to its quality. This facilitates the buying process, making it easier for
the buyer to buy.
45
• Storage
This is an activity that can close the time gap. Seasonal production of agricultural
products necessitates storage to ensure the ready availability of these products
throughout the year. For example, wheat is stored in silos from where it is delivered to
milling companies, as needed, for distribution to wholesalers and retailers.
• Financing
Costs are incurred in the transfer of products and services from sellers to buyers.
These costs must be financed, usually by banks and other financial institutions. All
participants in the exchange process should strive to keep financing costs down to
present the product at a price acceptable to the consumer and worthwhile to the
seller.
• Risk-taking
The owner of the product is exposed to the risk of loss or damage, and can insure the
goods against some risks, such as arson, theft and storm damage.
Exchange activities
Exchange is the key term in the marketing process. The concept of exchange is quite
simple. It means that people give up something to receive something they would rather
have. Normally we think of money as the medium of exchange. We give up money to
get the products and services we want. Exchange does not necessarily require money
however. Items and services may be bartered or traded, such as house-sitting for free
accommodation, or fresh produce for manufactured goods.
Exchange marketing activities are buying and selling. Ownership is transferred from
one party to another. Buying activities are not regarded as a marketing task, but rather as
the responsibility of a business’s purchasing department. Selling, on the other hand, is a
very important task of the marketing department of a business.
3.2.5 The marketing process17

The marketing process (see Figure 3.2 on page 47), which has evolved from a simple
bartering transaction between two participants, has become a very complex task. In a
large business, there is usually a marketing department responsible for the marketing
task. Heading this department is a marketing manager and team of specialists. All
the activities discussed in the previous section must be performed by the marketing
department in a way as to ensure the maximum advantage for the company as a whole.
46
Chapter Ten – Marketing Management
Feedback by means of marketing research
Market management The target market

Makes a decision Consists of consumers
regarding the market with certain needs for
offering consisting of four products and services
Market offering
variables: and who are willing
t "QSPEVDUXJUIOFFE to sacrifice something
satisfying properties (money) to satisfy those
t %JTUSJCVUJPOXIJDIXJMM needs
deliver the product to
the consumer at the
correct place and time
t .BSLFUJOH
communication
messages that inform
the consumer about
the market offering
Sacrifice money
and persuade him or
her to buy
t "QSJDFUIBUUIF
consumer will be Objective:
willing to pay Total need satisfaction
Main objective:
Maximisation of
profitability in the long
term
Environment
Figure 10.2: The marketing process18

Figure 3.2: The marketing process18
10.2.6 The marketing environment
Although the interaction between the business and its environment is the
The four variables about which the marketing management team must make decisions
concern of the entire strategic management team, marketing management
are known as the Four Ps. They are:
probably plays the most important role in this interaction. Support for
• this product itself
the argument can be found, firstly, in the existence of a business mission
statement – an important component that examines the business’s product-
• the place where it is to be sold (distribution of the product)
market relationship. This entails a broad but clear indication of the business,
product or service, and at what market it is aimed. Both the business’s product
development and its market fall within the domain of marketing management,
33747

• the promotion or marketing communication methods to be used to inform the

consumer
• the price of the product, which should reflect its value to the consumer.
Decisions on these four marketing instruments combine to form an integrated marketing

strategy, or marketing plan. The marketing strategy for a specific market offering is
directed at a group of consumers in a specific environment. If anything should change
in the environment, the market offering and the marketing strategy must be changed
accordingly.
It is a fact that the market offering is seldom directed at the satisfaction of one single
consumer; rather a group of people is usually involved. The larger this group, the more
advantageous it is for the manufacturer and the intermediaries. In the total consumer
market there are many different groups. The members of each of these groups (also
called market segments) have more or less similar characteristics, needs and product
preferences. After careful consideration, marketing management selects from many
different market segments a specific target market (or markets). The market offering is
often changed in some way or another to meet the preferences of different target markets.
It seldom happens that an organisation has only one single target market.
Recent trends in marketing have introduced new concepts such as mass customisation,
implying that the Internet can be used to develop a marketing strategy for a single
consumer.
3.2.6 The marketing environment

Although the interaction between the business and its environment is the concern of
the entire strategic management team, marketing management probably plays the
most important role in this interaction. Support for this argument can be found in the
existence of a business mission statement – an important component that examines the
business’s product–market relationship. This entails a broad but clear indication of the
business, product or service, and at what market it is aimed. Both the business’s product
development and its market fall within the domain of marketing management, which
necessitates its involvement in developing the business’s mission and strategy, as well as
its involvement with the external environment.
48
A second reason for the importance of marketing management’s involvement in the

interaction between the business and its environment arises from the requirements that
the marketing concept puts to management. It calls upon top management to determine
the needs of the consumer and to satisfy them, as opposed to deciding for the consumer
what he or she needs.
Thirdly, marketing management plays a decisive role in the interface between the
business and its environment because the latest trends in strategic management show
that successful businesses are externally oriented, and that they focus on the consumer,
the competitor, the market and the market’s environment.
One should also bear in mind that corporate planners depend on marketing management
for ideas on new products and marketing opportunities, and that the marketing strategy
(product, price, distribution and marketing communication) plays a decisive role in the
total strategy.
3.3 Consumer behaviour

Several individual and group factors strongly influence the decision-making process.
Figure 3.3 (overleaf) summarises these influences.
3.3.1 Individual factors influencing consumer buying decisions

Individual factors refer to factors inherent in human behaviour that will influence an
individual’s behaviour as a consumer.
Motivation19
All behaviour starts with needs and wants. Needs are the basic forces that motivate an
individual to do something. Wants are needs that are learned during an individual’s
lifetime. A motive is a need or want that is sufficiently stimulated to move an individual
to seek satisfaction. Hunger that is strong enough to move the consumer to seek out a
take-away meal, and fear of burglary great enough that the consumer seeks security by
installing an alarm system, are examples of aroused needs and wants and that become
motives for behaviour.
To further complicate the situation, a purchase is often the result of multiple motives,
some even in conflict with one another. When buying a new house, a young buyer will
look for a house in an area that is affordable, but at the same time an area that is safe.
49
show that successful businesses are externally oriented, and that they focus on
the consumer, the competitor, the market and the market’s environment.
One should also bear in mind that corporate planners depend on marketing
management for ideas on new products and marketing opportunities, and
that the marketing strategy (product, price, distribution and marketing
communication) plays a decisive role in the total strategy.
STIMULI
Marketing factors Environmental factors

Product, price, quality, distribution Economic, political, cultural
and communication and technological
Group factors
Individual factors
Cultural, family, social class, reference
Motivations, perception, attitude,
groups
personality, lifestyle, learning ability
and opinion leaders
Decision-making process
Problem recognition, information search, assessment of alternatives, purchase decision,
post-purchase behaviour
Purchase decision
Choose product, which brand to buy and from which dealer,
purchase amount, purchase timing and method of payment
20
Figure
Figure 10.3: Overview 3.3: Overview
of consumer of consumer
behaviour19 behaviour
The best known and most accepted theory of classifying the diversity of needs is that of
Maslow.
338 The lowest-level needs are physiological, which help to ensure the survival of the
individual. The highest level is reflected in the desire for self-actualisation. According to
Maslow’s theory, the individual is motivated to fulfil whichever need is most strongly felt
at any given
Business_Management.indb 338 moment. 2014/10/30 5:55 PM
Perception
A motive activates behaviour intended to satisfy the aroused need. Since behaviour can
take many forms, an individual gathers information from the environment to help make
a choice. The process of receiving, organising and assigning meaning to information
or stimuli detected by the five senses is known as perception. It is also the way that
50
consumers interpret or give meaning to the world surrounding them. The consumer can,
for example, form a perception of the quality of a product by feeling it or just by looking
at it.
Stimuli picked up by the senses are relayed to the brain, where they are interpreted.
The consumer reacts according to this interpretation and not always according to the
objective reality. Subjective factors always play a role in perception. The experiences,
values and prejudices of an individual colour his or her perceptions. This means that few
people perceive things in exactly the same way. 21
Learning ability 22
The consumer’s ability to learn also influences behaviour. The consumer must, for
example, learn which product attributes relate to which brand and where the product
can be purchased. Consumers must also be able to recognise, for example, distinctive
packaging. They must remember the information supplied in the marketing message
when they are in a position to purchase the product.
Learning can be defined as the result of a combination of motivation, attention, experience

and repetition. Three elements are implied in this definition. In order to learn, the
consumer must be motivated and must give full attention to the message (must perceive
and experience it), and there must be some measure of effective repetition. A considered
combination of these three elements results in a successful learning situation. Imbalance
in any way usually leads to failure.
Attitude 23
An attitude is defined as the specific feeling an individual experiences about an object.
This feeling is usually described as positive or negative. The object that brings forth this
feeling can be a brand, company, product, services or almost anything.
Attitudes are also influenced by the customers’ moral codes. What an individual considers
to be good and bad, and right and wrong, will determine how they feel about an object.
Personality 24
Personality refers to those psychological characteristics of people that both determine
and reflect their reaction to environmental influences. Personality distinguishes one
individual from another, and one group of individuals with similar characteristics from
another group.
51
While research seems to indicate that individual traits are not good predictors of
behaviour, it is a well-known fact that marketers use personality traits to describe
individuals and to differentiate between them. It is also true that marketers can expect
that consumers will tend to purchase the product that best suits their personality. People
who drive 4X4s are perceived to be sporty and outdoors people, whereas sedan drivers
are seen to be more conservative.
Lifestyle 25
Lifestyle refers to individuals’ or families’ way of living. The lifestyle concept provides
descriptions of behaviour and purchasing patterns, especially the ways in which people
spend their time and money. Personality, motives and attitudes also influence lifestyle.
3.3.2 Group factors influencing consumer buying decisions 26

Humans are social beings and, as a result, group norms will influence their behaviour
patterns. These norms include habits, rules and regulations. Since the average individual
belongs to more than one social group, each with its own norms and rules for behaviour, it
is clear that social pressure has a profound impact on economic activities. There are only
a limited number of products without any social impact, due to the fact that consumers
usually surrender to the pressure of social needs. The different groups that can compel a
consumer to conform to group norms are the cultural group, family, reference groups and
opinion leaders, as shown in Figure 3.4.
Culture
Culture comprises a complex system of values, norms and symbols that have developed in
society over a period of time, and in which all its members share. These values, norms and
symbols are created by people and transmitted from one generation to another to ensure
survival and to facilitate adaptation to the circumstances of life. They are transmitted
from parents to children. In this process, the school, church and other social institutions
play an important role. This process is referred to as socialisation.27
Family
Of all the groups influencing consumer behaviour, the individual maintains the closest
contact with the family. In family interaction, the child learns behaviour patterns by
means of the socialisation process.
The family can be regarded as a nuclear group whose members live in close contact with
one another and act as a decision-making unit when they attempt to satisfy individual
52
average individual belongs to more than one social group, each with its own norms
and rules for behaviour, it is clear that social pressure has a profound impact on
economic activities. There are only a limited number of products without any
social impact, due to the fact that consumers usually surrender to the pressure
of social needs. The different groups that can compel a consumer to conform to
group norms are the cultural group, family, reference groups and opinion leaders.
Opinion leaders
Group factors
influencing
Reference
consumer Culture
groups
buying
decisions
Family
Figure 10.4: Group3.4:

Figure factors influencing
Group consumer buying
factors influencing decisions
consumer buying decisions
10.3.2.1 Culture
needs from one shared source (the family income). This fact implies that individual needs
Culture comprises a complex system of values, norms and symbols that have
must necessarily
developed be subordinated
in society to those
over a period of other
of time, andmembers to aall
in which greater or lessershare.
its members extent.
This leads
These to consultation
values, norms andandsymbols
joint decision-making
are created byamong family
people andmembers.
transmitted from
one generation to another to ensure survival and to facilitate adaptation to the
Reference groups
circumstances of life. They are transmitted from parents to children. In this
Aprocess, the school,
group consists church
of two andpeople
or more other social institutions
who interact with play
each an important
other role.
to accomplish
This process is referred to as socialisation 27
some goal. Individuals may belong to many sorts of groups, such as families, close
personal friends, co-workers, members of an organisation, leisure and hobby groups and
10.3.2.2 Any
neighbours. Family
of these groups may become reference groups.
Of all the groups influencing consumer behaviour, the individual maintains
Athe closestgroup
reference contact withpeople
involves the family. In familyuses
that a consumer interaction,
as a basisthe child learnsor
for comparison
behaviour
‘point patterns
of reference’ in by meansresponses
forming of the socialisation process.
and performing behaviours. In all reference
The family can be regarded as a nuclear group whose members live in close
groups, there are distinctive norms of behaviour, and members are expected to conform
contact with one another and act as a decision-making unit when they attempt
to these norms in order to avoid sanctions being applied against them.
Opinion leaders
341
The opinion leader has an important function in the marketing communication process,
acting as a go-between in what is known as the two-step flow of communication.
Research results have indicated that information does not flow directly from the mass
media to individual consumers in the target market but is channelled through a person
– the opinion leader – who interprets and evaluates the information, relaying acceptance
or rejection of the message to other consumers in the target market.
53
The role of the opinion leader is especially important in purchasing high-risk new
products. In the case of a new fashion, for example, the fashion opinion leader is willing
to accept the risk of ridicule or financial loss, which the ordinary consumer is usually
anxious to avoid. The ordinary consumer will only become interested after the new
fashion has been vetted and approved by the opinion leader. This process of gradual
acceptance is known as diffusion.28
3.3.3 The buying decision-making process

Not all consumers proceed in order through all the steps. Consumers engaged in
extensive decision-making go through all the steps. Each of the steps in the decision-
making process will be discussed briefly.29
Need recognition
The process by which a consumer makes a purchase decision begins when the consumer
recognises a need. This phase is sometimes called the problem recognition or problem
awareness phase. When an individual perceives a difference between the desired state of
affairs and the actual state of affairs, an unsatisfied need is felt or recognised. A problem
exists that must be dealt with as soon as possible. The recognition may come from an
internal stimulus, such as hunger, fatigue or a desire to impress people. Alternatively, it
may come from external stimuli, such as an advertisement, the launch of a new product
or an invitation to a party.30
Information search
After consumers have identified a need, they may then look for information about how
best to satisfy that need. Whether the consumer searches for more information or not
depends on the perceived benefits of the search versus the perceived costs. The perceived
benefits include finding the best price, obtaining the most desired model and achieving
ultimate satisfaction with the purchase decision. The perceived costs include the time
and expenses of undertaking the search. Consumers will spend time and effort searching
as long as the benefits of the search outweigh the costs.31
Evaluation of alternatives
Evaluation entails the appraisal by the consumer of the attributes and benefits of various
alternatives. A host of criteria may be used to evaluate products.
54
The abundance of evaluation criteria involved in any major decision makes evaluation
especially difficult. The decision-maker must also decide on the relative importance of
often conflicting criteria.32
Purchasing decision
After searching and evaluating, the consumer must decide whether or not to buy. If the
decision is to buy, a series of related decisions must be made. Kazmi33 lists these as:
• brand decision
• vendor decision
• quantity decision
• time decision
• payment method decision.
Post-purchase behaviour
After purchasing the product, the consumer will experience some level of satisfaction or
dissatisfaction. The marketer’s job does not end when the product is bought, but continues
into the post-purchase period. Marketers must monitor post-purchase satisfaction, post-
purchase actions and cognitive dissonance.34
Types of decision-making
We distinguish between three types of decision-making:
1. Real decision-making
This is a complex process and involves extensive problem-solving, such as the decision
to buy a new house or car.
2. Impulse decision-making
This refers to unplanned action on the spur of the moment as opposed to conscious
planning during real decision-making. For example, you wait in the queue at the till
and decide to buy a chocolate bar displayed at the till.
3. Habitual decision-making
This occurs when a consumer is brand loyal. For example, Mary usually buys a large tin
of Ricoffy coffee automatically and does not even consider the coffee of competitors.
3.4 Market segmentation and target marketing

To ensure its continuity and growth, an organisation is dependent on, inter alia, the
consumer and the satisfaction of his or her needs. Although the satisfaction of customer
55
needs is not a goal in itself, it enables the organisation to achieve its own goals. Therefore,
the greater the need-satisfaction that customers can derive from an organisation’s
products, the easier it becomes for the organisation to achieve its own goals.
To achieve maximum customer satisfaction, marketers divide the heterogeneous market

into fairly homogeneous subsets of customers. This process is referred to as market
segmentation. Each segment of the market, it is assumed, will have similar needs and will
respond in a similar way to the market offering and strategy. The market for airlines can be
divided, for example, into business travellers, holiday travellers, local travellers, overseas
travellers, and so forth. Each of these subsegments exhibits different characteristics and
needs about the destination and services required.
The organisation must decide next which market segment’s needs it can best satisfy.
Mango airlines, for example, decided to cater primarily for the needs of local budget
travellers, and has therefore developed its product offering around their needs. The
process of deciding which segment/s to pursue is referred to as market targeting.
Once the target market segment has been chosen, the organisation must decide how to
compete effectively in this target market. A decision has to be made on the competitive
advantage to be achieved. This is known as positioning. Mango airlines can decide to
compete on the basis of a lower price (when compared to competitors), or of ambience
and prestige, which would be reflected by the quality of the interior of the aeroplane,
the professional service of its employees and the availability of facilities and services
required by local travellers, such as quick availability of tickets and comfortable seats.35
3.5 The marketing mix

The marketing mix is made up of four major areas about which marketing management
must make decisions, and which form the building blocks upon which an effective
marketing campaign is based. These four variables, which are also known as the Four
Ps, are:
• the product aspect that tries to ensure that the product characteristics match the
benefits sought by the target customers
• the promotion element that tries to communicate the organisation’s ability to satisfy
the customer through the use of communication, such as advertising, personal selling,
sales promotions and publicity
56
• the place, or distribution component, that tries to deliver the right product to the
right place at the right time to satisfy customer needs
• the price component of the mix tries to match the money that customers will pay for
the product with the value customers receive through the purchase and use of the
product.
These four components (as mentioned earlier) work together to help the organisation
achieve its marketing objectives.36
3.5.1 Product
Product decisions are critical. The marketer must determine what the actual product
offers, as well as the need-satisfying benefits that should be included. The marketer
needs to make decisions on the range of different types of products and/or services. This
is called the product mix.
Example
Radical Holdings and their Four Ps

Radical Holdings is a South African company that designs, manufactures and markets power
wheelchairs. Martin Brown, founder and CEO of Radical Mobility, is a quadriplegic, who has been
confined to a wheelchair since 1998.
One would think that in selling a product such as a power wheelchair, the basic attributes of
delivery, price, practicality and technology would be sufficient to build the image of the brand. Not
so. Customers in this niche market are looking for more than just physical attributes due to their
circumstances; they also need those important intangible attributes.
The Radical Mobility product range includes various models of custom designed power
wheelchairs for the South African and international markets. The choice in products currently
includes five different power wheelchair models with numerous additional functionalities that
can be added at the request of the customer, including power recline, tilt-in-space, power seat
elevation and lights.
57
In order to remain competitive, Martin regularly researches other power wheelchair suppliers
and industry leaders to assess their pricing and business strategies. Awareness of the brand is
extended by advertising in publications directed at occupational therapists, orthopaedists and
people with disabilities. The customised nature of the product does not allow for holding inventory.
Subsequently, the average lead time for delivery is between six and eight weeks depending on the
complexity of the seat functions added.
Although the company is situated in Mogale City, Gauteng, the finished wheelchair can easily be
37
transported to the customer by multimodal forms of transport.
Specific product strategies must be established. These include:
• whether the product mix will be extended through product diversification
• whether the product mix will be reduced for more specialisation
• whether to standardise the product range
• how to differentiate or distinguish the product from other competitive products
• how to manage the possible obsolescence of the product.
A plan for the development and commercialisation of the products must be developed.
The product design and package design are important, as they are so closely related to
product decisions. The whole issue of a brand name and the branding decisions must
be addressed, and plans made to establish brand awareness within the selected target
markets.
Although product is usually the first component of the marketing mix addressed by
marketing, the development and design of the product offering and package is totally
dependent on the input from the environmental analysis and customer analyses.
Without researching these two areas, the marketer cannot effectively design a product
offering to meet the needs of the customer. For example, the worldwide escalation in fuel
prices has forced car manufactures to develop engines that are more fuel-efficient and
environmentally friendly. Volkswagen developed the BlueMotion that emits less carbon
dioxide. Evolving use of products may necessitate packaging design changes. Both of
these could lead to new product opportunities and/or brand extensions.
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3.5.2 Price
Price is important because it is the only element in the marketing mix that generates the
revenue. It is also important because it affects the organisation in a direct way, namely its
profitability. The marketer needs to establish the price sensitivity of the target customers
and then establish the basic price. This can be done on the basis of costs, demand or
competitive pricing structures. All three of these factors will influence the setting of a
price. The marketer must also establish flexibility in the pricing structure through the
use of adjustments.
We have referred to the effect of the environment on pricing by noting that economic
conditions could lead a marketer to develop a lower-priced alternative. The marketer
must monitor the environment to analyse the effect of the environmental factors on
pricing. New developments in materials and processes can have a significant impact on
a business’s bottom line.
Technology, in particular, has provided significant threats to many businesses by its

accelerating rate of change, yet it also provides opportunities to improve bottom line
performance through increased profitability. Developments such as ‘just-in-time’ (JIT)
materials management systems and e-commerce have had a notable impact on the profit
margins of car manufacturers. Many cars are now sold through the Internet, with an
impact on promotion and distribution costs, and therefore on pricing.
Marketers must also carefully research and monitor the target market’s sensitivity to its
pricing strategy.38 Most businesses, as well as customers, were severely affected by the
economic downturn in the second part of the first decade of the 21st century. The year
2008 was marked by customers trading down. Woolworths reacted to the new spending
pattern of customers and continued to focus on increasing the quantities to satisfy
demand for the lines Woolworths is known for. They reacted with a more aggressive
pricing strategy. Prices were reduced on 245 food lines and Woolworths introduced more
promotions such as the ‘eat for 4 under R100’ campaign. Customer feedback tells them
that Woolworths’ food prices are now seen as far more competitive.39
3.5.3 Marketing communication (promotion)

It is essential for marketers to inform current and potential customers in the marketplace
about their products and marketing activities. This communication can be done by using
59
marketing communication tools, such as advertising, sales promotion, personal selling

and publicity.
It is clear that there are a number of decisions associated with the use of these
communication tools, such as what message to deliver, which media to use, the budget
required and what promotional support activities to implement. All of these must be co-
ordinated and evaluated. The marketer must also communicate internally throughout the
organisation to ensure that the employees and staff are aware of what the expectations
are in the marketplace, and what message the organisation is delivering to its target
audiences.
The choice of media is an aspect to which marketers must pay particular attention.
The growing number of media (Internet, intranet, zeppelins, travelling billboards, new
magazines and new television stations) means that marketers have to pay attention to
making the correct choices for communicating with the target markets in an effective
manner. This requires systematic research of the customer base to monitor trends
towards the media as well as advertising campaign impact.40
The marketing communication process aims to achieve three objectives:

1. Inform
The potential consumer must be told about the availability of the product or
service. Most of us read or viewed with interest the promotional material about the
introduction of high-definition television. The information presented can be classified
as an effort to inform us (the potential target market) about the availability of this
technology.
2. Persuade
This is a vital component of most marketing communication with the customer. Even
the most mundane advertisement includes an element of persuasion. When we see
an advertisement for bleach and the message states ‘Buy XYZ bleach for the whitest
clothes’, we are being persuaded by the manufacturer to buy XYZ bleach and no other
brand.
3. Remind
Consumers tend to forget communication messages. This is why manufacturers must
remind consumers about their products, services or even just their brand. During
2011 KFC used an advertisement called ‘Love is forever’ to remind consumers about
the KFC brand. In this advertisement, an old man and woman are taken back through
60
different phases of their lives, and through all of these phases, KFC was with them.
Through this ad consumers are reminded of KFC and that their products can be
enjoyed no matter how old one is.
Nando’s restaurant chain, for example, has been particularly effective in designing
campaigns that are related to current events in South Africa. Their success is as a result
of monitoring the environment for opportunities.
3.5.4 Distribution decisions (place)

The marketer has to establish the intensity of distribution needed to meet the market’s
needs and expectations. This could be intensive, selective or exclusive distribution. The
marketer also has to decide on the types of distribution channels through which to
deliver the product or service to the final consumers. There are many options to consider
here, from direct channels through to those that utilise intermediaries, such as retailers,
wholesalers and agents. The effect of the physical position of the marketer’s own business
could be included here, as the location of a business is often the most critical determinant
of possible success.
Distribution decisions and distribution channel design is an area where rapid changes
are occurring in terms of the marketing mix. The use of the Internet for direct sales
is revolutionising the way many firms reach their customers. Dell recently overtook
Compaq as the leading personal computer seller in the US. Dell has a completely different
distribution strategy to Compaq. Whilst Compaq distributes through the traditional
computer retailer channels, Dell uses a direct channel by selling to customers by means
of the Internet. This innovation has led to significant reductions in distribution costs, and
has had a direct effect on its pricing policy. It is critical for marketers to monitor both
changes in the environment and customer expectations of where they want to purchase
products. In so doing, they will always be able to meet customer needs by providing the
right product at the right time.41
3.6 Product life cycle 42

A product can be defined as a physical good or service which is obtained by the consumer
and which has the aim of satisfying the needs of the consumer as a result of the product’s
direct use with additional factors, services and perceptions of the product such as being
useful, desirable or convenient. But needs and perceptions change over time, so products
go through predictable stages that, together, are called the product life cycle.
61
During the product life cycle – from its introduction to its eventual withdrawal – the
product finds itself, time and time again, in different competitive market environments,
necessitating changes to the marketing strategy. Depending on the extent of and relative
growth rate in product sales, the phases of the product life cycle are usually introductory,
growth, maturity and decline.
Because consumer behaviour patterns and competition in the marketplace will inevitably
change with time, the marketing strategy will often have to be adjusted during the
product life cycle. When marketing management is threatened by competitors, it may be
‘forced’ to change or adapt the marketing strategy, depending on whether an attack or a
strategic withdrawal is planned.
3.6.1 Marketing in the introductory phase

The introductory phase begins after preparations for entering the target market have
been completed and the product is offered for sale. When the product first enters the
market there are certain hurdles that must be overcome. Sales of the product start at
zero, and will begin to build up slowly. The reason for this is that it takes some time for
a firm’s marketing efforts to take effect. The business has to get people to hear about the
product and to generate trial use of the product.
The business will also experience low profit levels. This is because of the low initial sales
and also because of the need to recoup product development and product launch costs.
The low sales level also means that the manufacturing costs are high.
The main objective in this phase is to generate awareness of the product in the target
segment and to promote trial. If the product is an innovative product, there will be no
direct competitors, and the organisation may have to build up primary demand (the
demand for the product category rather than for the brand). If the product is an addition
to an existing range, there is bound to be direct competition.
Distribution can be challenging. It may be difficult to persuade retailers to stock the

product unless there is a real unique selling feature. Penetration of the target market
could be slow if attempts at distribution are not successful. In parallel with this is the
job of generating awareness in the target market. This implies that marketing costs
will be high.
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Deciding on the product’s price is also important, and the marketer must decide whether
to price high, low or to have a special introductory offer. The four main pricing strategies
are:
• rapid skimming (high price and aggressive marketing to increase rate of market
penetration and promote brand preference for the product)
• low skimming (high price and low marketing expenditure to maximise early profit in
this phase, especially if the product is an innovation)
• rapid penetration (low price and high expenditure on marketing communication,

which enables the most rapid market penetration rate and largest market share – used
if market is very large, unaware of product and most consumers are price-sensitive)
• slow penetration strategy (low price and low expenditure on marketing communication
– a good strategy if demand is price-elastic, if market is large, consumers know the
product, market is price-sensitive and some competition already exists).
3.6.2 Marketing in the growth phase

The growth phase is characterised by a strong growth in sales in the target market,
especially because of the increase in repurchasing and purchases across a wide spectrum
by the early majority of consumers. This could be due to increasing awareness of the
product and successful trial marketing. The emphasis here is on building brand preference
and loyalty as soon as possible, and on increasing the number of outlets stocking the
product.
Another characteristic is the increase in the number of competitors. Competitors will

have had time to assess the product and its potential, and will have decided on their
response. Their activities could deflect attention away from the product so the marketer
may have to take defensive steps.
3.6.3 Marketing in the maturity phase

As soon as the maturity phase is entered, sales growth and the demand for the product in
the target market level off. Improved products that satisfy the same needs are launched,
attracting the innovators and early adopters.
Most products are in the maturity stage of the life cycle. Managing products in this phase
poses a serious challenge to marketers. In the maturity phase the accelerated growth
63
rate levels off because of the saturated market penetration. A stable set of loyal buyers
of the product should have emerged. Marketers must look at their products carefully. If a
product starts looking dated or becomes less attractive relative to competitors’ offerings,
then customers could end up switching brands. If a brand is not well positioned in this
phase it could be in serious trouble. This means that product differentiation and possible
modification or range expansion must be carefully considered.
Because of the increased competitive activity there could be more price competition,
driving price levels down. Marketers must also increase their marketing activity in
order to retain loyalty. This means focusing on marketing communication to emphasise
differentiation in, or improvements to, the product. Distribution channels will also need
close attention. Unless the product is a steady seller, retailers could be considering
reducing shelf space or even delisting the product. The reduced price levels and increased
marketing costs mean reduced profits for the marketer and the distributor.
3.6.4 Marketing in the decline phase

The decline phase is characterised by a rapid decline in sales in the target market. New
uses for, and consumers of, the ‘old’ product are totally lacking and all the new competing
(and substitute) products enjoy increasing acceptance in the target market.
A product that goes into decline for market-based reasons is almost impossible to rescue.
A marketer can perhaps control the rate of decline to some extent, but sales and profits
often keep declining in spite of marketing efforts. Examples of market-related change
could be changes in consumer tasks or technological developments.
As a result of declining product sales, marketers often reduce or withdraw marketing

activities such as personal selling, merchandising, advertising or distribution. The
withdrawal of marketing support often speeds up the decline process! One of the
problems with this phase is that it can take up management time with very little reward
for the organisation. This implies that management must take decisive action in order to
be able to focus efforts on new products that may need attention.
Management must decide whether to:
• withdraw marketing support and leave the product to run its own course naturally,
which allows the business the possibility of reaping some profit and gives them time
to adjust
64
• eliminate the product by taking it off the market to free up management time and
resources for new products
• initiate a phased withdrawal in which an ultimate cut-off date is set, with interim
stages of gradual withdrawal, or
• sell the product to a niche operator or a smaller, more flexible firm that can earn a
satisfactory return from the remnants of the market.
3.7 Marketing control and implementation 43

Even well-designed market and marketing strategies can fail without effective organising,
structure and good leadership. The implementation of marketing plans depends, to a
large extent, on the organisational structure and close co-operation of all marketing
personnel under the leadership of the marketing manager. Planning and organising
are closely linked. Implementation involves both organising and leadership. Organising
involves the structuring of a company to co-ordinate resources and activities to achieve
marketing objectives in an effective manner.
Leadership is an integral part of the implementation of strategies. It is the driving force

within an organisation. Leadership includes delegating authority to subordinates,
co-ordinating tasks and activities, communicating on all levels of the organisation, and
establishing a corporate culture that is conducive to attaining the overall objectives of
the organisation.
Control is the directing or redirecting of a company’s actions to ensure that they meet
objectives. Evaluation is a necessary adjunct of control, because, before actions can be
controlled, they must be evaluated to determine whether results are on target.
3.8 Relationship between the marketing function and the

other business functions
The marketing function can be regarded as a key function in the organisation because
of its contribution to profit. However, (as noted in Chapter 1) seven different functional
departments can be identified in the contemporary large organisation and the managers
heading these seven departments must work together to realise the organisation’s
objectives.44
• The operations function comprises the physical utilisation of raw materials and their
conversion into manufactured materials and finished products.
65
• The human resources function pertains to the acquisition, training, utilisation and
retention of a sufficient number of competent personnel.
• The financial function includes the acquisition, utilisation and control of the funds
necessary for running the organisation. The main activities here are the acquisition
and application of funds for the profitability, liquidity, solvency and continuity of the
organisation.
• The purchasing function ensures that the materials necessary for production are
bought at the right places, at the right times, in the right quantities and at the right
prices.
• The public relations function maintains and cultivates a favourable and objective image
of the organisation among those whose opinion is important to the achievement of
the business objectives.
• The information function makes available internal information for planning and
control.
• The marketing function generates income from sales, and is responsible for managing
the marketing process.
• General management includes the activities of persons in managerial positions. These

persons in top, middle and lower management have to plan for, organise, lead and
control the organisation as a whole, as well as its individual functions. The general
manager is at the head of the management team.
3.9 Summary
The success of the marketing concept is now widely understood, spurring growth in
non-profit marketing as organisations begin using the tools and techniques of marketing
management. The environment is changing as well, with almost every company being
affected by rapid globalisation. The business and the community it serves are not
self-sufficient, closed entities, but depend on each other for survival. Together, they
form a complex, dynamic business or marketing environment in which changes in
the environmental variables continually determine the prosperity or otherwise of
the business. Since these variables are more often than not beyond the control of the
organisation, it is the task of management to adapt constantly to change. In some cases,
management operates proactively, in other words it takes the lead and anticipates events
to augment change.
66
This chapter also looked at the factors involved in conducting marketing research
and the research techniques available to gather the specific information needed by a
company. The steps in the marketing research process were dealt with, focusing on the
individual consumer and the factors influencing consumer behaviour. Individual as well
as group determinants influencing the decision-making process were described. Market
segmentation remains one of the cornerstones of modern marketing. It is imperative for
marketing management to realise that they cannot hope to satisfy all markets. Instead,
they must divide the heterogeneous market into more homogeneous groups of customers,
choose one or more to target with their product offering, and position themselves relative
to their competitors.
This chapter also examined the decisions made by marketers in terms of the marketing
mix. A number of analyses were needed in order to accomplish this. First, the marketing
orientation of the business was analysed to ensure that the company culture is correct
and proactive. Secondly, the marketing environment and its effect in all the decision-
making areas of marketing were highlighted. Thirdly, we emphasised the importance of
marketing research in order to align the market offering with the marketing environment,
and to meet customer needs. This all entails a thorough understanding of the customer
and the characteristics that affect the decisions made towards purchasing. Lastly, target
market selection and positioning are critical, as all the decisions made by marketing are
made effectively as a result of selection and positioning.
Read the case study and answer the questions below.
Case study
PepsiCo
PepsiCo initially entered the South African market by acquiring Simba, the manufacturers of the
well-known Simba chips and Ouma Rusks. It has expanded its South African involvement recently
and positioned itself in the local market by entering into an exclusive bottling agreement with
Pioneer Foods, creating a strategic partnership for both companies. Pioneer Foods’ products include
Weet-Bix, Marmite and Ceres juices. PepsiCo products include soft drinks such as Pepsi, Pepsi Light,
Pepsi Max, Mirinda, 7 Up and Mountain Dew.
67
Pioneer Foods’ unfailing commitment to quality and integrity in all its business undertakings makes
it the perfect partner for PepsiCo. PepsiCo states: ‘Over the years we have continually committed
ourselves to offering product choices that meet a broad variety of needs and tastes, be they fun
products or products that contribute to a healthier life style.’ Part of their mission is: ‘to be the
world’s premier consumer products company, focused on convenient foods and beverages.’
In the mid-eighties, PepsiCo launched an aggressive marketing and branding strategy in Africa to
try to penetrate the market that was largely dominated by Coca-Cola. They introduced the first-
ever 1.5 litre and 2 litre packaging (bottles) of soft drinks and subsidised kiosks (containers). This
concept was successful in the African market. In order to counteract this aggressive marketing and
packaging strategy, Coca-Cola hiked the market price of the bottles that PepsiCo was buying from
a company that was co-owned by Coca-Cola. This had a serious and negative impact on PepsiCo as
a company and its market penetration, and eventually the company collapsed in Africa.
During 2006–2007, PepsiCo announced an ‘assault’ on the South African market in a press release
that indicated some interesting strategy changes, including the launch of a new drink Pepsi Max.
Like Pepsi Light, Pepsi Max is a ‘light weight’ contender because it is 100% sugar-free but has an
enhanced cola flavour to ensure maximum taste, providing it with knockout potential. According
to Avishkar Rangovind, the marketing manager for Pepsi South Africa at that stage, ‘Pepsi Max is
the definitive drink for a young male South African consumer. Pepsi Max consumer advertising and
activation has been very attitudinal and this will be brought into South Africa as well.’ Pepsi Max
was promoted by the strap line ‘Maximum Taste, No Sugar’ and was launched with a consumer
campaign across South Africa during the 2006–2007 summer holidays.
Another campaign by PepsiCo that followed a similar strategy occurred in the United Kingdom.
The decline in sales of carbonated drinks in the UK seems to be induced by a steady increase in
demand for more natural products. With increased demand, it is only natural for brands to develop
and emphasise their more natural product offerings, and here again it seems that Pepsi is ahead
of Coca-Cola on the trend curve. PepsiCo has launched Pepsi Raw in certain UK test markets. This
is meant to a healthier alternative to the traditional cola. A type of Pepsi made from only ‘naturally
45
sourced’ ingredients, it taps into the demand for premium, less processed products.
Questions
1. Describe how market research can help PepsiCo to stay competitive against Coca-Cola.
2. Discuss how the determinants of consumer behaviour and individual and group factors
affect PepsiCo.
3. Do you think that PepsiCo adapts towards environmental changes?
68
Endnotes
1. Cant, MC, Van Heerden, CH & Ngambi, HC. 2013. Marketing Management: A South African
Perspective. Cape Town: Juta. pp. 10–11.
2. Clow, KE & Blaack, D. 2010. Marketing Management: A Customer-Oriented Approach. California:
SAGE Publications. p. 270.
3. Pride, WM & Ferrell, OC. 2012. Marketing. 16th ed. USA: South-Western Cengage Learning. pp.
33–34.
4. Roberts, ML & Zahay, D. 2013. Internet Marketing: Integrating Online & Offline Strategies. 3rd ed.
South-Western: Cengage Learning. p. 101.
5. Roberts & Zahay, Internet Marketing, pp. 23–28.
6. Swarbrook, J & Horner, S. 2007. Consumer Behaviour in Tourism. 2nd ed. Massachusetts:
Butterworth-Heineman. pp. 6–7.
7. Akehurst, G & Alexander, N. 2013. Retail Marketing. New York: Routledge. p. 3.
8. Pride & Ferrell, Marketing, p. 4.
9. American Marketing Association. 2014. Defining Marketing. Available: https://www.ama.org/
AboutAMA/Pages/Definition-of-Marketing.aspx. (Accessed 10 September 2014).
10. Lamb, CW, Hair, JF & McDaniel, CD. 2012. Essentials of Marketing. 7th ed. Ohio: South Western
Cengage Learning. p. 5.
11. Pride & Ferrell, Marketing, pp. 12–17.
12. Nieuwenhuizen, C. 2007. Business Management for Entrepreneurs. Cape Town: Juta. p. 90.
13. Cant et al, Marketing Management, p. 5.
14. Nieuwenhuizen, Business Management for Entrepreneurs, pp. 90–91.
15. Nieuwenhuizen, Business Management for Entrepreneurs, pp. 90–91.
16. Nieuwenhuizen, Business Management for Entrepreneurs, pp.90–91.
17. Kazmi, SHH. 2007. Marketing Management. New Delhi: Excel Books. pp. 211–225.
18. Du Toit, M & Erdis, C. 2011. Fundamentals of Branding. Cape Town: Juta. p. 12.
19. Sarangapani, A. 2009. Rural Consumer Behaviour in India: A Study of FMCGs. New Delhi:
University of Science Press. p. 18.
23. Boshoff, C & Du Plessis, F. 2009. Services Marketing: A Contemporary Approach. Cape Town: Juta.
pp. 76–77.
24. Boshoff & Du Plessis, Services Marketing, pp. 76–77.
25. Boshoff & Du Plessis, Services Marketing, pp. 76–77.
27. Sahaf, MA. 2008. Marketing: Making Decisions for Strategic Advantage. New Delhi: Prentice-Hall
of India Private Limited. p. 115.
28. Sahaf, Marketing, pp. 117, 296.
29. Lamb et al, Essentials of Marketing, p. 189.
30. Lamb et al, Essentials of Marketing, pp. 190–191.
69
31. Lamb et al, Essentials of Marketing, pp. 190–191.

32. Kazmi, Marketing Management, pp. 187–188.
35. Dasgupta, D. Tourism Marketing. 2011. South Asia: Pearson. pp. 117–121.
36. Chaudhari, CG & Gokhale, N. 2009. Marketing Management. Pune: Nirali Prakashan. pp. 3–7.
37. Nieuwenhuizen, C. 2012. Business and Marketing Cases. Cape Town: Juta. pp. 109–120.
39. Cant, M & Machado, R. 2010. Marketing Success Stories. 7th ed. Cape Town: Oxford University
Press. p. 87.
42. Limthongchai, P & Speece, MW. (n.d.). The effect of perceived characteristics of innovation
on e-commerce adoption by SMEs in Thailand. University of Nebraska and Asian Institute of
Technology, Thailand. Available: http://bit.ly/1MuFJO0. (Accessed 10 September 2014).
44. Van Hoepen, L & Verster, V. 2008. Client Service and Human Relations. Cape Town: Pearson
Education South Africa. pp. 116–124.
45. Cant & Machado, Marketing Success Stories, pp. 75–82.
70
Chapter 4
PUBLIC RELATIONS MANAGEMENT
Learning outcomes
• define PR, publics and stakeholders
• explain what online PR is
• describe the difference between online and offline PR
• highlight the differences between marketing and PR
• discuss the functions and characteristics of PR
• identify the stages in the process of PR
• discuss the tools and techniques of PR
• describe controlled and uncontrolled media
• discuss the different types of mass media
• describe the different online PR tools
• briefly discuss the place of PR in the organisation
• explain the purpose of PR in society.
4.1 Introduction
The past few decades have placed renewed focus on the importance and role of public
relations (PR) as a strategic component of the overall business plan of the organisation.
High levels of corporate corruption and the world economic crisis of 2008 and beyond
have highlighted the value of PR and its skilful use as a marketing support tool. For
organisations to survive in today’s market, top management is tasked with managing
and presenting the organisation so that it is seen as caring for the environment and its
customers and that it values its various stakeholders. Management needs to portray the
organisation as being something other than just a profit-hungry corporation.
This chapter will focus on defining what PR is in terms of its functions and characteristics,
online and offline media and the place of PR in the organisation and in society.
4.2 Public relations defined

The Public Relations Society of America (PRSA) defines PR as ‘an organisation’s efforts
to win the co-operation of groups of people’ and its purpose is to help ‘an organisation
and its publics adapt mutually to one another’.1 However, the Public Relations Institute
of Southern Africa (PRISA) expands on this definition and explains that PR in its simplest
form is ‘relationships with publics’ and defines it as ‘the distinctive management function
which establishes and maintains mutual communication, understanding, acceptance and
cooperation between an organisation and its publics’. 2 Smith3 further indicates that PR
as a management function ‘focuses on long-term patterns of interaction between an
organisation and all of its various publics, both supportive and non-supportive’ whilst
seeking ‘to enhance these relationships and generating mutual understanding, goodwill
and support’.
Ultimately, the public’s perception of an individual or organisation, whether correct or

incorrect, is very important. The main aim of PR is to foster support for and create an
understanding of a particular organisation, event, brand, product or service. It is in the
best interests of this function to explain the mutual benefits of a relationship between an
organisation and its stakeholders, as well as between employees and their customers.4
4.2.1 Publics and stakeholders 5

Public relations is an organisational function that facilitates two-way communication
between an organisation and its stakeholders, keeps management up to date with public
opinion, manages all communication and accentuates the organisation’s interests to the
public and corporate social responsibility.6 It is therefore important to be clear about the
definitions and roles of the terms ‘publics’ and ‘stakeholders’ as used in the definition
above as they are often confused because of their similar functions.
In short, a public is defined as a group of people with an interest in a specific organisation,

matter or concern. However, Seitel7 explains that a public is formed when:
• a similar situation or circumstance is experienced by a set group of people
• the group of people can agree on the uncertainties and challenges of the situation
• the group becomes proactive and works on finding a solution to these challenges.
According to Steyn,8 ‘publics’ is the term usually used by corporate communication

practitioners and ‘stakeholders’ is the term used by top executive management. The
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Chapter 4 Public Relations Management
key publics of an organisation are internal stakeholders, external stakeholders and the
broader community.
When a problem in the relationship between stakeholders and the organisation occurs,
stakeholders turn into a public. However, if these stakeholders are not yet aware of
this discrepancy, they are referred to as a ‘latent public’. If they do become aware of the
problem, they are referred to as an ‘aware public’. When these stakeholders (or aware
public) start communicating about the issue, they are referred to as an ‘active public’.
Therefore, it is vital for PR practitioners to employ different communication strategies
during the different stages that stakeholders can find themselves in. 9
4.2.2 The role of PR in the organisation

The conventional purpose and idea of PR were to ensure positive relations between
the organisation and its stakeholders by having effective communication strategies and
channels in place. However, the role of PR today has evolved significantly into a function that
is also expected to support integrated marketing communication strategies. Promoting
the organisation’s brands, products and services has become a key responsibility of the
PR function as well as cultivating and communicating a positive organisational image to
its publics.
Case study
Standard Bank10
At a time when many organisations were focusing on leveraging resources and cutting budgets
due to the global recession, Standard Bank was poised to cement its brand in the minds of
consumers, stakeholders and employees globally. Now more than ever, it was critical that the
group’s strategy and vision were clearly understood and articulated across all geographies, and the
marketing strategy was aligned to the refined group strategy.
Making internal connections – uniting 50 000 employees in 33 countries behind a new

rallying cry
The executive team spent time fine-tuning the business strategy into specific goals that would
work globally and across business units. In addition, the bank sought the views of all 50 000
employees across 33 countries through an employee engagement survey called ‘Heartbeat’ to
provide insights into what employees thought of Standard Bank, its leaders and chosen direction.
This feedback was used to build ‘connections’ with employees, further shaping Standard Bank’s
73
future. Standard Bank executives hosted 58 road shows in 26 countries at 33 locations around the
world to connect with employees and to share insights into the group’s history and plans for the
future. Following a ‘talk show’ format, management spent time discussing the key focus areas and
implications for each country, and employees were given opportunities to ask questions.
At the same time, an internal social networking site called ‘Blue Connection’ was launched. The
site was a first for Standard Bank and it enables employees around the world to connect with each
other. Using features common to Facebook and Twitter, Blue Connection encourages employees to
make connections, collaborate more easily and share ideas across borders and oceans.
Having laid the foundations for internal alignment, understanding and support for the business
strategy and a clear brand promise, Standard Bank was ready to take the message externally, to
start to prove that Standard Bank was moving with the times.
Case study questions

1. What kind of PR tool is Standard Bank’s Blue Connection?
2. Explain the importance of Blue Connection as an internal communication tool.
3. The corporate image of Standard Bank is an important element of which practitioners must
always be aware. Describe Standard Bank’s corporate image in your own words.
4. Suggest tools that Standard Bank can use to take their internal message to external audiences.
4.3 Online PR
Public relations has always been concerned with the identification of significant
stakeholders and managing the conversation between a company and its stakeholders.11
The tasks that a PR practitioner needs to perform are not much different than what they
were 20 years ago, but developments in technology, together with the transformation
in the way that we communicate, are causing the methods used in PR to transform at an
increasing rate. 12
Public relations now has more channels than ever before to utilise for conversations with
stakeholders. No longer confined to just press conferences, the PR practitioner can also
make use of online media such as email, social media or an online media room to get the
message out to stakeholders.13 In many instances journalists can now even be bypassed
and the message communicated directly to the target stakeholders. Thus online PR can
be defined as ‘the use of Internet tools and technologies in the communication process
between organisations and their publics’. 14
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The acronym ‘PR’ traditionally stood for ‘public relations’, but with new online media
the ‘P’ in the acronym stands for positioning, perspective and personality, and the ‘R’ for
relationships, responsibility and rewards.15
Table 4.1: New meaning of ‘PR’ 16

‘P’ ‘R’
Positioning – where in the mind of your Relationships – build relationships and trust by
stakeholders your company is positioned making use of online content
Perspective – providing your point of view to all Responsibility – you have a responsibility to your
stakeholders stakeholders to communicate who you are and
what is going on
Personality – distributing your personality by Rewards – the company will receive rewards for
making use of online media using online media
4.4 Marketing and PR

The marketing and PR functions of an organisation are commonly confused because of
their overlapping roles and responsibilities. However, there is a clear distinction between
these organisational functions, especially in larger organisations where PR is more
prominent. In brief, PR is focused on building goodwill, corporate image and relationships
with stakeholders, while marketing has the objective of attracting, sustaining and meeting
the needs and wants of its customers. 17
4.5 The functions and characteristics of PR

Developing and implementing strategic, co-ordinated PR programmes rely heavily on
marketing and integrated marketing communication. It is therefore imperative for PR
officers to have a clear understanding of what is expected of them. 18
Public relations as a management function has certain characteristics: 19
• PR is constantly changing. Maintaining and building new relationships require

continual transformation, adjustment and adaptation.
• PR requires logical analysis. In order to provide solutions to problems, it is necessary

to investigate and critically analyse situations.
• PR requires strategy. Setting objectives with time and resource constraints in mind is
essential to solve problems.
75
• PR relies on implementation and execution. Without being proactive and implementing

selective strategies, stakeholders’ and publics’ needs will not be met.
• PR requires performance assessment and control measures. Critically evaluating

performance according to results achieved and objectives set is critical.
• PR requires flexibility. Execution of strategy should allow for adjustment and alteration
to provide flexibility when satisfying the needs of stakeholders and the public.
With the characteristics of PR kept in mind, the key functions of PR are summarised in
Table 4.2.
Table 4.2: Functions of PR

Function Explanation
Research • Gather information about a range of issues (eg public opinion,
trends, emerging issues, media coverage and consumer
concerns)
• Monitor programme implementation
• Assess effectiveness
Planning and advising • Determine needs, priorities, goals and objectives
• Collaborate with management and/or customers
• Problem-solving
Media relations and placement • Contact media houses (eg newspapers, magazines and trade
publications)
• Negotiate publishing of news articles and broadcasting via
television and radio
• Respond to media requests for information
• Arrange production, booking and placement of corporate
advertisements
Organising • Handle media conferences, conventions and exhibitions
• Organise open house days, celebrations, fundraising events,
competitions, programmes and sponsorships
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Function Explanation
Writing • Write news releases, newsletters, correspondence, reports,
booklets, radio and television text, magazine articles, product
information, trade papers, technical material and corporate
advertisements
Editing • Check and edit special publications, employee newsletters,
shareholder reports and other communication for internal and
external groups
Production • Multi-faceted and very challenging
Speaking • Create communication using multimedia knowledge and
skills including art, photography, design and audio-visual
presentations
• Either the PR practitioner will speak or arrange for another to
speak
• Plan programmes in response to public and problem situations
• Monitor their effectiveness during implementation
• Evaluate overall impact
Training • Prepare executives for dealing with media, presentations and
other public appearances
• Service staff development
Management • Manage personnel, budget and action programmes
4.6 The PR process 20

The PR process integrates strategic, operational and tactical levels of planning to ensure
that PR’s key roles and responsibilities are carried out. The process of developing positive
relations with publics and gaining acceptance with stakeholders is made up of four
different stages: researching, planning, implementation and feedback, and evaluation.
Table 4.3: Stages in the PR process

Stage Process for the programme
Researching and defining issues and concerns What is the issue or concern at hand?
What background information, evidence or data
are available?
Which internal factors are affecting the issue?
Which external factors are affecting the issue?
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Stage Process for the programme

Planning the programme Who are the publics/stakeholders?
What is the objective of the programme?
What are the objectives for each stakeholder
group?
What is the programme for each stakeholder
group?
What is the communication programme?
What is the communication programme for each
stakeholder group?
Which media and message channels will be
used?
How will the programme(s) be implemented?
What is the budget (per programme)?
What is the schedule (per programme)?
Implementing the programme What is the operational plan (day-to-day tasks
and activities)?
How will feedback about the programme be What control measures will be put in place?
given?
Evaluation How will the completed programme be
evaluated?
The roles and responsibilities of the PR function as explained above need to be supported
and carried out using specific tools and techniques. Most of these techniques are used to
ensure effective communication with stakeholders and publics.
4.7 The tools and techniques of PR 21

The implementation and execution of PR strategies are highly dependent on the tools,
techniques and methods employed to communicate with the marketplace. Factors such
as resource and time constraints will greatly affect the choice of tool or technique as well
as the organisation’s choice of degree of penetration relating to the level of sophistication,
diversity and complexity.
The key and the most common tools that can be employed by PR officers are discussed
in the next section.
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4.7.1 Media relations

The responsibility of facilitating media relations remains one of the most crucial aspects
of the PR function. Ensuring good relations with the public is a never-ending obligation
that must be managed sustainably over the long term, not only when positive publicity is
required. Effective media relations strategies require the following:
• researching available media channels
• securing media contracts
• giving detailed briefings to secured media contracts
• setting up interviews and meetings
• drafting key feature articles and press releases for print media
• drafting broadcast interviews and background material, film and photography for
broadcast media
• stimulating debates on important issues.
Media ‘gatekeepers’ see themselves as acting on behalf of the public or audience. Public
relations officers therefore are responsible for framing the message they want to portray
to media gatekeepers to ensure sufficient news value. Criteria that need to be met by
media gatekeepers include the following:22
• Estimations of the number of people affected, the seriousness of the consequence, the
directness of the cause and effect and the immediacy of the effect.
• Proximity, or the distance between the audience and the problem or issue of concern.
This criterion simply suggests that local connections or news angles increase news
value.
• Timeliness, or perishability. Like bread, news gets stale. This is the reason why
journalists and broadcast media compete to be first with the news, but print media
cannot compete with broadcast media on timeliness.
As a result, print media may be more interested in why and how than in when,
although daily newspapers remain concerned with the timeliness of information.
• Prominence. Almost by definition, celebrity events and celebrities are of interest to

large numbers of people. They are newsworthy so people are interested in the private
lives of public organisations and figures.
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• Novelty. The unusual, bizarre, deviant and offbeat. Some even define news as
‘deviation from the norm’. Journalists and editors know that people are attracted by
and interested in what is new, unique and unexpected.
• Conflict. Strikes, fights, disputes, wars, crimes, politics and sports are all forms of
conflict. All too often conflict is the major ingredient in news, not only because of
its appeal to journalists but because of media pandering to public interest in the
sensational and uncertain. Conflict situations often have issues that are not clearly
defined, uncertainty about what is right or wrong and over-simplified versions of
winners and losers.
An example of establishing good relations with a public would be a media launch, when
a company such as BMW introduces a new model at a function for motoring journalists
and they are given the opportunity to test drive the vehicle and to experience it. The
expectation is that the journalists will then write a complimentary review of the vehicle
to generate positive publicity.
4.7.2 Publications
Planning, generating and producing internal and external publications is the next key
responsibility of the PR function. Using the media described above in media relations,
successful communication programmes are based on the balanced use of both the
written and spoken word. This equilibrium again depends on availability, immediacy and
the importance of the message.
Internal publications, which mainly consist of communications to employees, include

staff newsletters, letters from management, memos and employee manuals, whereas
external publications include annual reports, newsletters and industry opinions.
4.7.3 Corporate image

Corporate image is defined as the net result of the combined experiences, impressions,
beliefs, feelings and knowledge people have about a company and this process begins
with corporate branding.
Public relations officers must be aware that anything that represents the company and
what it does or does not stand for and what it does or does not do will either support
or break down this image. It is therefore crucial that the image of its products, services
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and brands, letterheads, web pages, brochures and vehicles contribute positively to the
desired corporate image of the organisation.
4.7.4 Corporate advertising

Corporate advertising involves using advertising in a PR role when an organisation is
unhappy with what is being said about it in the editorial sections of the media or when
the organisation wants to add its voice to a specific cause, for example global warming.
There are three types of corporate advertising:
• General corporate advertising entails strengthening the organisation’s image in the

eyes of the public.
• Investor and financial relations advertising refers to positively enhancing the corporate
brand in the eyes of the financial community through the presentation of detailed
summaries of financial results.
• Advocacy, or publicised support for a particular issue, is a controversial type of

corporate advertising because it tries to influence public opinion on a political or
social issue.
4.7.5 Sponsorship and events

Organisations are finding sponsorship of sports, arts and cultural events and the
association of their brands with these events to be extremely beneficial as a tool for
integrated marketing communication. The rate of sponsorship has thus increased
significantly over the last few years.
4.7.6 Promotional activities

Promotional activities such as conferences, teleconferences, exhibitions, direct mail and
other special events are considered high profile and media sensitive. Public relations
officers understand the importance of these activities and therefore will spend a lot of
time and effort on planning and organising them. These events also require specialised
skills and knowledge, which can be provided by other professionals in the fields of
accounting, graphic design and marketing.
Certain corporate objectives must, however, be considered before the concept or

brainstorming stage of planning promotional activities. During the execution stage, PR
81
officers must ensure the success of the project by giving critical reviews that compare
the value of the activity and the resources (time and money) spent on achieving the set
objectives.
These activities give the organisation an opportunity to display its level of professionalism
and ethical behaviour. Stakeholders and the public will judge the organisation and form
an opinion about the organisation’s image, therefore it is vital for PR officers to create a
positive first impression at promotional events.
4.7.7 Crisis management

Despite the fact that PR practitioners cannot always predict the occurrence or time
of a crisis situation, they are able to anticipate that disasters can occur. In order to be
prepared for dealing with issues or problems that can have a huge impact on the image
or operations of an organisation, issue management – defined as ‘the proactive process
of anticipating, identifying, evaluating and responding to public policy issues that affect
organisations and their publics’ 23 – is a helpful tool to assist in handling and resolving
crisis situations.
When organisations face crisis or disaster situations, decisions need to be made quickly
and efficiently. Special task forces or units can assist management in how best to handle
these situations so that it will have positive outcomes for both the public and the
organisation.
4.7.8 Lobbying
Lobbying, ‘the specialist part of PR that builds and maintains relations with the
government primarily for the purpose of influencing legislation and regulation’, plays an
important role in the function of PR.24 It is key for PR practitioners to understand how
the government functions and the legislative process in order to influence policymakers.
This activity is starting to become more important in the marketplace, especially for large
influential companies.
4.7.9 Networking
Building relations with influential people in different levels of industries and structures
is extremely beneficial to PR practitioners. Networks consist of groups of people
82
with different backgrounds who exchange information, experience and contacts for
professional or social purpose.
4.8 Difference between traditional and online media

A longitudinal study conducted by Wright and Hinson found that for the last three years
the support for traditional mainstream news media is weakening, whereas support is
increasing for blog and social media in PR and that these new online media forms are in
actual fact influencing traditional mainstream media.25 Online PR by its nature provides
several benefits to a PR practitioner. These benefits are clear when looking at the main
differences between traditional and online media.
The differences between traditional and online PR include the following:
• Availability of the message. Traditionally the media and employees were first informed
about news by means of a press release or a news conference. With the emergence of
online media, the media, consumers, employees and all other stakeholders, anywhere
in the world, can all be informed about the news at the same time, as organisations
now have the power to release a statement via different online media at the same
time.26
• Reaching the target market. More niche targeting can be done with online media
as the message can be targeted at a very specific market. Organisations can also
reach markets that can only be found online and send the message directly to these
audiences.
• Availability. Online media is available 24 hours a day, 7 days a week, and 365 days a
year.
• Measurability. All information distributed using online media is measureable. Online

monitoring tools are dealt with later in this chapter.
• Cost. It is generally known that advertising in traditional media such as television and
newspapers is very expensive; costs are reduced when using online media with the
large markets that can be reached.
• Conversation. Traditional media is one-way media. With online media, organisations

can have an authentic conversation with stakeholders and can immediately respond
to all stakeholders. 27
83
• Smart content. Content released online can be easily changed, optimised for search
engines, made interactive and linked. The information can be stored in large amounts
online and retrieved with the touch of a button.
Marketers and PR practitioners need to realise that the more online communication
takes place, the more powerful media beyond traditional paid media gets.28 Traditional
paid media includes all the traditional mass media channels which are customarily used
in PR and marketing, such as broadcast media and print media. With the advent of online
media, PR practitioners can now extend their reach by making use of media forms beyond
paid media, which include various online PR tools.
4.9 Different forms of media

As was mentioned previously, the PR practitioner’s collection of available media tools
increased with the introduction of online media. Gone are the days of using only expensive
traditional paid media forms as discussed later in the chapter.
The PR practitioner now also has access to paid media, owned media, earned media, sold
media and hijacked media. These five different forms of media need to be embraced by
companies, and can be defined as follows: 29
• Paid media is media that the organisation pays for in order to market products or
services. This can either be as a result of the organisation’s own efforts or by making
use of a third party.
• Owned media is new media channels created by organisations themselves which they
use to market their products or services.
• Earned media is media that consumers create or existing media created by an

organisation that consumers share.
• Sold media is media on which the organisation owning the media invites others to
place content.
• Hijacked media is media ‘taken captive’ by consumers or the opposition and used in
a negative way.
Examples of the different types of media can be seen in Figure 4.1. In order to utilise all of
these media forms, the PR practitioner needs access to a different set of tools that stretch
beyond the traditional broadcast and print media.
84
• Earned media is media that consumers create or existing media created by an
organisation that consumers share.
• Sold media is media which the organisation owning the media invites others
to use to place content on.
• Hijacked media is media ‘taken captive’ by consumers or the opposition and
used in a negative way.
Examples of the different types of media can be seen in Figure 7.1 below.
Paid Owned Earned Sold Hijacked
D
SOL
A consumer
Jane watched
who feels she
A well-known a funny
A car was badly
airline places an commercial
manufacturer treated by a
advertisement about a well- A newspaper
created a well-known food
indicating that it known hotel sells advertising
website where it retailer changes
is now also flying group and sends space on its
displays all of the the words
to Singapore, on the link to all her website.
products it has in one of its
a billboard next friends so that
available. advertisements
to the highway. they can also
and distributes it
watch it.
on social media.
Figure 7.1: Figure 4.1: Examples of different

Examples of different forms of media forms of media
In order to utilise all of these media forms, the PR practitioner needs access
to a different set of tools that stretch beyond the traditional broadcast and
print media. This is where online PR tools come into play. Let us consider the
4.10 Controlled and uncontrolled media
different types of online tools available to PR practitioners.
Media can be divided into controlled and uncontrolled media (in as much as the
7.4 Online media tools for PR
organisation has an influence on the content of the message). Organisations use a mixture
Just as in the case of standard PR media tools, a range of online media tools is
of differentavailable
media channels in order As
for PR practitioners. to with
communicate an integrated
traditional media message
it can be expected to the target
that
a PR practitioner will not necessarily use all the online media tools available.
audience – Each
including controlled and uncontrolled media.
organisation will determine which tools work best for its purposes or use
different tools for different situations. It is thus important to know what each
tool is and its application and uses in order to make an informed decision on
Integrated which
marketing communication
tool to use. (IMC) tools
Some of the most popular refers to in
are listed ‘the various
the table below marketing
and will be explained in more detail in the following section.
communication elements to provide added value to the customer and increase This list is by no positive
means30
all that is available.
relationships’. In other words, a media planner can decide to use the local radio station,
Twitter and Facebook to convey the PR message. 105
When selecting an appropriate medium for your PR message, it is suggested that you as
the media planner consider the following questions:31
Juta_Public relations.indb 105 2015/02/10 12:55 PM
• What is the objective of the message?
• Who is the intended audience for the message?
• What is the receptiveness of the intended audience to the various media to be used?
• When should the message reach the intended audience?
• How much can be spent on selecting a proper medium?
85
4.10.1 Controlled media 32

As the name suggests, controlled media means media where the message is controlled by
the PR practitioner or message developer. Therefore the PR practitioner has an influence
over the content of the message, how it is said, when it is said, the placement of the
message and the format of the message.
Leaflets, brochures, emails, websites and corporate print material (such as annual reports,
organisation-sponsored audiovisual material and corporate speeches) are examples of
controlled media. Another characteristic of controlled media is that it is generally paid
for by the communicator.
4.10.2 Uncontrolled media 33

In contrast to controlled media, uncontrolled media means that the PR practitioner
or message developer does not have any direct influence over the media. PR releases,
publicity, news, stories or photographs are examples of uncontrolled media. In comparison
to controlled media, the publicity generated from uncontrolled media is generally not
paid for, and is perceived as a more creditworthy source of information.
4.10.3 Social media: controlled or uncontrolled?

The lines between controlled and uncontrolled social media are fuzzy.34 Facebook,
Twitter, YouTube, Instagram and LinkedIn are typical social media platforms and
consumers can comment on products, brands, organisations and any other matter on
their personal social sites or on the social media platform of the organisation.35 Therefore
the communication posted by an organisation’s Facebook page is controlled, yet the
responses (posts) from the audience cannot be controlled. The same applies for Twitter
and YouTube, where an organisation has control over a Twitter feed posted or a video
uploaded onto YouTube for public viewing, yet cannot control the feedback tweets that
follow the original Twitter feed or the video posted on YouTube from the organisation.
It is therefore crucial for organisations to monitor their social network sites in order to
secure their online reputation.
4.11 Different types of traditional mass media for PR

Mass media, as the name suggests, refers to the media used to convey a PR message to
mass audiences. The Internet, with its multimedia capabilities, has affected the traditional
86
ways individuals access mass media in society and later in the chapter more information
on the role of technology in online PR will be discussed.
This section discusses the role of traditional mass media communication by referring to
the use of broadcast media, print media, support media and internal media.
4.11.1 Broadcast media

The two forms of broadcasting media, radio and television, are discussed. Note that
radio and television have both strengths and weaknesses and that these strengths
and weaknesses should be investigated carefully when evaluating which broadcasting
medium is best suited for a particular PR campaign or message.
Radio
Radio is available on airwaves, via satellite and on the Internet36 and, as stated by Du
Plessis, Van Heerden and Cook,37 the value of radio advertising, and by implication PR,
should not be underestimated as a great number of listeners base their decisions on what
they hear on the radio. South African radio falls into three broad categories: public service
radio, commercial radio and community radio. Each of these is briefly discussed below.
• Public service radio.38 Ukhozi FM, the South African Broadcasting Corporation’s
isiZulu cultural service, is South Africa’s largest public service radio station with
6.38 million listeners a week. Other public service radio stations in South Africa
include SAfm, RSG–Radio Sonder Grense, Lotus FM, Umhlobo, Thobela FM and
many more. The SABC is responsible for public service broadcasting in South Africa
and, while wholly owned by the state, the corporation is financially independent of
taxpayers’ contributions, delivering its income from advertising and licence fees.
From a PR point of view, public service radio stations generate content on a variety
of matters and organisations (depending on the radio station), ranging from personal
empowerment to current affairs issues, talk shows, interviews and many more.
• Commercial radio.39 Commercial radio stations in South Africa include Algoa FM,
Classic FM, Kaya FM, 702 Talk Radio, Good Hope FM, OFM, East Coast Radio, Radio
2000, KFM 94.5 and many more. The scope and reach of community radio stations
varies enormously; it was indicated that in 2012 there were 165 community stations
with about 8.6 million listeners a week, collectively.40 From a PR point of view,
publicity can be generated on topics of recent and relevant news, such as the Oscar
Pistorius trial and the Ebola virus epidemic.
87
• Community radio.41 Community radio stations serve geographic communities and are
crucial for embedding democracy at a local level, as well as helping spread education
and community spirit. Community radio stations in South Africa are available in all
official languages and in all nine provinces of the country. From a PR perspective, an
organisation can use community radio stations to promote its involvement in a local
development project within a specific community, or where it has contributed to the
community in some way.
• Digital radio. Technology provides many opportunities for conveying PR messages

and generating publicity to niche markets. As consumers are becoming reliant on the
Internet to evaluate products, brands and organisations, and for news to obtain and
evaluate information, PR practitioners are becoming experts at tailoring online radio
messages to narrow and well-defined audiences.42
The South African government launched an online, 24-hour radio station called Ubuntu
Radio, operated by the Department of International Relations and Co-operation. Ubuntu
Radio aims to showcase the government’s foreign policy and shore up its position as a
continental economic and political powerhouse as well as sharing views from an African
perspective.43
Another example of an online radio station in South Africa, is CliffCentral, which kicked
off in May 2014. CliffCentral was launched after radio DJ Gareth Cliff parted ways with
radio station 5FM.
Listeners are able to tune into online radio stations on their mobile phones and
computers, and most popular radio stations are available online. In comparison to other
countries, South Africa has high connectivity rates. Unfortunately there are still some
hiccups associated with online radio, including connectivity and sound problems. 44
Television
South African television broadcasts not only in all 11 official languages but also in
German, Hindi, Portuguese and sign language. The SABC broadcasts on three domestic
channels, SABC1 (the most watched channel offering news, entertainment and sport in a
wide range of languages), SABC2 (which offers mostly locally produced programmes) and
SABC3 (most of SABC’s English content, including many American and British comedies
and drama).45
88
4.11.2 Print media

Print media can be defined as ‘a medium that disseminates printed matter’ or as ‘the
industry associated with the printing and distribution of news through newspapers and
magazines’. 46 Print media can therefore be viewed as a more permanent form of media
when compared to broadcast media because of its availability for review at any time.
Newspapers and magazines are the two most prominent types of print media, but
one must also consider printed advertisements, brochures and catalogues, posters
and pamphlets.47 The definitions, advantages and disadvantages of newspapers and
magazines as print media will provide an insight into what print media entails.
Newspapers
Newspapers can be described as ‘a publication issued at regular and usually close
intervals, especially daily or weekly, and commonly containing news, comment, features,
and advertising’.48 South African newspapers can be divided into three classifications:
the timeframe, the demographics and the geographic distribution of the newspaper. 49
• Timeframe. The timeframe of a newspaper refers to whether the newspaper is printed

daily, weekly or monthly (eg some newspapers print a morning and evening edition
every day, such as News24, while other newspapers, such as the Sunday Times, are
printed only once a week).
• Demographic distribution. The demographic classification of newspapers refers to the

language and the specific audiences of the newspaper. The language of publication
is a distinguishing factor that is used to classify a newspaper. Newspapers such as
The Citizen and The Star are only available in English, while Die Burger and Beeld are
printed only in Afrikaans. Special audience newspapers target specific and narrowly
defined readers which have similar interests, eg Travel Industry Review.
• Geographic distribution. Newspapers that are geographically distributed will be

available only in specific areas, for example Grocott’s Mail in Grahamstown or Die Son
in Cape Town.
Magazines
Magazines are ‘general interest regular periodicals covering several topics through
short articles by in-house and external authors, carrying black and white and colour
advertisements and graphics, and printed usually on glossy paper’. 50
89
Classifications of magazines 51
There are many different types of magazines available that cater for a large variety of
interests. This in turn provides advertisers with the ability to target specific interest
groups by being selective about which magazine they place their advertisements in.
There are three distinct categories into which magazines can be divided.
• Consumer magazines. Consumer magazines are bought for entertainment and

information. These magazines can be further split into smaller divisions and are
generally sold to the public for entertainment and information. Examples of these
types of magazines are Heat, Men’s Health, Garden & Home and Car.
• Specialised magazines. The second classification of magazines is the specialist interest

magazines that focus on specific events or activities. Golf Digest, National Geographic
and SA 4x4 Mag are examples of this type of magazine.
• Business publications. The final category is business publications and these relate
to the industrial and business space. This category can also be further subdivided
into different industries and business types. Examples of business publications are
Marketing Mix and Mining Weekly.
4.11.3 Support media

In this section, outdoor advertising, transit advertising, in-store media, directory
advertising and oramedia will be discussed.
Outdoor advertising
Du Plessis, Van Heerden and Cook52 describe outdoor advertising as ‘the oldest form of
advertising and . . . one of the more omnipresent forms of media’. Outdoor advertising
is considered to be a cost-effective medium because of its ability to reach increasingly
elusive consumers who are very mobile and less exposed to traditional forms of media.53
An example of outdoor advertising is billboards.
According to Wilson and Till,54 the growth and success of outdoor advertising is largely
due to the medium’s ability to reach a vast number of consumers and a key to the success
of outdoor advertising is the ability to remain innovative through the introduction of new
technologies, such as 3D. A PR practitioner can, for example, make use of billboards to
propagate the fact that the company is involved in humanitarian aid in Africa, thereby
giving stakeholders a different take on the involvement of the organisation.
90
Transit advertising
Transit advertising is described as ‘advertising placed in or on modes of public
transportation or in public transportation areas’. 55 Advertisements can be placed
anywhere from the sides of buses, trains and taxis to inside bus stations and near train or
bus platforms. Transit advertising is targeted at the large numbers of consumers making
use of commercial transportation services on a daily basis.
Advertisers benefit from transit advertising by means of extensive exposure and

frequency due to regular routines of commuters.56 Transit advertising is important
because it provides high visibility of products on a daily basis and this kind of advertising
makes it hard for the audience to ignore the advertisement as they would for a television
or radio commercial, where they can fast forward or change radio stations.57
In-store media
In-store media is found in stores where consumers conduct their purchases and the
primary aim for in-store advertising is to reach shoppers where they buy, and to inform,
remind and encourage consumers to make in-store purchases.58
A store is a 360-degree sensory environment, with enticing smells, samples to taste,

auditory announcements and a bombardment of visual media. In-store purchasing
decisions take place very quickly as most decisions are made within seconds and many of
the decisions are not planned in advance because of the amount of stimuli the consumer
is faced with. In-store media can refer to anything that communicates to the shopper, from
commercial messaging (intended to directly affect economic activity) to non-commercial
messaging such as décor. 59
Directory advertising 60
Directories can be seen as both a reference source and an advertising medium and the
Yellow Pages, Brabys and Who Owns Whom are the more common directories used in
South Africa.
Display advertisements make valuable information available to consumers as

organisations can choose whether they want to list their telephone numbers or place an
advertisement in the directory.
91
Oramedia 61
Oramedia techniques include puppet shows, village theatre, improvisational theatre,
gossip, poetry and music, marketplaces, festivals and weddings, funerals and political
rallies. Oramedia is primarily used to communicate with rural publics, people from
different ethnic groups, cultures, languages and lives beyond the reach of mass
communication media. Although oramedia (also referred to as folk media) is an important
support media tool, it is considered underutilised in South Africa.
Oramedia can be specially created for the use of a PR practitioner to support existing mass
communication media, for example promoting all kinds of PR programmes, including
family planning, adult literacy and the fight against HIV/Aids.
4.11.4 Internal media

Before one can look at internal media, internal communication needs to be discussed.
Internal communication, between management and staff, can be used to encourage
employees to support organisational marketing (and PR) efforts.62 Communication is
especially crucial when it is aimed at internal stakeholders (employees) as the success
of an organisation’s sustainable development and financial performance depends on
effective communication with employees. 63
Internal communication media vehicles include in-person communication, printed

communication and information-technology-based communication. The tools for these
three internal communication media vehicles are presented in Table 4.4 on the facing
page. 64
The channels of mass media communication were discussed in this section, focusing on
broadcasting media, print media, support media and internal media. Remember that these
mass media channels can be used in conjunction with each other and in combination in
order to deliver an integrated message to the target audience.
1. Differentiate between controlled and uncontrolled media by referring to the definitions,
characteristics and examples of both types of media.
2. Would you consider Facebook controlled or uncontrolled media? Discuss your reasons.
3. Discuss the advantages and disadvantages of radio as a vehicle for mass media.
4. Discuss the advantages and disadvantages of magazines as a vehicle for mass media.
92
Table 4.4: Internal communication tools

Tools Methods
In-person communication All-staff meetings, individual meetings and
recognition meetings, formal speeches, panel
discussions, question-and-answer sessions,
oral testimonials, employee counselling,
committee meetings, demonstration and training
programmes, interviews, personal instructions,
office grapevine
Printed communication Internal newsletters, staff handbook, resource
library and notice boards, house journals,
information brochures, handbooks and manuals,
bulletins, bulletin boards, annual reports,
commemorative stamps, exhibits and displays,
mobile displays, suggestion boxes, instructions,
orders, pay inserts, flyers, written reports, financial
statements, training kits
Information-technology-based communication Email, list servers, telephone/video conferencing,
discussion forums, blogging, social networking
sites and intranet or website, video blogs, forums,
wikis, mobile platforms, digital signage, Internet
protocol, television, RSS
4.12 Online media tools for PR

Just as in the case of standard PR media tools, a range of online media tools is available
for PR practitioners. As with traditional media it can be expected that a PR practitioner
will not necessarily use all the online media tools available (see Figure 4.2 on page 94).
Each organisation will determine which tools work best for its purposes or use different
tools for different situations. It is thus important to know what each tool is and its
application and uses in order to make an informed decision on which tool to use. Some
of the most popular tools are listed in Figure 4.2 (overleaf) and will be explained in more
detail in the following section. This list is by no means all that is available.
4.12.1 Websites and online media rooms

A website is generally known as one of the most important tools that an organisation can
use in its marketing and branding endeavours. A website is a collection of pages on the
93
Public Relations – Theory and Practice
Websites & Online

Email E-newsletters
media rooms
Online Public Relations Tools
Online press
Onine press
Social media SEO & RSS
releases
release
Figure 7.2: Online PR tools Figure 4.2: Online PR tools
7.4.1 Websites and online media rooms

A website is generally known as one of the most important tools that an
organisation
Internet can use
that contain in its marketing
information and branding
about a specific endeavours.
subject and published by A an
website is a
individual,
a collection
company orof pages on the Internet that contain information about a specific
65
any organisation.
subject and published by an individual, a company or any organisation.12 In
today’s online world, it is not only about getting traffic on your company’s
Inwebsite
today’s online
but aboutworld, it is notaonly
creating about getting
relationship withtraffic
youron your company’s
stakeholders oncewebsite
they arebut
66
there.
about The alast
creating
13
thing you
relationship want
with yourisstakeholders
for your stakeholders
once they aretothere.
visit your website
The last thing
and
you leave
want without
is for the information
your stakeholders theywebsite
to visit your needed. Therefore
and it is the
leave without beneficial for
information
companies to have a specific section of their website which is used solely to
they needed. Therefore it is beneficial for companies to have a specific section 14of their
communicate with the media; this is known as an online media room. This
website
onlinewhichmedia is room
used solely
should to communicate
be linked to with the media; this
the company’s is known to
homepage as make
an online
it
67
easierroom.
media for publics and the
This online media
media room toshould
find information they
be linked to the need. The
company’s 15
type ofto
homepage
information
make it easier for inpublics
an online media
and the mediaroom usually
to find includes,
information theybut is 68
need. not limited to,
the following: 16
• Press/news releases. The PR practitioner can upload press/news releases for

the media and other stakeholders to view or download.
• Executive biographies and photographs. The profiles of the most important staff
in the company can be uploaded here for the media and other stakeholders
to access.
94
106
The type of information in an online media room usually includes, but is not limited to,
the following:69
• Press/news releases. The PR practitioner can upload press/news releases for the media
and other stakeholders to view or download.
• Executive biographies and photographs. The profiles of the most important staff in the
company can be uploaded here for the media and other stakeholders to access.
• PR practitioner contact details. Up-to-date contact details of the PR practitioner or

department should be available here, should anyone need to make contact with them.
It is thus the task of the PR practitioner to make sure that the website is updated with
relevant news, that the online media room is kept up to date with the latest press/news
releases, executive biographies and photographs, and that the PR practitioner can be
reached via the contact details that are provided.
This will also make the PR practitioner’s workload less as they will not need to send
this information to everyone that needs it, but can direct the interested stakeholders to
the website and online media room. If stakeholders know that your company keeps an
updated website and online media room, this will become their first stop for information
before they contact you.
4.12.2 Email
Another online PR tool mentioned in Figure 4.2 is email. Email is one of the top thousand
most used words in the world and is an abbreviation of electronic mail, which can be
defined as ‘messages distributed by electronic means from one computer user to one or
more recipients via a network’. 70 Generally, an email can be an informal or formal way
of communicating text, visual images, hyperlinks to information, and documents in the
form of attachments to stakeholders.
Email can be used by PR practitioners to deliver important information instantaneously

and relatively securely to a database of stakeholders. It is also handy for them to have an
electronic ‘paper trail’, or ‘thread’, of conversations with stakeholders.
4.12.3 E-newsletters
The third online PR tool as illustrated in Figure 4.2 is e-newsletters. E-newsletters
(also known as electronic newsletters) are distributed internally and externally to
95
stakeholders and are used to inform, entertain or persuade stakeholders about specific
topics or issues.71 An e-newsletter is exactly the same as a printed newsletter, but sent via
an electronic communication channel. These channels can either be email or a website.
The e-newsletter is a great way to build a relationship with your stakeholders. By sending
an e-newsletter you can keep them up to date with what is happening in the company.
4.12.4 Social media

Figure 4.2 also includes one of the most exciting online tools available to PR practitioners
– social media. Social media is used to describe an extensive range of applications that
are run on the new generation of the Internet called web 2.0.72 Social media is one of the
fastest growing media types in history.
The figure below illustrates how long it took to reach 50 million users via the different
types of media. Chapter 7 Online Public Relations
Radio: 38 years
Television: 13 years
Internet: 3 years
Facebook: 1 year
Twitter: 9 months
Figure 7.3: Adoption in years of different media24

Owing to the popularity of social media as a communication medium, the
practising of PR is changing.25 Instead of PR practitioners communicating with
only the
Owing media
to the and they
popularity in turn
of social mediacommunicating with medium,
as a communication stakeholders, social
the practising
media is changing 74 this one-way communication into conversations. Now it is
of PR is changing. Instead of PR practitioners communicating with only the media
possible for one person to speak to thousands of people at once and also for
and they in turn
customers communicating
to speak with26stakeholders, social media is changing this one-
to each other.
wayThe
communication into conversations.
stars in the figure Now it stakeholders
represent influential is possible for(media
one person to speak
and other) andto
the task of the PR practitioner is to communicate with these stars.
thousands of people at once and also for customers to speak to each other. As
75 you can
see in the figure above, traditional media is a one-way communication, whereas

with social media there are conversations with and between stakeholders.27
96
Owing to the popularity of social mediaChapter as a communication

4 Public Relationsmedium,
Management the
practising of PR is changing.25 Instead of PR practitioners communicating with
only the media and they in turn communicating with stakeholders, social
Themedia
stars inisFigure
changing this one-way
4.4 represent communication
influential stakeholders into
(mediaconversations.
and other) andNow it is
the task
possible for one person to speak to thousands of people at once and also for
of the PR practitioner is to communicate with these stars. As you can see in the figure,
customers to speak to each other.26
traditional
The stars in the figure represent influentialwhereas
media is a one-way communication, with social
stakeholders (mediamedia there and
and other) are
76
conversations
the task ofwith
the and between stakeholders.
PR practitioner is to communicate with these stars. As you can
see in the figure above, traditional media is a one-way communication, whereas
with social media there are conversations with and between stakeholders.27
Traditional media Social media
Figure 7.4: The difference between traditional media and social media28
Figure 4.4: The difference between traditional media and social media77
There is a magnitude of different social media platforms that can be used by PR
practitioners, and the following discussion focuses on the more popular ones.
Companies
There need to
is a magnitude of remember that media
different social social platforms
media encourages
that can beusers to by
used share,
PR
not to purchase a product or subscribe to a newsletter.29 It is about building
practitioners, and the following discussion focuses on the more popular ones. Companies
a trusting relationship with your stakeholders. Companies need to have a
need to remember
presence onlinethat
andsocial
notmedia encourages
just wait userstotohappen
for a crisis share, not to purchase
before a product
commenting or
78
or subscribe
responding to on
a newsletter.
social mediaIt platforms.
is about building
30 a trusting relationship with your
stakeholders. Companies need to have a presence online and not just wait for a crisis to
happen before commenting or responding on social media platforms.79
109
Social media consists of social networks, blogs, microblogs and discussion forums, to
name a few categories. It is impossible for a company to be active on all of the social
Juta_Public relations.indb 109 2015/02/10 12:55 PM
media available. It is thus important to ensure that social media is part of your marketing
strategy to make sure that you use the social media platforms that will best suit the
company’s marketing objectives. It is also important that your target stakeholders use
the social media platforms that you choose to use.
We now look at some of the social media available to PR practitioners and how they can
be used for PR activities.
97
Social networks
Social networks can be defined as web platforms where individuals or organisations
can create a public or semi-public profile within a restricted system, connect with users
they share a connection with and view and navigate profiles of their connections and
others within this restricted system.80 These social media platforms can be used to build
relationships with stakeholders and to build trust. They can also be used to distribute
information to stakeholders without using a third party like a journalist. It is a direct
channel to your stakeholders.
An example of how Facebook was used for PR by creating publicity can be seen in the
ALS Ice Bucket Challenge. The campaign was launched to increase awareness and raise
funds for amyotrophic lateral sclerosis (ALS). People were nominated by their peers to
record a video of a bucket of ice water being thrown over their heads and donate money
to ALS and, in turn, nominate more people to become part of the campaign. According
to Facebook the following ice bucket challenge statistics were recorded between 1 June
2014 and 1 September 2014:81
• 17 million videos were shared on Facebook about the campaign.
• 440 million people viewed the videos more than 10 billion times.
• Celebrities such as Mark Zuckerberg, Bill Gates, Oprah Winfrey and Christiano
Ronaldo joined in the conversation.
In South Africa, Joost van der Westhuizen, the well-known former Springbok rugby
captain, who has been diagnosed with ALS, also completed the challenge and nominated,
among others, the entire South African, New Zealand and Australian rugby teams.
Example
The impact of Facebook

The following scenario serves as an introduction to this chapter and illustrates the importance of
social media and, in effect, online PR. Let’s look at the following hypothetical example – which has
most likely happened in the past!
98
Lily’s Gourmet Pet Food (LGPF) manufactures a range of pet foods. During the manufacturing
process the pet food ingredients came into contact with rat poison used in the factory to control
pests. The company became aware of the problem but decided to ship the food believed to have
come in contact with the poison as it was already packed for delivery. They made this decision
as they believed that the product was not severely contaminated and would cause only a mild
reaction in some pets that ate it.
Nina’s dogs eat LGPF, and after eating from a new bag of food, both dogs became ill. She was
concerned and rushed them to an emergency veterinarian at 20:00. After a thorough examination
the veterinarian determined that the dogs had come into contact with poison, most probably
rat poison. Nina found this very strange as she did not have rat poison in her home; she then
remembered that this happened after they ate from the new bag of food. The veterinarian
confirmed that the food could have caused the problem. Five other dogs were brought in with the
same symptoms that night and the veterinarian phoned the owners to hear what food the owners
had fed their dogs. All five dogs had eaten LGPF!
Nina voiced her concern on LGPF’s Facebook page while sitting at the veterinarian’s office and
several other pet owners indicated on social media such as Facebook and Twitter that their pets
suffered the same symptoms. The concerns raised by Nina and other pet owners went viral in less
than 12 hours, with several newspapers picking up on the story. There was no response from LGPF.
The next morning it was front page news in some local newspapers, still with no response from
LGPF. The following morning at 11:00 LGPF released a statement that some of its product had come
into contact with rat poison and that it was recalling certain batch numbers.
This was a case of too little too late as 12 dogs were already reported as having died. This is an
example of the power of online PR. In today’s 24-hour 7-day-a-week world, companies cannot
afford to make basic mistakes like this. News spreads like wildfire online and can do irreversible
damage to a brand. Companies can no longer ignore the power of social and digital media and in
effect the power of online PR – leaving things one day too long can be fatal for the brand and the
organisation.
Blogs
A blog can be defined as an online diary with the latest entry on top followed by older
entries.82 Blog posts are assigned keywords as well to make it easier to sort entries into
subject types when searching for something specific. Blogs also allow for readers to leave
comments, which can start a conversation on the topic that is being dealt with.
99
According to Van Rensburg and Cant, there are three types of blogs: personal blogs,
corporate blogs and news blogs.83 A personal blog is used to share experiences and
opinions on various topics and is authored by an individual in his or her personal
capacity.84 Corporate blogs are used to communicate with internal and external publics
on matters pertaining to the organisation and news blogs are collections of online news
where readers can engage in dialogue with other readers on the news stories posted in
the blog.85
Scott identified four ways in which blogs can be used in marketing and PR:86
• To spread news. According to Evans, blogs can be an excellent way of spreading news.87
The reason for this is that people who read blogs are sincerely interested in the topic
of the blog and PR practitioners can reach a very specific audience via a blog. It is,
however, important that PR practitioners know how to approach bloggers so as not
to offend them. You will need to build a relationship with a blogger without getting
anything out of it before approaching them with content you want to distribute to
their audience. 88
• To monitor what is being said about your company. PR practitioners can monitor what
the public is saying about their organisation, products and services, and whether it is
positive or negative.89 By doing this, the company will be aware of what stakeholders
like but also what they do not like. They will also be aware of a crisis in the form of
negative comments if they monitor what is being said.
• To take part in conversations. By commenting on blogs and blog comments the PR

practitioner can start a conversation and build a relationship with bloggers and
readers of the blog.90 If handled correctly, it can result in the PR practitioner becoming
a credible and trusted source of information.
• To contribute own content. PR practitioners can change the nature of the conversation
about their company, products and services by contributing their own content in the
form of blog posts.91
Microblogs
A microblog essentially is the same as a blog in that anyone can decide to start
microblogging at any time, but it differs in the allowed length of the post. Twitter is the
most popular microblogging platform. It allows users to create a profile, which people
can follow, and to post messages (or ‘tweets’) that are no more than 140 characters in
length, or a picture to followers.92
100
There are two ways in which PR practitioners can use microblogging:93
• to see what people are saying about you and your competitors
• to start a conversation by setting up a profile and starting to post.
An example of how social media, especially Twitter, can have an effect on PR can be seen
in a 2014 movie titled Chef. The power of social networks as a PR media is illustrated
with a well-known chef accidentally sending a tweet publicly to a food critic and ruining
his reputation in the process. He decides to go in a new direction with his career and his
son helps rebuild his reputation with the use of social networking, specifically Twitter.
An example of how Twitter was used in a public relations campaign can be illustrated by
the KFC Journey of Hope campaign, which is part of the KFC Add Hope initiative where
money is raised to feed South African children in need. Riaan Manser, an adventurer, was
asked to do a 42-day, 4 100 km journey on a bicycle across five of South Africa’s provinces.
On his journey he stopped at charities in the five provinces and ate the same meals that
the children received and nothing extra. Followers could increase Riaan’s food intake by
tweeting with the hashtag #addhope; once the maximum calories were reached, all the
extra tweets were converted into meals for the Add Hope feeding scheme. The results of
the campaign included 8 482 visits to the site, 24 420 page views and 1 898 tweets of
support.94
Discussion forums
Discussion forums are Internet-based sites that usually centre around a specific topic
and provide a platform for users to post questions. These questions can be answered
within seconds or it can take days or even months to receive a response, if any. This
conversation that is started on a discussion forum is called a thread.95
As with other social media, PR practitioners need to monitor these discussion forums in
order to see what users are saying about their organisation, its products or its services.
Haig advises PR practitioners not to rush into the answering of questions. He suggests
that PR practitioners simply silently view the discussion forum for a time before starting
to engage to make sure that they understand the dynamic of the forum.96 Examples of
discussion forums include Google groups, Yahoo groups and Facebook groups.
101
4.12.5 Search engine optimisation (SEO)

When working with online media, organisations want to come up on top of the list when
stakeholders search for certain keywords. By making use of search engine optimisation
(SEO) – preparing your website in such a way that it is more likely to be selected by the
popular search engines – you improve the chances of this happening.97 This textbook will
not elaborate further on SEO, as it is an extensive topic covered in other publications. As
a PR practitioner you will use SEO when writing online press releases, e-newsletters, on
your website, in your social media posts and in article marketing. This will increase your
chances of appearing in those top spots on search engines.
4.12.6 Real Simple Syndication (RSS)

The abbreviation RSS stands for Real Simple Syndication, a system which enables readers
of blogs or websites to subscribe to their favourite sites, and it informs them of new
content so that they do not have to visit the site unnecessarily.98
RSS can be used in two ways by PR practitioners, either for distributing information or
for gathering information. Distribution of information includes PR practitioners making
RSS available on their company websites and/or blogs, and making sure that interested
stakeholders have a way in which they can follow news or information from the company.
Gathering of information includes a PR practitioner subscribing to RSS feeds of the
most important blogs or sites that they follow to get news on what is happening in their
industry.
4.12.7 Online press releases

The last online PR tool listed in Figure 4.2 is the online press release. An online press
release has the same objectives as an offline press release, but differs in writing style.
Business Wire provides the following tips for writing an online press release that is
search engine optimised and will reach the correct stakeholders:99
• An online press release must be created about one topic, which includes keywords
and phrases, which is relevant to your stakeholders. This will make it easy to find,
read and share.
• A headline should be clear and concisely written as search engines depend on the
titles of pages to rank them.
102
• Keywords not in your headline can be incorporated in a sub-headline.
• Add links to your online press release to add value to your document and to drive
traffic to your website.
• Highlight important aspects in the online release by making use of paragraphs and
bullet points or bold, italic and underlined text.
• Insert multimedia such as videos and images into your press release to make your
content more relevant in search engines.
• Put your company logo on your press release so that stakeholders will recognise the
press release.
• Provide complete contact information for stakeholders to contact you.
• If the company is listed on the stock exchange, include the information in your press
release.
In online PR a company may have one person or a whole department responsible for all
the online PR tasks. Today, there are outside organisations that specialise in online PR to
assist you with online press releases and monitoring the results. Examples include PR
Newswire, PRWeb, Business Wire and PR.com.
4.13 Social media monitoring

Social media monitoring can be defined as using an application to monitor the
conversations that include your company or brand on the Internet.100 The great thing
about social media is that organisations can actually see what is being said about them,
their products and their services and it is important that they monitor these discussions
that are taking place.101 The monitoring of conversations on social media can be done by
making use of applications that were developed with this purpose in mind. According to
Brito, these applications ‘listen’ to the conversations online and PR practitioners can see
where conversations are taking place, how often the conversations take place and the
mood of the conversation by specifying certain keywords.102
Organisations should also act on information gathered through these conversations and
not just monitor social media. The data collected from these conversations can be used
for ‘reporting, research and decision-making’. 103 Depending on what online media you
use, there is a plethora of online monitoring tools, ranging from free-to-use tools to very
expensive. Some examples are Radian, 104 Meltwater Buzz and Brandwatch.
103
4.14 The place of PR in the organisation

The purpose and size of an organisation will determine how the role of its integrated
marketing communication (IMC) function will be organised. Public relations, as an
element of IMC, traditionally formed part of the corporate communication function,
which dealt with corporate advertising, stakeholder relations, publicity and corporate
PR. Public relations today, however, is seen more and more as a separate function and on
the same level as IMC because of its importance in the business environment.105
The success of PR as a management function within an organisation depends on the

recognition and embracing of the following measures of management:106
• participation and commitment of management
• competency of PR practitioners
• centralisation of policymaking
• two-way communication between internal and external publics
• co-ordination of planning and executing strategy to meet agreed-upon objectives.
However, it is also important to step back and look at PR from the view of society and the
community at large.
4.15 Public relations in society 107

The view of PR as a management function is not always positive because of its persuasive
nature and its ability to influence public opinion for the gain of the organisation. However,
the officers who ethically conduct responsible PR programmes understand that there
is risk in operating in a way that is harmful to stakeholders and society and it will not
benefit the organisation.
According to PRISA, ‘public relations helps our complex, pluralistic society to reach
decisions and function more effectively by contributing to mutual understanding among
groups and institutions. It serves to bring private and public policies into harmony.’ 108
For this reason, PR, with its careful mix of characteristics, has a definite benefit and place
in society.
104
Case study
Yuppiechef 109
Small, nimble and quick to react
Yuppiechef has an ongoing, self-imposed brief to find innovative ways of building its brand. It is
constantly on the lookout for opportunities to engage its community of customers and fans and
inspire, educate or entertain them. An opportunity presented itself in 2010 when South African
retailer Woolworths took its first cautious steps into the world of social media with its ‘Woolies
Lovebirds campaign’, a campaign designed to get Woolworths fans excited about Valentine’s Day.
On the eve of the campaign (Sunday, 31 January 2010), a Twitter user named Tayla Goldberg
(@taylagoldberg) posted a photo of one of the in-store posters in the Woolies Lovebirds Campaign,
encouraging her followers to get involved in the competition.
Shane Dryden, a partner at Yuppiechef, saw this photo and spotted that Woolworths had made
a crucial ‘typo’ in the URL and was sending people to ‘www.woolieslovebird.co.za’ (without an ‘s’)
instead of to ‘woolieslovebirds.co.za’. Noticing that the advertised URL was not registered, Shane,
after a brief telephone discussion with his two partners, registered the incorrectly spelt URL and
directed all the traffic to the Yuppiechef website. The directors agreed that in the morning they
would have to come up with a plan of how to make good use of this ‘hot’ property.
The twist was that Woolworths would have to match whatever Yuppiechef fans donated (starting
with a minimum value of R25) in order to get its URL back. It was this slightly more creative slant
on the ransom that led to the rapid spread of the campaign by word-of-mouth, as everyone was
invited to get involved and was taking the side of David in this David and Goliath battle!
Yuppiechef’s goals from the outset were to get people talking about the campaign, to garner as
much positive PR from the campaign as possible, to position Yuppiechef alongside South Africa’s
big players, to raise as much money as it could for Soil for Life, and to have some cheeky fun.
The ransom note

The ransom note that was posted read, ‘Woolies, we’ve got your lovebirds and if you want them
back unscathed, you have to match rand for rand what any Yuppiechef fan donates to Soil for
Life (Yuppiechef’s charity of choice for 2010) between now and 14 February or the Lovebirds get
it.’ Since its intention was never to extort money from Woolworths, the Yuppiechef team set the
ransom limit to R5 000, thinking that if it received 200 x R25 donations in the 14 days leading up to
Valentine’s Day, it would have been happy.
105
The Yuppiechef team posted the ransom note on its blog at 09:00 on Monday morning, 1 February
2010, and emailed the fans to let them know about it. It offered regular updates about the
campaign on Twitter and Facebook. By 10:00, the story was already doing the rounds on Twitter
and soon the campaign began to snowball. Jon Cherry broke the story in the mainstream media
on CapeTalk 567 radio late on Monday morning and by the end of that first day Yuppiechef had
received R5 500 in donations! Woolworths called Yuppiechef at 17:30 on that day to say it realised
it had been caught with its pants down but liked the way Yuppiechef had dealt with the situation
and liked the charity it was supporting and so would pay the ransom and add another R2 500 to
the R5 000 limit, provided Yuppiechef returned the URL by 09:00 the following morning.
Very glad that Woolworths did not send in the lawyers, but somewhat disappointed that there was
not more of a battle to be had, the Yuppiechef team agreed and posted the news on their blog and
on Facebook.
On Tuesday morning it redirected the URL to the official Woolworths competition page only to
receive a call from Woolworths an hour later to say that it felt the coverage it was receiving online
about agreeing to pay the ransom was positive and that it was happy for Yuppiechef to keep
the URL pointing to the ransom note, provided that there was a link at the bottom of the post
redirecting people to the official competition page.
However, it would seem that Woolworths did not know what it was in for. The following day both
Woolworths and Yuppiechef began to receive calls from the press enquiring about the situation.
On Wednesday the story was featured in the Mail&Guardian Online, on Thursday it was covered
by The Daily Maverick. On Thursday afternoon Yuppiechef received a call from Jeremy Mansfield,
presenter of The Rude Awakening on 94.7 Highveld stero, saying that he wanted to interview Paul
Galatis, Yuppiechef’s marketing director, on his show on Friday morning at 06:40 – Johannesburg
morning rush hour. At this point, the amount that Yuppiechef had raised was R25 000 and there
were still nine days to go until Valentine’s Day.
Yuppiechef decided it was time to invite Woolworths along for the ride and asked it to contribute
more than the initial R7 500 to the charity. Paul gave Woolworths a call and proposed that the
following morning, on radio, he raise the ransom to R100 000 and that Woolworths agree to match
it if fans donated that amount to the charity. Shocked by the proposal, the Woolworths social
media manager had to escalate the proposal for a response. This email was sent immediately after
that phone call:
106
Hi Sandra,
Thanks for the chat. Just wanted to put our thinking down on paper.
Firstly, we have no intention whatsoever to embarrass Woolworths. We think that you guys have
played it brilliantly and there has been heaps of kudos for your response and support of the
campaign.
When we placed the initial limit on the ransom, we had no idea whether we would raise R1 000
or R1 000 000 so we put it at R5 000 to be super conservative. However, the response has been
overwhelming and we have raised R25 000 in the first three days! People love the story. We have
until Valentine’s Day to keep on raising cash and the media are just starting to get hold of the story
now.
When Jeremy Mansfield interviews me tomorrow morning on Highveld (06:40), we are likely to bring
in considerably more money. So we are inviting you to work with us and run with the story. Jeremy is
going to encourage people to donate, but for him to tell people, ‘Go and donate, the target is
R7 500!’ sounds very small and insignificant. Let’s have us raise the ransom to R100 000 and then
let’s have you guys respond and match it.
If we raise R100 000 and Woolies matches it to R7 500, that is not news. If we raise R100 000 and
Woolies matches it to the rand, that’s a story worth telling.
Again, we want to work with you on this and want everything that comes from it to remain positive
for both parties. We have no intention of embarrassing you in any way. I look forward to hearing
from you soon to discuss this before tomorrow morning. You may have another idea.
Kind regards,
Paul Galatis
paul@yuppiechef.com | www.yuppiechef.co.za
Tel: +27 (0)21 702 4969 | Fax: 0866 104 744
9 Milton’s Way, 11 Bell Crescent, Westlake Business Park 7945, South Africa
After a few hours of silence from the large corporate, Paul received a phone call from the online
reputation management (ORM) executive of Woolworths. After a lengthy debate around whether
the move would be a good one or a bad one for Woolworths, Woolworths politely asked
107
Yuppiechef to leave it out of the radio punt the following morning as it was unable to raise the
cash in the given time frame. Although disappointed, the Yuppiechef team respected Woolworths’
decision and did not challenge them to a raised ransom the following day. However, they did
encourage all listeners to visit the site and to continue to donate to Soil for Life until Valentine’s Day.
Immediately after the interview Philips South Africa called Yuppiechef and offered to donate
R10 000 to the charity, followed by Standard Bank, Fin24 and Sanlam Developing Markets, each of
which donated R10 000.
Over the next nine days the story was covered on TV by Jeremy Maggs in his Sunday Maggs on
Media slot; Paul took part in a TV interview on CNBC Africa’s Money and Media show; articles
appeared on the front page of the Ideate, BizCommunity and Fin24 websites; an essay on the
situation was also published by South Africa’s leading copyright lawyers and radio interviews on
SAfm with Michelle Constant and on Classic FM’s Internet Hour with Ruben Goldberg all followed.
All radio interviews, the TV interview and other media can be found at http://www.spatula.co.za/
yuppiechef-holds-woolies-lovebirds-ransom.
With two hours to go before Valentine’s Day, Yuppiechef managed to hit the R100 000 mark in
donations and over the following week, a further R15 000 flowed in, taking the total raised to
R115 000.
Conclusion
The campaign was innovative in its spontaneity and rather risky ‘hijack’ nature. For the cost of
registering a URL (R100) and creating a ransom note online, Yuppiechef received R3.5 million in free
PR, raised R115 000 for a very good cause and made something of a ripple in the SA social media
world.
Yuppiechef does not use an agency for any of its work. This ability for the in-house team to move
quickly enabled it to respond nimbly to the situation and is testament to the fact that a big budget,
a great agency and careful planning can quickly be trumped with the help of a small ‘typo’ and a
large, passionate community connected by social media.
Points of information
Although visits to the Yuppiechef site and blog soared, no short-term impact on sales was
recorded. Yuppiechef was fortunate that Woolworths responded graciously and did not sue its
socks off – as it technically could have done on the same grounds that FIFA did with many ‘free-
riders’ during the 2010 World Cup.
108
Written by: Paul Galatis

Website: www.yuppiechef.co.za
Questions
1. What online PR tools did Yuppiechef make use of in this case study?
2. What would you have done differently if you were the PR practitioner for Yuppiechef?
3. What forms of media are used in this case study?
4. Do you think Yuppiechef should have used social media monitoring during this time? Motivate
your answer.
4.16 Summary
In this chapter the role of PR as an element in integrated marketing communication
was discussed. The differences between marketing and PR were explained as well as
controlled and uncontrolled media were compared. Furthermore, this chapter delved
into traditional mass media, looking specifically at broadcast, print, support and internal
media. In today’s world it is important to be present where your stakeholders find
themselves, otherwise you will start to fall to the back of the pack. In this chapter it is
clear that technology is opening up new avenues of communication to your stakeholders
through online PR.
1. Define online PR in your own words.
2. What is the difference between online PR and traditional PR?
3. Discuss the different online tools available to a PR practitioner and explain how you would
use each one in a PR situation.
4. What is social media monitoring?
5. Why is it important to invest in social media monitoring?
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Chapter 5
FINANCIAL MANAGEMENT
Learning outcomes
• explain why financial management is important to any manager
• discuss how financial management relates to the other functional activities in any enterprise
• explain and define financial management as a concept and as an organisational function
• discuss how the generic function of management is applied in financial management
• explain the most important concepts (eg different forms of assets and liabilities, fixed and
variable capital needed, ROI and ROE) used in financial management
• provide everyday examples (preferably from your own experience) for each of the above-
mentioned aspects of financial management
• define the two primary sources of finances or capital: own capital (share capital, equity, retained
earnings) and outside (foreign, borrowed, external, loan) capital
• describe the major characteristics of:
◊ permanent finance or capital and its sources
◊ long-term finance or capital and its sources
◊ medium-term finance or capital and its sources
◊ short-term finance or capital and its sources
• explain which principles are involved in correctly choosing sources of finance or capital
• discuss the typical problems experienced by especially small enterprises in obtaining finance or
capital.
5.1 Introduction
The following questions are often asked by existing and potential managers:
• What is a fair price to ask (or pay) for a specific initiative or business unit?
• How much should monthly sales or gross income be in order for the initiative or
business unit to be viable and survive?
• How can I know for sure if the business initiative will be realising a profit or a loss?
Chapter 5 Financial Management
• Will the forecasted profit be enough and which criteria should be applied for
answering this question?
• Is it better (safer, more profitable) to use only own capital, or is it better to borrow
additional capital?
• When a manager uses own and borrowed capital as well, what should the balance be
between these two sources?
• When the enterprise experiences a sharp increase in demand for services, goods and
stock during a peak season, should these be financed with long-term or short-term
funds?
• Should the company sell products and services for cash only or should a manager also
extend credit facilities to clients?
• What are the advantages and disadvantages of selling on credit?
• How can a manager be sure that the services made available to the marketplace
(stock/inventory procured for resale purposes) will in fact be bought and paid for by
customers?
• How important is cash flow management to the manager of the business?
• How important is effective administration to business success?
These are only examples of the many questions an enterprising manager or business
entrepreneur should ask regularly. The success of any business enterprise depends on
answering these questions (and other similar questions) well.
Important information
No one can be a successful business entrepreneur or a successful manager without a thorough

understanding of financial management.
Enterprising managers or business entrepreneurs do not need to be chartered

accountants or specialists in world money markets. However, each and every business
entrepreneur or manager must have a good insight into and an understanding of the core
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concepts and the fundamental elements of financial management. This is an area that is
simply too important to ignore.
The aim of this chapter is to introduce you to the exciting and very important world of
business finance. Through an explanation of the concepts and elements of basic financial
management, you will develop a thorough knowledge and understanding of these
concepts and elements. By working through the chapters in this book, you will acquire
the expertise to be able to apply these concepts to the overall management of an existing
enterprise or even the launch of a new branch or a totally new venture.
Example
Anna Molele is an excellent and well-skilled creative manager with more than 10 years’ experience
working for a variety of advertising agencies. She is very good in understanding the needs of
customers and at creating the right advertising concepts and designs for customers. Now she is
planning to start her own advertising agency enterprise and has spent much time preparing her
business plan. Just last night she said to her husband:
‘All my plans are in place. I am going to invest as much time and money as possible in being
creative, recruiting the right staff and in marketing my business. At the same time, I will spend as
little time and effort as possible on record-keeping, financial budgets and the like. I hate figures and
paperwork, and will leave that to a bookkeeper, whose only task will be to satisfy my banker and
the Receiver of Revenue once a year.’
Question
Discuss Anna’s view of administration and paperwork. Write down at least five ‘common sense’
arguments to support and/or oppose Anna’s view.
5.2 The financial function in any enterprise or

organisation
For any enterprise to operate on a profitable, successful and sustainable basis, a number
of enterprise functions and activities need to be identified and managed. Typical
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examples of these activities and functions are marketing, human resources, production,
and security and safety.
Another one of these functions is the financial function. The financial function is just as
important as any other function, and the manager of any business enterprise must pay
close attention to it (together with the others). All business functions are interrelated.
Together, they enable the enterprise to achieve its mission and goals.
The financial management function is distinguished from the other managerial and
business functions and activities, but should never be seen in isolation from them. Each of
these other business functions and activities has financial implications for the enterprise.
Examples
• Unproductive employees have a detrimental effect on the financial performance of the

enterprise.
• A lack of effective and appropriate marketing activities will lead to a lack of income for the
institution or enterprise.
• Accruing or purchasing services and products for resale that are not in demand in the
marketplace leads to high storage and other costs, with no acceptable rewards for the initiative.
5.3 Defining financial management

Financial management is responsible for acquiring the necessary financial resources to
ensure the most advantageous financial results for the enterprise over both the short
and long term. The term ‘financial management’ also covers the responsibility for making
sure the enterprise makes the best use of its financial resources.
5.3.1 Examples of financial management

Here are some examples of financial management:
• Arranging in time with the treasury department (within the corporate organisation)
or a bank manager (when the enterprise is an own business) for the required funds at
the best conditions possible (acquiring the needed financial resources).
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• Ensuring that all financial transactions are recorded accurately and systematically.
• Ensuring that payments and cash received from sales are safeguarded and banked as
quickly and as efficiently possible (making the best use of financial resources).
5.3.2 Comparison with other business functions

It should be clear to you that the financial management function is mainly concerned
with financial matters. Although all activities in an enterprise or business have a financial
implication, we cannot say that financial management is responsible for all these activities
or that financial management must have the final say over each and every other business
activity. To understand this principle, let us look at an example:
Example
Emily Ngobeni is the brand manager of a well-known financial institution. She is considering the
placement of an advertisement in a national Sunday newspaper. She must decide which issues of
this project are financial management issues and which are marketing management issues.
Questions
1. The availability of applicable funds, the method of paying for the advertisement, the timing of
the payment and the possibility of negotiating for a discount are all issues that relate to which
function of the business?
2. The wording of the advertisement, appropriate illustrations, colour, placement (page allocation)
and size of the advertisement relate to which function?
Answers
1. All are financial management issues.
2. These are marketing issues.
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In many smaller enterprises, one person (the owner/manager) handles all the managerial and
business functions. This means that there is less of a need to distinguish which issues are financial
or marketing or other functional management (like production or human resources) issues. In
larger organisations, where different managers are responsible for different functions, this need
becomes more important.
5.3.3 The definition of financial management
Definition
Financial management may be defined as the responsibility for timeously acquiring the needed
financial resources at the best conditions possible and ensuring the best use of these resources
over the short and long term.
5.4 The managerial functions of financial management

Now that we have defined financial management, we need to ask the following important
question:
How do the generic functions of management (planning, organising, activating and

controlling) apply to financial management?
5.4.1 Some financial activities in any enterprise

By now, you should have an idea why financial management is so important in any
enterprise or business, how it is defined and its relationships with other functions in any
enterprise or organisation.
There are many financial activities in any organisation. There are examples on the
next page:
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Examples
• Collecting external information on financial matters: For example, changes in interest rates;
the exchange value of the rand; the availability of loan capital; trends in debt collection; the
profitability of similar businesses in the same industry.
• Preparing financial budgets: For example, working together with the marketing function to
forecast expected income and sales volumes in the forthcoming year; working out a cash flow
budget.
• Recording all financial transactions: For example, making sure that every expense in the
business is recorded and allocated to the correct project or cost centre.
• Analysing financial performance: For example, continuously and timeously assessing
whether actual income, expenses and cash flows are on course, according to the annual business
plan and budgets.
• Financial reporting: Supplying the other functionaries of the enterprise with needed financial
information (for example, indicating whether direct labour, other developmental costs and
equipment expenses per project are still within each agreed financial budget or not).
• Safeguarding cash resources: For example, ensuring that cash received from cash sales and
debtors’ payments is safeguarded and banked as soon as possible.
• Formulating credit policy: For example, investigating the advantages and disadvantages of
selling to clients and customers on credit; ensuring that only creditworthy clients are allowed to
use your services.
• Debt collection: For example, ensuring that debtors honour their commitments regularly and
on time.
• Salary administration: For example, ensuring that all employees’ services rendered are
correctly recorded and that they receive their correct salary exactly on time.
• Negotiating with suppliers of capital: For example, negotiating with treasury or banks or
other financial institutions the availability of needed bridging capital (say, an overdraft facility) at
the best conditions possible.
The activities mentioned are only some examples. A number of other activities may be added to
this list.
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5.5 Important elements in financial management

As an introduction to financial management, this section of the chapter briefly explains
the meaning of a number of financial management concepts.
5.5.1 Assets
The overall objective of a private business enterprise is to maximise the rate of return on
investment to the owner(s) over the long term, taking into consideration the interests of
all applicable stakeholders. To achieve this, the business needs assets, which vary greatly
in nature. The investment decision determines what assets are required to do business
successfully. The manager or entrepreneur must make investment decisions on what
assets are required by the enterprise.
For example, a manufacturing enterprise will definitely need manufacturing equipment,

a transport enterprise will need vehicles, a retailer will need shop premises, while a
services enterprise will need appropriate offices and equipment for its staff to render the
applicable services.
In all cases, the assets of an enterprise can be divided into two major categories: fixed
assets and current assets.
• Fixed/noncurrent assets are those assets owned and required by the enterprise for
a period of longer than 12 months. (Assets that do not belong to the business, such
as items that are leased or rented, are still assets needed and used, but are not part of
fixed assets for the purposes of the business’s balance sheet.) Typical fixed assets are:
◊ land and buildings
◊ equipment and machinery
◊ vehicles
◊ furniture.
• Current/liquid assets are assets owned by the enterprise that will be turned into
manufacturing/usage, sales or cash within a period of 12 months. Typical current
assets are:
◊ raw materials
◊ stock (inventory) – either work-in-progress or finished goods or services
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◊ outstanding debtors (people who owe the business money)
◊ cash (on hand or in the bank).
There is a third category of assets: other assets. These are assets not directly involved in
the normal operational activities of the business, for example:
• shares in another business
• investments (like a 12-month fixed deposit) at a financial institution.
5.5.2 Capital
Once you have decided on all the required fixed and current assets for your enterprise or
strategic business unit, you need to ask yourself a number of important questions:
• How will I be able to acquire these needed assets?
• How will I be able to afford and pay for these assets?
• If the shareholders’ capital is not enough, who will be willing to help finance these
assets?
• Is it wise to use only own capital or should I also invite and allow other parties to be
involved?
• Are there certain important principles involved in ensuring that I make the right
financing decisions?
• I am sure that some other people may be willing to assist me, but what are their
requirements and motives? Will it be to my advantage, or theirs?
• Are there specific problems experienced by the average business manager or

entrepreneur, and how can I learn from them?
In this section, we will show you how to find the answers to these questions.
For this, the business requires capital. Also referred to as: the financing decision. We
can identify a number of sources – for example manufacturers or banks – that act as the
suppliers of the necessary capital or assets to the business.
Capital supplied is also sometimes called liabilities to the enterprise (the capital supplier
needs to be repaid at one or another time).
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It is important to understand that the words ‘capital’ and ‘finance’ do not necessarily refer to physical
cash or money. Finance may be cash (in one or another form), but may also take the form of an
asset supplied. The capital is then the monetary value of that asset.
The major types of capital are:
Own capital (equity, share capital)

Own capital (also known as owner’s capital, shareholders’ funds or owner’s interest or
equity) is one of the most important sources of finance for any business enterprise. The
characteristics of own capital are as follows:
• Often, it is the first source of capital available to start a new business.
• It is that part of the total capital used in a business that is legally recognised as the
total value (at a certain point in time) of contributions made by all the legal owners
of the business.
• It serves as the basis from which other (mostly outside) capital can be attracted.
• Without own capital invested in the enterprise, it is very unlikely that other potential
suppliers of capital will be interested in putting money into your business.
• Own capital is permanent. The investment will last as long as the business itself,
provided that the business is not sold or terminated (although exceptions to this rule
are possible).
• It is not easy to withdraw a part of own capital, especially if the business is not a sole
proprietorship, for example, when it is a partnership, close corporation or a private
company.
• There are a variety of sources for own capital, including owner’s savings, pension
payouts and existing owned assets put to use in the business. It may even consist of
unrelated assets (for example, a house or household furniture) that may be sold or
bonded and changed into cash.
• A person starting an enterprise does not need to depend solely on his or her
own contribution to complete the full picture of own capital. There are two other
supplementary sources of own capital:
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◊ If the founder borrows money from someone else in his or her personal capacity
(and not on behalf of and in the business’s name) and invests it in the business, the
monies are considered to be own capital.
◊ If the founder wishes to bring co-owners (partners and other shareholders) into
the business, these co-owners may also be additional sources of own capital.
• Another, very important, source to add to the value of own capital is the reinvestment
of net profit (after tax) as time goes on. This is sometimes called ‘retained earnings’.
Outside capital (foreign, borrowed, external, loan capital)

As the name suggests, outside capital is finance/capital that comes from sources outside
the business.
Definition
A more formal definition is that outside capital is the sum total of all claims by other parties (other
than the legal owner or owners of a business), who have supplied the business with assets and/or
cash, and who have not yet been paid in full.
To understand the nature of outside capital, note the following points:
• Outside capital is usually made available to the enterprise on either a short-, medium-
or long-term basis. This is different from own capital, which remains in the business
permanently. Outside capital therefore has to be repaid at some time in the future. In
contrast, it is rare that own capital must be repaid.
• Suppliers of outside capital are paid financing fees (for example, interest) as
remuneration (reward or payment) for helping to finance the business. The exceptions
are trade creditors (businesses that supply the enterprise with commercial goods and
services on a credit basis). In contrast, the suppliers of own capital are usually paid
a dividend as remuneration (they also benefit from the growth in the value of their
investment in the business).
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• If the business is liquidated or sold, the suppliers of outside capital usually have
distinct and preferential claims when it comes to being paid. Normally, employees
(salaries in arrears) and the Receiver of Revenue have first priority. The last parties to
be paid (if anything is left) are the suppliers of own capital.
Table 5.1: General characteristics of own capital and outside capital

Own capital Outside capital
Has a permanent nature May be of a short-, medium- or long-term nature
(no permanence)
Is seldom withdrawn Withdrawal is common
Is remunerated in the form of dividends and Is remunerated in the form of interest paid and/
growth in value or goods sold
Is in full charge of the management of the Has very little or no control at all over the
business business
Has the last claim to be remunerated when Has preferential claim over owners to be
business is liquidated or terminated remunerated when the business is liquidated or
terminated
Case Study
Vusi, the founder of Vusi’s Marketing, had no cash to invest in his business when he started it, but
he was at that time the proud owner of appropriate photographic and other graphical and editing
equipment to the value of R300 000 and a vehicle to the value of R100 000. He was also able to
convince his previous employer to sell additional needed equipment to him. They agreed that he
needed only to repay the total value of R600 000 in five years’ time.
Questions
1. How much capital did Vusi initially invest in his new business? Is this own or outside capital?
2. How much did Vusi’s previous employer invest in the new business? Is this own or outside
capital?
Trade credit
This is a form of borrowed short-term capital (when buying stock/raw materials on
credit from suppliers). The same applies to a bank overdraft, while a 20-year mortgage
loan (to help finance a factory building) is regarded as a long-term loan.
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Permanent and variable capital

Permanent capital is that amount of assets/funds/money that is required by an
enterprise at all times (say, over a year). Variable capital refers to the additional amount
of assets/money (over and above the amount of permanent capital needed) that the
enterprise needs from time to time – for example, during seasonal peaks such as Easter
and Christmas.
Example
Mavis Tshabalala manages the emergency care unit of a private hospital. A minimum stock level of
R600 000 is needed all year round in the unit. But three times a year, during the April, June/July and
December/January holidays she has to increase her stock levels to R1 000 000 to cater for the high
increase in trauma cases. In her case, the R600 000 needed to finance the minimum stock level all
through the year will be regarded as permanent capital, while the additional R400 000 required
only for the three peak periods can be regarded as variable capital.
Current (liquid, operational) liabilities/capital

This is capital utilised on a short-term basis (less than a 12-month period) and should
normally only be used to finance part of the current assets of the enterprise. Examples
are: trade creditors, bank overdrafts, short-term loans and wages or tax payments in
arrears.
Working capital
This usually refers to the current assets, while net working capital refers to current assets
less current liabilities.
5.5.3 Other financial management concepts

Financial structure
The concept of financial structure relates to the composition of the business’s assets in
relation to its sources of capital. It also shows the relationships between owners’ capital
and long and short-term outside capital, and how these capital resources were utilised
in total to finance fixed and current assets. An example will be that the equity part of a
business makes up 60% of all capital (the remaining 40% will be capital supplied by
outsiders, non-owners).
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Profitability
Many people will say, ‘Profitability is what business is all about’, and in a sense this is
correct. Profitability is one of the most widely used measures available to determine the
degree of success or failure of private business operations.
The owners of any business enterprise expect to always earn a satisfactory profit on their
investments in terms of money, time, etc. This is called return on investment, or ROI,
and is expressed as a percentage. Profitability is one of the most frequently used and
best measures available to determine the ultimate degree of success or failure of private
business operations. Profitability is therefore one of the most fundamental and most
important concepts in business.
There are major forms of profitability (there are more than 20 variations).
• Return on total investment (ROI): This indicates the rate of return on total capital that
is the profitability of the business as a whole. A high return on investment is proof
of its management’s ability to make good use of all capital and assets. A low (or no)
return on investment indicates management’s inability to add value to the enterprise.
• Return on equity (ROE): This indicates the rate of return on own capital (equity), or the
profitability of own capital (equity). The actual owners or shareholders of a business
are often more interested in this measure than in ROI. Fundamentally, the owners are
in business to maximise the return on their own investment over the long term. This
ratio can thus be regarded as the bottom line for the executive manager.
It is important to point out that the two kinds of profitability mentioned above should not be
confused. They are two totally different (but related) concepts.
Example
Jabulani Moloketi has a small business called Moloketi’s Marketing Services. He provides a variety
of marketing services to clients. At the end of the financial year, his business’s financial statements
show the following:
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Net profit before interest: R100 000

Interest paid: R30 000
Net profit after interest: R70 000
Total capital employed: R400 000
Owner’s equity: R200 000
In Moloketi’s business, the two kinds of profitability will be determined as follows:
Return on total investment (ROI) = net profit before interest × 100
R100 000
total capital employed = × 100
R400 000

= 25%
This means that Moloketi was able to use outside and own capital in such a way as to show 25c net
profit for each R1 of own capital employed.
Liquidity
The liquidity of a business has nothing directly to do with its profitability. Many profitable
enterprises go bankrupt because of insurmountable liquidity problems. Liquidity refers
to the ability of the enterprise to pay its short-term financial commitments continuously
and on time. A business has a liquidity crisis if it is unable to pay its creditors when
payment is due because of a lack of cash (liquid) resources. The same applies to other
liabilities and obligations, such as taxes, rent, wages and salaries and municipal rates.
Solvency
Solvency is the degree to which the total assets of the business cover its total liabilities. If
an enterprise’s total commitments or liabilities are larger than the value of its total assets,
it is considered to be insolvent. The reliability of the value of the assets in a business is
therefore critical in any calculation of solvency.
5.6 Forms and sources of finance

We explained that the capital needs of any enterprise include fixed and current assets.
Remember, too, that any enterprise has a permanent need for capital and a variable need
for capital.
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It is important to satisfy the need for permanent capital only from long-term sources of
capital. Similarly, the need for variable capital should be satisfied by using short-term
sources of capital.
The unit manager or business entrepreneur must make use of the appropriate forms and
sources of finance to satisfy these needs and requirements. In this section, we will look at
four forms and sources of finance that are relevant to the business sector.
5.6.1 Permanent finance and its sources

Normally the only source of permanent finance for a small, start-up business is own
capital – the initial or subsequent investment of the owner’s capital in the business.
The only other source may be the reinvestment of net profit (after tax) in the form of
undistributed reserves (also called retained earnings).
There is quite a variety of legal forms of own capital (for example, share capital and loan
accounts by shareholders).
It is rare, but not uncommon, to find suppliers of outside capital who are interested
in taking up shareholding in a viable small business. The Industrial Development
Corporation and Business Partners are two of these types of organisations.
5.6.2 Long-term finance and its sources
Definition
Long-term finance consists of those monies or goods made available on credit to the enterprise for
a period of five years and longer (normally not longer than 20 years).
The major characteristics of long-term finance and its sources are listed below:
• Normally a formal written document signed by all parties and drawn up by an

attorney will spell out the detailed agreement and conditions of agreement between
the supplier and receiver of monies or goods.
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• In most cases, interest has to be paid to the supplier. In the past, it was not uncommon
to have a fixed interest rate lasting for the full period. Nowadays, the interest rate will
be linked, say, to changes in the prime banking rate and will be adjusted accordingly
as time goes on.
• In most cases, long-term finance will only be made available to the enterprise if it can
be directly linked to one or another form of fixed asset. Normally, such a fixed asset
will also be legally registered as collateral for the amount due to the supplier of the
capital.
Example
Nature of asset Form of collateral Contribution

Land Mortgage bonds Money to buy land from seller
(1st, 2nd or 3rd)
Buildings Mortgage bonds Money to buy or erect
(1st, 2nd or 3rd) buildings
Equipment with a life Contract of pledge Money to buy it or the sale of
expectancy longer than five the equipment itself
years
• This form of finance will usually be indicated as a long-term loan on an enterprise’s

balance sheet.
• In some cases, long-term shareholders’ loans may also be supplied by the owners of a
business, and are not regarded as equity. In most of these cases, no form of collateral
will be required.
• In rare cases, other outside parties (such as a family member or a friend) may supply
a long-term loan without expecting or insisting on adequate collateral.
Questions
1. What are the assets most commonly financed with long-term loans?
2. What are the most likely sources of finance for acquiring these assets?
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Answers
• Land, which is financed by own capital, banks, other financial institutions and/or the seller of the
asset.
• Buildings, which are financed by own capital, banks, other financial institutions, the seller of the
asset and/or the building contractor him or herself.
• Machinery and equipment (with a five-years-plus life expectancy), which is financed by own
capital, banks, other financial institutions and/or the seller of the asset.
Wealthy private individuals (so-called business angels) may also be possible sources of long-
term finance for a viable business. These are people who are looking for alternative investment
opportunities. They prefer to invest their capital in local businesses (instead of international stock
markets and the like) where they have a more personal relationship and interest. If that business
grows and becomes bigger and more profitable, these investors also expect to be additionally
remunerated. They may even sometimes wish to become minority co-owners or shareholders of
the business.
5.6.3 Medium-term finance and its sources
Definition
Medium-term finance consists of assets and/or monies supplied to the business for periods lasting
between one and seven years.
The major characteristics of medium-term finance and its sources are as follows:
• A written and signed document is usually an integral part of the whole transaction.
• Normally interest will have to be paid by business enterprise. A variety of forms of

interest may apply. In some cases, it will be a single, fixed interest rate; in other and
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most cases, the interest rate may change in direct relation to changes in the official
banking rate.
• Instalments are used to repay the amount of the initial capital (plus interest and other
finance charges). Instalments may be staggered in equal monthly payments for the
whole period. Sometimes only interest and finance charges must initially be paid
monthly, while the capital is repaid only at the end of the period (or every six or 12
months).
It is important to know that the conditions applicable to this type of finance are generally
negotiated and packaged to suit the requirements and circumstances of individual enterprises. The
suppliers of medium-term finance are generally able to offer a wide variety of conditions.
Even more important to remember is the fact that the manager or business entrepreneur should
never blindly accept the initial conditions and demands put forward by the willing supplier of
goods or capital. The manager or entrepreneur has to make sure that each and every condition is
to the advantage of the enterprise. Before signing anything, the manager or entrepreneur should
negotiate and query all conditions of the credit transaction.
• Renting (or leasing) an asset is also a form of financing. There are a variety of renting and leasing
options, each with its own characteristics and conditions.
• A hire-purchase agreement is also a typical form of medium-term finance.
Questions
1. What assets are most commonly financed with medium-term finance?
2. What are the most likely sources of medium-term finance for acquiring these assets?
Answers
• Machinery and equipment, which is financed by own capital, banks, other financial institutions,
the seller of the asset, and/or private individuals.
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• Vehicles, which are financed by own capital, banks, other financial institutions, the seller of the
asset, and/or private individuals.
• Furniture, which is financed by own capital, banks, other financial institutions, the seller of the
asset, and/or private individuals.
Activity
Visit a branch of one of the well-known banks and ask to speak to a loan officer. Ask this person to
explain to you the variety of forms of finance that the bank makes available to business enterprises.
List at least five forms and then give the major characteristics of each.
Another form of medium-term finance, offered by most banks and some specialised financing
institutions, is factoring. Factoring takes place when the business sells (as a once-off transaction
or even on a monthly basis) its debtors’ book (all or some of its debtors’ accounts) to the bank or a
specialised financing institution. The bank or specialised financing institution will pay cash for the
debtors’ book and will then collect the outstanding monies. Remember that any buyer will want to
make sure there are no bad debts to be realised. Thus the buyer (who is known as the factor) will
negotiate to buy the debtors’ book at, say, only 60–90% of its invoice value. This form of finance is
not readily made available to most start-up businesses.
5.6.4 Short-term finance and its sources
Definition
Short-term finance is made available to the business enterprise for a period of less than 12 months.
Normally, the specified period of availability is 30 to 90 days (in the case of suppliers’ credit) or even
24 hours (a bank overdraft facility may be withdrawn within 24 hours, although usually it will be
available for much longer).
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The major characteristics of short-term finance and its sources are as follows:
• When short-term goods or services, stock and materials are made available on credit
terms to an enterprise, we say that these goods or services are being temporarily
financed by the suppliers – the suppliers are then considered to be the suppliers of
short-term finances to the business.
• Normally, supplier creditors of short-term goods and services (for example, marketing
services, stock or inventory) will not charge interest on the outstanding balance owed
by the business. However, they may charge a high interest rate in the case of accounts
in arrears.
• The suppliers of short-term cash loans to the enterprise (banking overdraft facilities
or loans forwarded by individuals) will usually charge the business interest.
• Suppliers of short-term goods and services on credit are usually not very strict or
disciplined in assessing the creditworthiness of their credit purchasing customers.
This is because they wish to encourage sales, among other reasons. However, they
may become very strict and unforgiving if and when their trust in a business customer
proves to be unjustified.
• Suppliers’ short-term credit is not only restricted to the goods the business owner
or manager needs for reselling purposes (which is called stock or inventory). Other
goods and services needed to facilitate business activities (for example, marketing or
administration expenses) may also be acquired on a credit basis.
The term ‘trade creditors’ refers to the credit suppliers of goods and/or services needed for reselling
purposes (manufacturing works in exactly the same way).
The term ‘other creditors’ refers to the outstanding monies owed to the suppliers of goods and/
or services (other than for manufacturing and/or reselling purposes) that are needed for support
operations.
In some cases, the short-term capital needs of an enterprise may even be partially financed by
one or more customers (such as when a customer places an order with a manufacturer and pays a
deposit at the same time).
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Activity
Visit a manufacturer (or a wholesaler) and ask to speak with the credit control officer or manager.
Ask this person to explain to you the variety of credit forms available to business clients when they
need short-term assets or services.
Your written answer must include:

• the forms of at least two types of credit offered
• the main characteristics of these forms of credit offered.
5.7 Choosing sources and forms of finance

Over the long term, the business entrepreneur or manager is responsible for ensuring
the optimum added value to the business’s equity. To do this, he or she needs to make
sure that the specific sources and the specific forms of finance used will contribute to the
achievement of this goal.
This section will look at the critical considerations that must be analysed before each
financing decision is made.
5.7.1 Matching life expectancy of assets and the length of time for which credit
is available
As mentioned elsewhere, it is extremely important to match the life expectancy of the
asset or assets with the length of time for which the source of credit is made available. We
previously saw that an understanding of a business’s needs for fixed and current assets
requires an understanding of the needs for permanent and variable capital.
5.7.2 Availability and accessibility issues

In real business situations, it is sometimes not possible for the business entrepreneur or
manager to follow prudent financial management principles. Sometimes the appropriate
sources and forms of finance are not available. However, you should take care not to be
misled by the easiest source and form of availability and accessibility of capital.
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5.7.3 Costs associated with a specific source

Often, business entrepreneurs or managers are so relieved to find willing sources
of finance that they completely forget to negotiate the best possible conditions and
requirements. Always negotiate with suppliers of credit.
5.7.4 Independence versus dependence and control

One of the strongest motivations for starting an own business enterprise is the desire to
be independent – to initiate your own plans and to do things your own way.
However, the more outside capital you use in the business, the more your independence is
threatened. If you don’t have enough own capital resources, a needed piece of equipment
will only become available if and when you find an outside supplier of finance. The same
goes for bringing in extra partners or extra shareholders. This strengthens the own
capital base, but also reduces the independence of the business entrepreneur.
5.7.5 Freedom of application of finance

Most of the various sources and forms of finance available in the marketplace will only be
made available to the business entrepreneur as long as the money is used for a specific
and predetermined purpose.
Example
Form of finance Can only be used for

1. Mortgage bonds 1. The acquisition or renovation of land and
fixed buildings
2. Rental/leasing/hire-purchase 2. The acquisition of certain equipment such
as machinery, vehicles, furniture and fittings
3. Suppliers’ credit 3. The acquisition of specified goods and
services bought on credit from a supplier
4. A bank overdraft 4. One of the rare cases where the
entrepreneur has almost total freedom of use
5. Own capital in the form of cash 5. The only other source and form of finance
where the owner has almost total freedom
of use
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5.7.6 The effects of the financial leverage

Financial leverage is related to the cost and use of borrowed capital in the enterprise.
If the profitability of the enterprise (ROI) is greater than the interest rate on borrowed
capital, an increase in profitability of the own capital (ROE) is caused by the use of
borrowed capital. The enterprise therefore uses borrowed capital in the hope that it will
cause the profitability of own capital to rise. However, if the interest rate on borrowed
capital is greater than the profitability of the enterprise, the profitability of own capital is
negatively influenced and it drops. It is important to stress certain factors, namely:
• the relationship (weight) between own and outside capital
• the profitability of the whole enterprise (its return on total investment, or ROI)
• the costs/interests of outside capital compared to the ROI
• the final outcome of profitability as expressed in the return on equity (ROE).
In the attempt to attract own or outside capital, the business entrepreneur or manager
must not forget to work out whether the result of the decision will lead to either a positive
or negative leverage on own capital (ROE).
5.7.7 Considerations of liquidity and profitability

Deciding on the specific form of finance has a direct impact on the business’s liquidity
and profitability. Sometimes over the short term it is wise to forget about profitability
issues and to make sure that major liquidity threats do not sink the ship – there are
many examples of highly profitable businesses that had to close down because of sudden
liquidity crises.
5.7.8 Taxation considerations

There are important taxation issues that are relevant to the wellbeing of a private
enterprise. For now, remember that almost every decision on the required assets, as well
as on the sources and forms of finance, has tax implications.
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Example
Peter Nkosi needs a sophisticated and professionally well-equipped 4x4 vehicle to use in his wildlife
marketing business.
He has three options:
1. If he pays cash for the vehicle (using own capital), he will not be able to deduct any part of
the purchase price from his business’s income for income tax purposes (although insurance
premiums and maintenance costs may be deductible).
2. If he purchases the vehicle on a hire-purchase basis, he may pay a deposit (not tax deductible)
and a monthly instalment (where only the interest and insurance part of the instalment and
accrued maintenance costs may be tax deductible, but not the capital down payment part of
the instalment).
3. If he rents the vehicle without ever becoming the legal owner, the total costs of renting may be
deductible for income tax purposes.
5.7.9 Building long-term relationships

One of the major strengths of small business owners or managers (compared to the very
big businesses) is their dedication and expertise in building and developing strong and
relevant networks. This is something to remember and to build on.
There are many people involved in a small business: the owner(s), relatives and
friends, bankers, lawyers, suppliers, existing and potential customers, employees, local
authorities, the local communities and even staff of the South African Revenue Service.
The more the business entrepreneur or manager succeeds in building and developing
sound relationships with the vast range of constituencies, the more he or she will be
able to combine the wisdom and strengths of all these resources. If these networks are
neglected, isolation and ultimate failure may be the result.
5.8 Typical problems in obtaining finance

Small businesses have certain advantages when compared to big businesses (for example,
building strong personal relationships and networks). But the size and influence of the
small business can also be a disadvantage when it comes to obtaining finance.
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This section deals with typical problems experienced by small business entrepreneurs in
their quest for the right sources and forms of finance.
5.8.1 When own capital’s contribution is too small

To finance all the assets needed in a business, prudent financial management dictates
that the contribution of own capital should be at least 50%. In other words, own capital
should never be less than half of the business’s total capital.
To start a business, an entrepreneur generally uses all available savings and own capital.
As the business grows and expands, it creates an increased need for assets (and sources
of finance to acquire these assets). Because the entrepreneur’s original savings have been
depleted, he or she depends more and more on outside capital sources.
A related problem is that potential suppliers of outside finance also want to know about
the financial structure of the small business. The smaller the relative portion of own
capital to total capital, the less willing these suppliers will be to supply additional funding.
If they do provide funding, there will always be an additional cost to the small business.
5.8.2 Lack of experience in financial management

Usually, the small business entrepreneur will have excellent experience and knowledge
in a number of disciplines – for example, manufacturing and/or selling and marketing
and/or in supplying unique goods and/or services to customers.
But very few entrepreneurs are also experienced and knowledgeable about financial
management. This lack of expertise creates difficulties when approaching potential
suppliers of needed finance, and the entrepreneur may not be able to convince the
potential suppliers of finance to help him or her. These owners or managers have to
admit this fact and should seek assistance in preparing them in this field.
5.8.3 Lack of financial expertise

This problem is related to the lack of experience in financial management, but specifically
concerns the management and running of the business.
An entrepreneur who is experienced and knowledgeable about, say, marketing and/or

manufacturing will tend to be heavily involved in these activities. An entrepreneur who
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does not understand financial management issues will be more inclined to ignore or skirt
these issues. This tendency signals great danger for any small business.
5.8.4 Too much emphasis on collateral by suppliers of finance

Inexperienced small business entrepreneurs may only be aware of some of the sources
and forms of finance – perhaps only the large national banks and a few other major
financial institutions and trade creditors. If they approach only these sources, the results
can be disappointing. Generally, the first question asked by these suppliers is, ‘How much
collateral can you put up to guarantee your debts?’ Banks in particular are often accused
of using this quick and easy method of credit assessment. This approach is like saying to
someone, ‘If you don’t already have an umbrella, I can’t help you get one!’
Although this is a valid criticism of banks, it is also true that they often have no other
choice. If the entrepreneur has not done his or her ‘homework’ and chosen the right form
of finance, the banker can only accurately assess one of the aspects of credit, such as
collateral.
5.8.5 Lack of planning

The planning function is a big part of business management. The saying, ‘If you fail to
plan, you plan to fail’ contains a great deal of truth. On the other hand, if you prepare an
elaborate business plan and then do not implement your plan, you will have wasted a lot
of energy and other scarce resources.
Many business textbooks discuss the steps, contents and issues that should be addressed
in the business plan. Most of these textbooks point out that the major purpose of a
business plan is to convince potential suppliers of finance to invest in the business or
supply capital. This is only true on a secondary level, as the very first use of a business
plan is for the entrepreneur to determine the viability of his or her business ideas and
that the business plan is also supposed to help the entrepreneur to make a success of
implementing the business ideas.
5.8.6 Creditworthiness
Just as an entrepreneur or manager needs to make a careful analysis to determine the
creditworthiness of a client, so the suppliers of finance need to analyse the strengths and
weaknesses of the applicant.
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The challenge for the business manager or entrepreneur is therefore to be prepared, to

have substantiated facts and motivations ready to convince the selected source of finance
to provide needed capital, and to maintain this trust into the future.
5.9 Summary
In this chapter the definition and concepts of financial management were introduced.
Some major financial concepts (such as assets, capital, profitability and liquidity) were
explained. We discussed the major issues on how a business’s needs for assets should be
financed. We emphasised the differences between own and outside sources and forms of
finance. In direct relation to these issues, we examined the various sources and forms of
permanent and variable finance available in the marketplace. These include permanent,
long-term, medium-term and short-term finance.
There are a number of critical considerations involved in choosing the best form and
source of finance. However, the availability and accessibility of finance often forces the
entrepreneur or manager to disregard these considerations.
The chapter concluded by discussing some typical problems encountered in attempting

to obtain finance.
1. Explain why a thorough knowledge and understanding of financial management is a
requirement for anyone in any senior position or profession in any industry.
2. Explain how financial management relates to and integrates with the other functional areas
of a business.
3. Define financial management and illustrate the elements of this definition.
4. Explain and illustrate how the generic managerial functions (planning, organising, leading
and controlling) are applied in financial management. Try to think of examples from your
own experience.
5. Briefly explain the following financial concepts:
• fixed assets
• long-term capital
• current assets
• current liabilities
• owner’s capital
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• variable capital
• permanent capital
• profitability
• liquidity
• solvency
• working capital
• financial structure
• return on total capital
• return on equity
6. You can review the various concepts covered in this chapter by considering the following
example of a small business. Think about all the concepts discussed in this chapter and
try to identify them in the example. You should also be able to explain what each of the
concepts means.
Ismail Naidoo took over the company’s cafeteria 12 months ago. He inherited the needed
furniture and equipment from his late uncle (total value R800 000), but had no money of
his own to buy stock or to pay monthly expenses for six months. All the trade suppliers
to his new business agreed that he could buy his monthly stock (average R100 000) on
a 30-day credit basis, but he had to borrow the R80 000 needed for monthly operational
expenses (multiplied by six months = R480 000). His banker only agreed to a R100 000
bank overdraft facility, and he had to borrow the other R380 000 from family and friends
(who agreed that he could repay the loans after 10 years have passed, but required him to
pay interest monthly).
Ismail seems to be satisfied now that the past 12 months have come to an end. The net
profit (after paying R48 000 interest) was R200 000, while his own total investment was
only the furniture and equipment (R800 000) and the outside capital, worth R580 000
(overdraft R100 000, trade creditors R100 000 and long-term loans R380 000).
• Name at least four financial functions in this business.

• Name some of the managerial functions (planning, organising, leading and
controlling) in this business.
• List the different kinds of assets in this business.
• List the different forms of capital in this business.
• Explain the financial structure of this business.
• Calculate the ROI and ROE for Ismail’s business.
• Based on your calculations, what conclusions can you draw about the ROI and ROE for
Ismail Naidoo’s business?
7. Name and explain at least four characteristics of ‘own capital’ in any private business.
8. Name and illustrate at least five characteristics of ‘outside capital’.
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9. What are the nature and sources of permanent finance?

10. Briefly discuss at least five characteristics of long-term finance and their sources.
11. Explain in your own words what ‘business angels’ are.
12. Briefly discuss at least five characteristics of medium-term finance and its sources.
13. Briefly discuss at least five characteristics of short-term finance and their sources.
14. There are at least nine important considerations in choosing the right sources and forms of
finance. Can you think of five of these? Give a short explanation for each of your answers.
15. Small business entrepreneurs face unique problems in obtaining finance. What are five of
the problems they face? Give a short explanation for each of your answers.
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Chapter 6
THE HUMAN RESOURCE FUNCTION
Learning outcomes
• define HRM (human resource management) and an HRM system
• explain the role of HR (human resources) in a business context
• explain the HR function as a subsystem of an organisation
• describe each of the components of the HRM system in detail (this includes planning, staffing,
training and development, performance management and compensation and rewards)
• explain the concept of HR maintenance and its various components
• describe how the HRM function interacts with the other business functions.
6.1 Introduction
The human resource (HR) or personnel function is one of the functions of a business
identified in Chapter 1. It differs from the other functions in the sense that the tasks and
activities related to personnel also form part of all the other functions of the business.
Each individual who has authority over other employees, from top management to
supervisors, is involved in personnel work to a certain degree.
Most businesses operate on a continuous basis. This means that they do not simply exist
for a few months and then stop their business. They usually plan to be in business for
a longer period of time. As time goes by, businesses grow and employees resign, get
promoted or retire. Those lost have to be replaced to enable the business to continue
with its activities as before. Just like the heart supplies your body with blood to enable
it to live, the HR function supplies the business with people to enable it to do business
continuously.
Chapter 6 The Human Resource Function
Quote
There are certain business activities that aren’t necessarily heavily reliant on people, but in the
service industry, increasingly, people are all you have got. For example, can you tell me of a bank
that has a cheque account that blasts every other bank’s cheque accounts out of the water? Can
you tell me of any company that has a credit card that is so unique and different that everybody
wants that credit card and no other one, or an ATM that does such wondrous things that you’ll
never go to another bank? Not at all. So, at the end of the day, all we’ve got to differentiate us from
1
our competitors is our people.
— Tom Boardman, CEO of Nedbank, on the statement: ‘People are our most important asset’
This chapter will investigate the HR function as the formal part of the business responsible
for all aspects of the management of human resources, including all activities employed
to attract, acquire, develop, reward and manage human resources to achieve the goals of
the business.
6.2 Definition and scope of human resource management

(HRM)
From the numerous textbook definitions that exist in the HRM (human resource
management) literature, Price2 provides a working definition that is specifically linked
to a business context.
Definition
Human resource management (HRM) is a philosophy of people management based on the belief
that human resources are uniquely important to sustained business success. An organisation gains
competitive advantage by using its people effectively, drawing on their expertise and ingenuity to
meet clearly defined objectives. HRM is aimed at recruiting capable, flexible and committed people,
managing and rewarding their performance and developing key competencies.
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This working definition is particularly useful because it emphasises the shared

responsibility of managing people, the role of the HR function in the business and the
range of practices it is responsible for.
One of the primary objectives of the HR manager is to ensure that a business employs
the right number and type of employees at the required time. To achieve this, the HR
manager must carry out functions such as:
• human resource planning (the process of ensuring that the business has the right
skills at the right time)
• recruitment (to seek and find potential employees)
• selection (to choose the most suitable person for a specific post)
• placement (when the employee is placed in the post)
• orientation (when the new employee is introduced to the business, its procedures, the
work environment and to all the other employees).
In addition to this, the HR manager is also usually responsible for the best utilisation
and maintenance of labour as a production factor in the business. This includes the
training, development and maintenance (including salary, labour relations, personnel
administration and working conditions) of personnel.
Even though all businesses are not of the same size, ranging from one-person concerns
and small partnerships to large companies, there are always HR activities to be carried
out and managed. This does not mean, however, that each business has a separate HR
division. A small business (for example, with fewer than 20 employees) is unlikely to
have a separate HR division. In such a case, the owner or manager will normally decide
how the HR function will be managed.
There are many different options, for example:
• one person may be appointed to handle all the HR tasks
• one person may be appointed to handle all the HR tasks in conjunction with another
function, such as the financial function
• the manager could handle it herself or himself
146
• the manager could make use of temporary employees
• the manager could outsource the HR function (making use of an external company to
manage it).
In larger businesses, it is not possible for the owner and line managers to handle all staff
matters effectively themselves. They need expertise and assistance and an HR division is
usually established.
6.3 Human resource management in the business context

There is an established and increasing body of research evidence that confirms the
connection between how businesses manage their people and the economic bottom
line results they achieve. Most businesses today recognise the importance of people in
meeting their goals and that their employees can assist in gaining and maintaining a
competitive advantage. A comprehensive HR strategy is not only essential in achieving
the overall strategic goals, but also to show that the HR function actively supports the
direction that the business is moving in.
An organisation’s strategic HR choices are the options available to it in designing its HRM
system. Essentially, the HRM system can be defined as follows:
Definition
The HRM system is an overall approach to management, comprising the philosophies, policies and
practices related to the activities of staffing, retention, development, adjustment and managing
change.
Who is responsible for designing the HRM system and managing its central activities?
It is generally accepted that, when it comes to managing people, all managers are
responsible, not just the HR department. Line management must be concerned to some
degree with the activities of the HRM system (refer to Table 6.1), whereas the objective
of the HR department is to optimise the usefulness of the system, to link it with larger
organisational needs and to help line managers to manage employees more effectively.
147
For example, the HR department may develop the format and procedures for a 360-degree
performance evaluation system to help evaluate employee performance, but it is the line
manager who will conduct the actual evaluation.
Table 6.1: Central activities in the human resource management system in which line
managers need to be involved
Activity Description
Staffing • identifying work requirements within the business
• determining how many people are needed to do the
work and what skills mix is necessary
• recruiting, selecting and promoting qualified staff
Retention • rewarding and recognising employees for effective job
performance
• ensuring harmonious working relations between teams,
employers and managers
• establishing and maintaining a safe and healthy work
environment
Development • maintaining and enhancing employees’ job-related
competencies through improving their knowledge, skills
and abilities
Adjustment • maintaining compliance with business strategies and HR
policies (eg through discipline)
Managing change • enhancing the business’s ability to anticipate and respond
to developments in its external and internal environments
• enabling employees at all levels to cope with the changes
6.4 The human resource management process

Human resource management (HRM) is the system of philosophies, policies, programmes,
practices and decisions that affect the attitudes, behaviour and performance of the
people of an organisation, so that people feel satisfied, perform and contribute to the
organisation, achieving its strategic objectives. Practices include:
• human resource planning
• job analysis
• job profiling
• job design
148
5.5 The human resource management process
HRM is the system of philosophies, policies, programmes, practices and
decisions that affect the attitudes, behaviour and performance of the people
of an organisation, so that people feel satisfied, perform and contribute to the
Chapter
organisation, achieving its strategic objectives. 6 The Human
Practices Resource Function
include:
• human resource planning;
• • recruitment
job analysis;
• • selection
job profiling;
• job design;
• orientation
• recruitment;
• • training and development
selection;
• • performance
orientation;
management
• training and development;
• compensation
• performance management;
• • grievance management
compensation;
• • management
grievance management;
of discipline
• management of discipline; and
• maintaining labour relations.
• maintaining labour relations.
AsAscan
canbebeseen
seen
ininFigure
Figure6.1,
5.1, these
these practices
practices areare part
part of of
thethe process
process of of planning
planning and
and organising the HRM system, activating and leading the HRM system,
organising the HRM system, activating and leading the HRM system, and controlling the and
controlling the system to achieve the necessary HR outcomes, and hence the
system to achieve the necessary HR outcomes, and hence the long-term success of the
long-term success of the business.
business. The various components of the HRM system will be discussed throughout this
The various components of the HRM system will be discussed throughout this
chapter.
chapter.
Inputs Outputs
The HRM system
• Organisational Individual level
strategy • Performance
Staffing Training &
• Organisational • Commitment
development • Creativity
structural
HRM • Satisfaction
arrangements
strategy & Performance
• Systems and
planning management Group level
processes
• Organisation • Synergy
culture and • Cooperation
Monitoring &
climate Compensation & • Good relations
control
• Managers rewards
• Employees Organisational level
Individual &
• Information • Staff retention
collective labour
• Finance • Low absenteeism
relations
• Other resources • Cost-effectiveness
• Legal compliance
Figure 5.1: The HRM process

Figure 6.1: The HRM process 3
Source: Adapted from Amos et al. (2008:9)
6.5 Human resource management

105
strategy and planning
As mentioned earlier, a business needs to employ new staff members at various times. In
order to do this, the HR manager must first determine what type of people (qualifications
149
and experience) and how many people are needed for the business to expand or continue
productively. Information on the vacant positions must be obtained and for that the
foundations for HR planning should be used. The foundations are job design and job
analysis.
6.5.1 Job design

This essentially entails the dividing of the work that needs to be done into jobs by
organising the content, functions and relationships of jobs in a way that will meet
the needs of both the business and the employee. The three job design dimensions of
content, functions and relationships are not only relevant to individual jobs, but also to
the increasing use of work teams.
6.5.2 Job analysis

This refers to the study of what is done, when, where, how, why and by whom in existing
or new jobs. The resulting information can be used for the writing or updating of job
descriptions (which are the written statements of the duties and responsibilities of a
specific job) and job specifications (which are the lists of the qualifications, experience
and skill requirements for a given job).
In the following example, the owner of a small clothes business cannot cope with the
amount of work by himself any more. He decides to get assistance, but is not sure exactly
what type of people he needs and how many.
Example
The owner starts by doing a job analysis, ie collecting all the important data about the work. He
makes a list of all the tasks that must be performed in the business. Then he groups all the tasks
that logically belong together and that can be done by one person, such as the tasks to do with
money, income and expenditure. Such a combination of tasks can become one person’s job.
List of tasks
1. Conduct market research to determine what sizes, types and quantities of clothing are to be
purchased.
2. Purchase inventory.
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3. Exhibit clothes.
4. Maintain inventory at optimum levels.
5. Sell the clothes.
6. Keep record of accounts.
7. Keep the books up to date.
8. Calculate ordering and inventory quantities.
9. Market the department.
10. Co-ordinate continually with the owner.
Grouping of tasks
Person 1: Tasks 1, 2, 4, 9 and 10. This could be a head of department.
Person 2: Tasks 3 and 5. This could be a salesperson.
Person 3: Tasks 6, 7 and 8. This could be an accounting clerk.
Now, the owner has the option of appointing three people to do these tasks. If however, the
business is too small or does not warrant this number, some of the jobs could be linked and only
two people could be appointed. An accounting clerk could also be appointed on a temporary
basis, for example, for one day a week.
Job specifications and job descriptions can now be drawn up for these people. Job descriptions
should be drawn up (and kept up to date) so that the work poses a challenge and keeps an
employee busy for the whole day.
In your job description you can include any additional information, if you think it is
appropriate. When a task takes up less than 5% of the job holder’s time, it is not necessary
to list it.
Remember that you will probably use the job specification when advertising the position,
so adapt it to your specific needs. Put in all the qualifications and attributes that you want
the candidate to possess.
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Table 6.2: Job analysis, description and specification

Job analysis
A process to collect all the important data about the work
Job description Job specifications
A statement containing information about the A statement of the qualifications required by the
job itself. It includes detail on the following: person to do the job. It includes detail on the
following:
Job status: Permanent Qualification: BCom with Accounting and
Job title: Accounting clerk Financial Management III
Location: Administration section Experience: Two years in similar position
Job summary: Manage and attend to all Training: Inventory control
administrative and financial matters Physical exertion: Count inventory on high
Duties: Keep record of accounts, keep the books shelves (use ladder)
up to date and calculate ordering and inventory Responsibility: All administrative and financial
quantities matters
Equipment: Computer Personality: Friendly, confident, honest and
Supervisor: UR Boss (owner of business) hardworking
Job environment: Private office with air
conditioner
Dangers: None
The job description and specification are important aids for a manager. They are not only
used for appointing new employees, but also for:
• control purposes
• performance evaluation
• promotions
• the identification of training needs
• the establishment of salary scales.
Now that you know exactly what type of people you need in the business, you have to find
the people to fill the vacant positions. The second step of the HRM system will now take
place, namely staffing.
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6.6 Staffing
Staffing an organisation involves bringing suitable people into it who will not only fit
into a particular job, but also into the business as an organisation. The appointment of
suitable staff, their integration into the organisation, their day-to-day management and
their retention are what determine the success and survival of any organisation. In fact,
some of the most important decisions that managers make concern staffing because they
impact on how effectively work is done. The staffing process involves:
• recruitment
• selection
• employment and placing
• orientation.
The staffing process therefore flows out of the planning process described in the previous
section and requires the job to be analysed to ensure that a suitable person is ultimately
appointed. With the planning and preparation completed, recruitment can commence.
6.6.1 Recruitment
Recruitment is about attracting a pool of potential candidates from which the ideal
candidate can be selected, and doing so as cost-effectively as possible. When recruiting,
it is important that the activity should be seen in the context of the total HR function
and, in particular, it should be integrated with selection. Any relevant legal requirements
should be adhered to and the process should be managed from the perspective that it is
a two-way process. Just as organisations are searching for candidates, so too are people
searching for suitable organisations for which to work.
Recruitment strategies
In the recruitment process of finding and matching people to specific job requirements,
Price4 identifies three broad strategies that businesses can follow:
1. The ‘right person’ approach

This is the traditional and most common approach. It seeks to pin down the right or
best person according to a set of criteria on required skills and qualities considered
to be essential or desirable for job performance. The approach implies that jobs are
stable and long term, and that people are the variable element that can be brought in
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at any stage of their careers. The approach is appropriate for large organisations and
work environments where jobs can be defined tightly, where the job is discrete and
separable from other functions, and where the job is best done by an individual with
a specific range of skills. It is less appropriate for work environments where diversity
needs to be leveraged.
2. The ‘culturefit’ approach
This approach seeks to fit the person to the organisation from a perspective that
people are permanent, but jobs can be varied. Jobs and their content are reshaped
to make the best use of the individual employee’s skills within the needs of the
business. In this approach, personal qualities necessary to fit in with the culture of
the organisation are regarded as more important than technical skills. This approach
is found in traditional large Japanese companies, where recruitment focuses on young
people who can be socialised into the company’s way of working. It is also used in
smaller businesses and environments where a premium is placed on attracting
creative and innovative employees.
3. The ‘flexible person’ approach
This approach seeks to recruit people who are versatile and adaptable, prepared for
future change and able to contribute outside the confines of rigid skills and ability
profiles. It is a far more demanding approach that reflects a long-term strategy to talent
management, encouraging diversity and adding to the total pool of competencies in
the organisation’s human capital.
Recruitment sources and methods

Required talent can be found in the current pool of employees (internal recruitment) or
from outside labour pools (external recruitment).
• Internal recruitment
It is often desirable, particularly for positions above the entry level, to consider
current employees for purposes of maintaining morale, talent retention, and career
and succession planning. For the HR manager, internal recruitment may present
challenges due to line managers’ common reluctance to support the potential release
of subordinates for transfers or promotion. Consequently, for promotion-from-
within policies to be successful, strong top management support is needed. Common
methods for internal recruitment include job posting, which entails the publishing
of vacancies on company newsletters, bulletin boards or intranets, and employee
referrals, where current employees refer potential candidates and receive some
financial reward if such a candidate is successfully hired.
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• External recruitment
External recruitment is often a two-way process where not only the organisation
attempts to attract prospective employees, but also where job seekers actively pursue
potential employment in a specific organisation. For external recruitment to be
effective, some conditions need to be met:
◊ The timing of recruitment efforts and candidates’ job search efforts have to coincide.
◊ There must be a common communication medium – advertisements should be

placed in media that potential candidates are likely to peruse.
◊ Candidates must perceive that there is a match between their personal

characteristics and the stated job requirements.
◊ Candidates must be motivated to apply for the vacancy.
These conditions need to be considered by the HR department in selecting the

appropriate recruitment method. Commonly used external recruitment methods are:
◊ direct applications, including the blue-collar ‘gate hires’, walk-ins at the business
premises, or dropping off or mailing applications and CVs to the target business
◊ university campus recruiting, where organisations interact and build specific

relationships with universities for potential recruits
◊ advertising in local or national newspapers, trade journals, magazines or on radio
◊ recruitment/employment agencies (see Association of Personnel Services

Organisation, www.apso.co.za)
◊ executive search firms, a method that is usually limited to very senior appointments
due to the cost involved and typical confidentiality related to what is commonly
referred to as ‘headhunting’
◊ online recruiting on the Internet, which has revolutionised recruitment practice,

with more than 30 000 job search sites and millions of job listings (major websites
are Monster.com, HotJobs.com, Careerbuilder.com and so forth).
The question that arises is which of these methods one should use. Lower-level posts,
such as officials, artisans and junior sales staff could be advertised in a local newspaper.
If you are looking for a specific type of employee, you have to advertise specifically.
Specialised periodicals can be used. If you are looking for an HR person, you could use
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HR periodicals, magazines or professional associations. When middle- and higher-level

positions are vacant, you may wish to advertise more widely, such as in the weekend
newspapers or national periodicals.
In the course of the recruitment campaign, potential applicants should be informed

about the business and the positions available. Both positive and negative aspects should
be pointed out. Begin by pre-screening potential candidates and attracting them to the
business. They may be invited to visit and find out more about the business and working
conditions, which should be arranged and handled professionally. Even if the visitor does
not apply for the post, it creates a positive impression of the business.
To advertise a position, you need to compile an advertisement. It should include:
• the job title
• the salary
• important features of the work
• requirements of the successful candidate
• the fringe benefits
• application procedures
• the name of the person in charge of the applications
• a brief description of the business.
Of course, you may omit some information and add other details to suit your needs. Look
at current advertisements to give you more ideas. There is an example on the following
page. During the recruitment campaign, candidates apply for available posts. Applications
are accepted until a pre-determined date on which applications close.
6.6.2 Selection
The following step will be to start the selection process. Selection is the process of
selecting the most suitable candidate from the pool of candidates recruited. Making
the right selection decision is good business practice, as it contributes to the sustained,
optimal use of human resources.
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Business Functions Chapter 6 The Human Resource Function
Here is an example:
UNIVERSITY OF SOUTH AFRICA
ADMINISTRATIVE ASSISTANT
DEPARTMENT OF ICT
(Ref. No. Admin Ass/P1234/Apr08)
15)
Applicants for this position are required to indicate in detail on their application forms/CVs to what extent
their qualifications and experience meet the requirements of the post set out below.
Requirements:
• Grade 12 and 3 years relevant experience
• Good communication skills, oral and written
• Computer literacy/highly computer literate (MS Word, Excel, Groupwise)
• Excellent communication and interpersonal skills
• Excellent administrative skills (especially meeting and workshop preparations)
• Ability to take initiative, work accurately, independently and in a team
• Ability to work under pressure and solve problems
• Experience of digital filing systems
Recommendations:
• Knowledge of structures and procedures at a tertiary institution
Duties:
• General office administration
• Liaison with internal and external clients and stakeholders
• Handling enquiries and communications
• Perform any other work-related duties
Assumption of duty: 2016
January 2009
Post Grade: P 11
Salary: To be determined
Current fringe benefits will apply.
Enquiries: Ms P Madikwe 012 412 0000 (Directorate: HR Provisioning & Administration)
Applications, on the prescribed forms, are invited and should reach the Directorate: HR Provisioning
& Administration, Room 1-12, OR Tambo Building, Muckleneuk Campus or can be posted to the
Directorate: HR Provisioning and Administration, PO Box 123, Room 1-12, OR Tambo Building,
2015.
UNISA, 0003 on or before 25 October 2008.
Certified copies of all educational qualifications must accompany applications. Applications submitted
without copies attached will not be considered.
Application forms are obtainable on www.unisa.ac.za. UNISA reserves the right not to make an
appointment.
Appointments will be made in accordance with Unisa’s Employment Equity Policy.
Correspondence will be limited to short-listed candidates only. If you have not been contacted within
two months after the closing date of this advertisement, please accept that your application was not
successful.
(signed)
Mr AN Other
EXECUTIVE DIRECTOR: HUMAN RESOURCES
5
Figure 6.2: A job advertisement
Figure 5.2: A job advertisement
Source: Nieuwenhuizen (2007:183)
112
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Various selection methods may be used and it is advisable to use not only one, but a
combination, as each selection method has particular advantages and disadvantages.
Whichever methods you use, they should give you the information you require. Cost-
efficiency should also be taken into account. According to Pieters,6 selection can be done
by means of application forms, interviews, psychometric tests, assessment centres,
medical examinations and references.
• Application forms
These consist of a list of general questions, aimed at collecting biographical data, and
specific questions on the requirements of the vacant post. This enables you to obtain a
general impression of how suitable a person is and to determine whether the person
meets the minimum requirements of the post. You should be familiar with the latest
legislation about faith, age, gender and so forth. Questioning candidates about certain
issues, such as these, is not acceptable.
• The selection interview

This is a discussion between the applicant and the employer, aimed at obtaining
further information about the applicant. (The employer may also ask other managers
and/or specialists to sit on the selection interview panel to assist with the process.)
Simultaneously, the interview gives the applicant the opportunity to obtain more
information about the business and the job in question.
• Psychometric testing
This is used to obtain information about the personality of the applicant or to make
sure that the information obtained during the interview is correct. These tests must
be performed by professionals in this field and include personality and aptitude tests.
• Assessment centres
Here, the job content is investigated and the aptitude and behaviour required of
the incumbent are identified. Exercises are designed for the applicant to do. The
behaviour of the applicant is observed and recorded by trained assessors. This
gives the applicants the opportunity to show their specific skills, characteristics and
behaviour. Examples of these exercises are ‘inbasket tests’ and ‘case studies’.
• Medical examinations
These used to be quite popular as part of the selection process, but are seldom used
today because they are regarded as discriminatory. However, with certain physically
demanding jobs, such as mining, they are required and are the norm.
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• References
Information about the applicant’s job history is supplied by previous employers,
managers or supervisors, with the applicant’s permission.
The selection procedure is not the same for all businesses. It differs according to needs
and preferences, but for most purposes, these steps can be followed:
Step 1: Conduct a preliminary selection interview

Determine whether the qualifications and interests of the applicant are suitable for the
requirements of the post. The idea is to get an overall impression of the candidates and to
provide them with general information about the business. Applicants who have not yet
completed application forms are asked to do so.
Step 2: Application form

The application form is designed around the specific needs of the business. Personal
information (such as qualifications, training and experience) is evaluated and compared
with the job specifications. If you do not have an application form, look at other businesses’
application forms and create your own according to your requirements.
Step 3: Selection tests

The type of work will determine the tests that need to be done. These are designed to
obtain additional information, including intelligence, computer skills, personality traits
and other special abilities that could not be obtained from the application form. Various
tests exist for testing clerical aptitude, vision, interest and intellectual ability. These tests
are done by specialists and it is advisable to spend some money at this stage on having
the tests done professionally rather than appointing the wrong person and experiencing
great frustration at a later stage.
Step 4: Check references

Any information that is not yet known can be obtained from previous employers or
referees. (A referee is a person whose name the applicant provides and from whom you
can obtain more information on the applicant.) This information can be obtained by
telephone, letter or a personal visit. This step is essential to determine the credibility of
the applicant and should not be neglected. You can learn much from previous employers.
Remember, however, to ‘read between the lines’ when you speak to previous employers,
because they may gloss over important defects in the applicant’s character.
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Step 5: Final interview

During this interview, all the information gathered during the selection process is
integrated and you should aim to clarify uncertainties. Usually, a team is present at
this interview – a panel that should include the line manager, the HR manager, a union
representative and anyone else that this team considers necessary, such as a specialist in
the field of the vacant post. This person could assist with specialist job knowledge. The
candidate is also given an opportunity to ask questions and clarify any uncertainties.
The objectives of the final interview are to determine whether the person is suitable and
would be able to get along with the manager and the other employees in the section.
Look at the person as a whole, including the good and the bad points, and remember that
no one is perfect. Past performance is usually a good indication of what to expect in the
future.
Prepare the questions that you want to ask, for example:
• Why are you applying for the post?
• How do you view your role in the business?
• How would you contribute towards making the business more productive?
Step 6: Medical examination

The candidate must be physically suitable for the job to be done. If there is any problem,
it should be identified in good time. High medical claims and absenteeism will then be
avoided.
Step 7: Final choice

The candidate who is ultimately selected is usually the one whose qualifications,
experience and personality correspond with the job specification. Be objective and
remember that you need someone who can do the job.
Step 8: Final offer

Make an offer in writing to the chosen candidate. In the letter you could congratulate
the person, give a starting date, salary scale and other benefits attached to the job. The
administration and actual appointment is handled by the HR section.
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The applicant must now decide, within a stated time frame, whether to accept the offer
or not. The offer may also be negotiated, depending on the wish of the owner or manager.
Conclude a contract with the employee. The contract usually contains the basic policy
and conditions of service of the business. Working hours, leave and overtime are also
usually specified in this document. If the offer is not accepted, the next most suitable
candidate should be considered.
Step 9: Appointment
When the candidate accepts the offer, top management authorises the appointment and
the HR section finalises all administrative matters. The selection process comes to an end
here.
6.6.3 Employment and placing

Employment involves not only the process by which the new employee reports to the
workplace, but also the accompanying administrative tasks that have to be performed.
The HR manager ensures that the necessary forms, such as unemployment insurance,
tax and medical aid (where applicable), are completed and that any other outstanding
information is obtained from the employee. Arrangements for the transport of the
newcomer’s furniture and work items are also made where applicable.
Placement, which is the second last step in the process of providing human resources,
now follows. This is the process by which the new employee is placed in the post applied
for. The most suitable employee is allocated where his or her expertise can best be
utilised to the benefit of the business in carrying out those tasks allocated to him or her.
Placement also occurs when an employee is promoted, transferred or demoted. A good
recruitment and selection process should automatically lead to effective placement.
6.6.4 Orientation
The orientation process should already be in progress at this stage. The orientation
(also known as incorporation or induction) of newcomers is the process by which new
employees are firstly introduced to the business, its procedures, environment and work
situation and, secondly, to their co-workers, subordinates and superiors.
This is an opportunity that you should use to motivate new employees and put them
at ease. There are many benefits for the business in the long term if new employees
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understand from the very outset how the business works and if they can communicate
effectively with other people in the business. This will also make a new employee happy
and, therefore, productive.
Proper orientation needs an orientation programme. List all the things you should do
regarding the new employee before he or she arrives at the business, on the first day,
during the first two weeks and during the first six months.
There are many things that you can do during these orientation stages. The following are
some suggestions.
• Before the new employee arrives at the business

Congratulate the appointee. Send a formal letter of welcome and information
brochures about the business to the successful candidate. Information such as
working hours, dress code, schools and estate agents in the area and the general
policy of the business is usually appreciated. Ensure that the office or workspace is in
order and that the necessary furniture, equipment and stationery are in place before
he or she arrives. Inform the other employees about the newcomer and explain what
he or she will be doing.
• On the first day

Be available to meet the newcomer and to introduce him or her to the other employees.
Speak informally to put the new employee at ease. Show him or her the office space or
work areas. Finalise administrative matters, such as the completion of the necessary
forms. Get the newcomer working as soon as possible. If necessary, appoint someone
to orientate him or her. Check about transport and accommodation.
• During the first two weeks

Newcomers should be introduced systematically to:
◊ the activities of the section and how it supports the business as a whole
◊ their duties and responsibilities (refer to the job description)
◊ how, when and where they are paid
◊ working hours, leave policy, meal and tea breaks
◊ the use of the telephone
◊ dress code
◊ recreation facilities.
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• During the first six months

To ensure that the maximum is gained from newcomers, orientation does not end
after two weeks. They have to develop and become more productive. Identify any
shortcomings and training needs and see that something is done about them.
An orientation programme can leave a positive and lasting impression of an employer. It

is an opportunity that management should take advantage of to motivate and to inspire
loyalty. Understanding each other and communicating well from the start can have many
beneficial consequences in the long run.
6.7 Training and development

Training and development is about the organisation providing assistance to employees
so that they become effective in their jobs. It is not only about extending the knowledge
and skills of employees, but also about modifying their attitudes to the job and adjusting
their behaviour in the organisation. Managers who speak of their people being their most
important resource can demonstrate this through a commitment to developing their
staff. Training and development can also play an extremely important part in motivating
employees.
A distinction needs to be made between training and development:
• Training consists of a planned programme of activities designed to help improve

current performance at individual, group and organisational level by helping
employees to acquire and improve job-related skills.
• Development programmes have a longer-term focus on improving employees’

competencies in preparation for future jobs.
Although line managers are ultimately responsible for the training and development of
their staff, the HR function is central to co-ordinating the corporate talent development
strategies. Key responsibilities include:
• statutory compliance with skills development legislation and developing a corporate

work skills plan
• developing and maintaining a system that ensures that employees are appropriately
trained
• monitoring and maintaining a list of training providers appropriately accredited with

relevant bodies (for example SETA and ETQA)
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• co-ordination of all training and development offered to employees either internally

or externally, including ABET, learnerships, mentoring, coaching and ‘corporate
university’, where a large employer partners with a university for meeting the specific
training needs of the organisation
• conducting training needs assessments and the design and provision of in-house
training interventions when appropriate
• monitoring and evaluating the effectiveness of training and development against

strategic objectives
• measuring and reporting the return on investment (ROI) of training programmes as

economic value.
In South Africa, we face various macro-economical challenges, such as profound

skills shortages, high illiteracy levels and ineffective national education and training
systems. In response to these challenges, the South African government embarked on
a comprehensive human resource development strategy. This includes the introduction
of the Skills Development Act 97 of 1998 and the Skills Development Levies Act 9 of
1999, the implementation of which has a major impact on the training and development
role of the HR function. Beyond the challenges of legal compliance that the regulatory
framework imposes, the training and development of employees in themselves should be
strategic business objectives of organisations that recognise that availability of qualified
talent is essential for economic survival.
6.8 Career and performance management

6.8.1 Career management
Career management refers to the process of planning and shaping the progression of
employees within the organisation according to business needs and employee preferences.
Although, in the modern workplace, the ultimate responsibility for career development
rests with the individual, the HR function has a complementary responsibility to assist
employees in managing their own careers. These include:
• creating an environment where continuous learning is valued and rewarded
• providing professional HR development and specialist expertise for development

programmes, training and education
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• designing HR policies that are supportive of family friendliness and the requirements
of dual-career couples in the organisation
• communicating the business’s mission, objectives and future strategies so that

employees can realistically plan to share in its future
• ensuring the integration of career development components with comprehensive

HRM systems
• creating growth opportunities and time for employees to learn
• training managers in coaching, mentoring and performance management skills
• developing and implementing career pathing.
Career pathing is a process of mapping logical and possible sequences of positions to

which an employee can be promoted, transferred or rotated. To be successful, career
paths should represent real progression possibilities, be flexible and responsive to
changes in job content and work priorities, and specify the skills and knowledge required
to perform in each position along the paths.
Cascio7 suggests three main reasons why career management systems sometimes fail in
practice:
1. Employees believe that their managers do not really care about their career
development.
2. Neither employees nor the organisation are fully aware of employees’ needs and
organisational constraints.
3. Career plans are developed without regard for support systems necessary to fulfil
them.
6.8.2 Performance management

In the HRM system, employee performance is the final outcome after appointing someone.
Performance management as a holistic process brings together many of the elements
discussed up to now that make up the successful practice of people management.
The definition of performance management by Armstrong and Baron8 is on the

next page:
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Definition
Performance management is a strategic and integrated approach to increasing the effectiveness of

organisations by improving the performance of the people who work in them and by developing
the capabilities of individual contributors.
Since the performance of every employee contributes to the realisation of the business’s
strategic goals, it follows that the performance of every employee should be managed.
This, again, is the primary responsibility of every employee’s line manager, and the role
of the HR function is to design, develop, implement and maintain the tools and practices
that will assist line management to execute this task effectively.
The process of performance management essentially entails three elements, namely:

1. defining performance by setting clear goals, deciding how to measure goal
accomplishment and providing regular progress assessment. Performance appraisal
is an integral part of this element
2. facilitating performance by identifying and eliminating obstacles to good performance
and by providing resources to accomplish objectives
3. encouraging performance by providing sufficient rewards and recognition that
employees really value, in a timely and fair manner.
After performance has been managed, it is necessary to compensate and reward the
individuals that have met or exceeded the goals set out for them. Rewards also need to be
given to those individuals that have increased their effectiveness.
6.9 Compensation and rewards

High performance must be rewarded and, equally, poor performance must be corrected
through a combination of counselling, training and development. An individual can be
rewarded in various ways, such as recognition, allocation of more challenging work
assignments, promotions, financial rewards, public recognition or simply saying ‘thank
you’.
6.9.1 Reward and recognition

The reward system is very much at the heart of any employment relationship. In its
simplest form, this relationship is usually based on an economically motivated process
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where certain inputs (physical and mental work behaviour) are exchanged for some
outputs (rewards) that are considered to be desirable in satisfying individual needs or
goals. The utilisation of rewards can, therefore, be a very important and powerful tool
for shaping and determining work behaviour aimed at attaining the strategic objectives
of an organisation. In the business context, rewards are called compensation and the HR
function plays a key role in determining the total compensation system of the business.
Financial rewards include wages, salaries, bonuses and benefits (for example pension and
medical aid contributions). Non-financial rewards can include anything of value that will
enhance the employee’s self-respect and esteem by others (for example opportunities
for training and development or a desirable working environment, such as a large office
with a view).
Definition
Compensation is the financial and non-financial extrinsic rewards provided by an employer for
the time, skills and effort made available by the employee in fulfilling job requirements aimed at
achieving organisational objectives.
6.9.2 Incentives and benefits

A total compensation package includes three components, namely:
1. base compensation, comprising the regular fixed pay received as salary or wages
according to the salary structure
2. pay incentives that are designed to reward employees for good performance
3. benefits or indirect compensation.
Incentive compensation differs from other forms of compensation in that it constitutes

an additional reward for outstanding efforts aimed at achieving organisational goals. It is
usually financially based, and its widespread use stems from the general belief that pay
is able to motivate individuals or groups of employees to exceed minimum performance
requirements and increase organisational effectiveness. These could include bonuses,
sales commission, paid holidays, profit sharing and share options.
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Benefits, on the other hand, are linked to employment rather than to performance and
may be described as an indirect form of compensation that is mainly intended to improve
the quality of work life for an organisation’s employees.
A basic benefits package typically covers three broad areas, namely:

1. time benefits, such as leave
2. risk benefits, such as medical aid and group life insurance
3. security benefits, such as pension plans and provident funds.
Within these areas, a broad range of possible benefits may be incorporated in a total
compensation package. Whilst the provision of some of these benefits (such as a
retirement plan and accident and death insurance) are required by law, the possible range
of employer provided benefits is bound only by the limits of creativity of compensation
specialists (and the scrutiny of the South African Revenue Service).
6.10 Human resource maintenance

It costs a business a lot of money, time and human resources to employ suitable
employees. Management and supervisors should, therefore, do everything in their power
to make the best use of employees and motivate them to ensure that they remain in the
service of the business. HR maintenance involves all those activities that make the work
situation acceptable to the employee. In order to accomplish this, one needs to look at
salaries, performance management, personnel administration, working conditions and
labour relations.
Some of these activities, such as salaries and performance management, have been
discussed while looking at the HRM system. The other activities, namely personnel
administration, working conditions and labour relations will now be looked into.
6.10.1 Labour relations

Labour relations are concerned with the creation, maintenance, amendment and
administration of rules, control processes, ideologies, interactions and relationships in
the workplace.
There are three participants to consider: labour, management and government.

1. Labour is the human effort which is offered with the aim of acquiring an income.
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2. Management (in this case, the employer) firstly aims to run the business profitably so
that it can continue to exist and grow. The second function of management is to utilise
the available production factors optimally. Special attention should be given to labour,
which is usually the most important resource. The ability to control and utilise this
resource will, to a large extent, determine the success of the business.
3. The role of government differs from country to country, depending on the prevailing
socioeconomic and political dispensation. Government’s role includes providing the
legislative framework for labour relations.
The labour relations system is, therefore, a three-way relationship between labour,
management and government. It is in the interests of both labour and management to
strive for a climate free of conflict and to settle the conflicts that do arise in an orderly
way, with the help of appropriate institutions.
In many cases, employees are members of a union. This is a permanent representation

of employees in an industry, business or profession, established to regulate matters of
economic interest by way of negotiations with management so as to improve working
conditions and general living standards.
Since a poor relationship with a union can cause much harm to a business, most employers
conclude a memorandum of recognition with the unions. The memorandum includes
provisions about grievance procedures, mediation, safety measures, use of notice boards
and the administration of the agreement. To make this agreement binding, it must comply
with the common law requirements of a valid contract. The proposed provisions should
not clash with labour legislation, otherwise the agreement becomes invalid. Recognition
of a union implies an agreement, a relationship and a process.
It is essential to keep up to date with the relevant labour legislation, especially the issues
contained in the Labour Relations Act 66 of 1995. You can find all the details on the
website of the Department of Labour at http://www.labour.gov.za. Other information
that you can find there includes forms, sample documents and guidelines covering many
labour relations issues.
6.10.2 Personnel administration

The quality of decisions taken by management about employees is dependent on the
availability, completeness and accuracy of information pertaining to each person. The HR
169
division is responsible for thorough record-keeping of all relevant HR data, such as age,
qualifications and so on, and of each person’s service record in the business, including
promotions, merits, transfers and so on.
This data should be stored in a way that it is quickly accessible when management makes
decisions about promotions, transfers, rationalisation, training, development and other
similar changes. Larger businesses mostly use a computerised database for this function,
but a filing system will work equally well in a small business.
Employees must be familiar with the policy of the business. In most businesses, this
policy is contained in a personnel manual which is available to employees at all times.
Details contained in the manual include conditions of service, leave codes, rights and
privileges of employees, and disciplinary and grievance procedures. Since we operate in
such a dynamic environment, the manual needs to be updated constantly.
It goes without saying that management must not deviate from what is contained in the
manual. This could lead to conflict and unhappiness. Communication with employees
in this regard is extremely important. In many cases, it is more advantageous for the
employer to first discuss or negotiate any policy or other changes to the manual with
employees before they are implemented.
6.10.3 Working conditions

It is essential that working conditions should be pleasant and safe before one can
expect employees to be motivated and productive. Unsafe, unhygienic and unpleasant
conditions may result in an employee being injured or becoming ill. The consequences of
bad working conditions are usually greater absenteeism, a fall in productivity and a drop
in profits.
Accidents in the work situation are caused by unsafe conditions and unsafe practices.
These types of conditions and practices must be eliminated. According to the National
Occupational Safety Association (NOSA), the elimination of unsafe conditions should
come first. Examples of unsafe conditions are:
• unsafe constructions
• slippery and otherwise dangerous surfaces
• overcrowding in workshops
170
• a lack of protective clothing
• inadequate ventilation
• poor lighting in work areas.
Although these conditions cause the smallest number of accidents, they are situations
that can be remedied permanently and at relatively low cost. It is management’s
responsibility to ensure that the workplace is safe and hygienic and that personnel use
the right protective clothing and equipment.
Unsafe practices, on the other hand, are the result of human error and are more difficult
to change. It is mostly an attitude or disposition that has to change, which is not so easy.
Management should, therefore, first do everything possible to ensure that the working
environment is safe before it can expect personnel to work safely.
Accidents caused by human error refer to unsafe acts (practices), while accidents
resulting from technical failures refer to unsafe conditions. Examples of unsafe practices
are:
• working too fast
• working without authorisation
• sitting or working on moving equipment
• taking chances/risks
• moving in unsafe places
• refusing to wear protective clothing.
To prevent accidents, you have to know their causes. There are five basic causes; these
are divided into the following two categories:
1. Personal factors
These include a lack of knowledge and/or skills, physical or psychological distractions,
and incorrect attitude or motivation.
2. Work factors
These include unsafe conditions in the physical environment, and inadequate working
standards.
171
Managers at all levels must exercise constant control over employees to ensure that the
above factors do not arise. It is important to be on the lookout constantly for anything
that might cause an accident. As far as safety is concerned, it is vital to take preventive
action at all times.
There are various ways in which one can help ensure that employees remain healthy and
productive, for example:
• a clean workplace, recreation room and cloakroom
• sufficient leave, acceptable working hours and little or no over-exertion
• providing first aid in case of an accident or illness
• a suitable and pleasant workplace
• ergonomically designed office equipment, especially desks and chairs
• sufficient lighting that eliminates reflection and, where possible, uses natural daylight
regulated by means of blinds
• limiting noise – and noise intensity – by isolating machines and pipes, making use of
carpeted and cork floors and/or acoustic tiles
• temperature regulation by means of air conditioning, especially where large

fluctuations occur, as excessive heat results in discomfort and fatigue.
Employers are compelled by law to provide an environment that complies with certain of
these factors. You would be well advised to read the Occupational Health and Safety Act
85 of 1993 to ensure that your business does indeed comply. A business cannot afford to
neglect the maintenance of its most important resource – its human resources.
There are many other HR issues related to basic conditions of employment, such as the
Unemployment Insurance Fund (UIF), for example. If you wish to know more about
these, you should visit the Department of Labour’s website (http://www.labour.gov.za)
to get the latest information. There you will find information on just about everything
that you need.
6.11 Interaction of human resources with other business

functions
The proposed strategic role of the HR function as business partner has specific
implications for the interaction and collaboration between the HR function and other
172
business functions. Business partnering refocuses attention on some basic issues about
how HR is to achieve its aims: supporting line managers, aligning HRM activities with the
business and delivering efficient services to the entire organisation.
The Chartered Institute of Personnel and Development (CIPD) suggests that the HR
function can strengthen the partnership with other business functions through the
following actions:9
• The performance measures that business leaders use (for example sales costs,
production and utilisation) should be widely available and discussed in the HR team.
• Senior HR professionals should regularly ask how the business is performing, what
the hot issues are and what is being done.
• HR should ask to be involved from the outset in the business planning process.
• The personal objectives of strategic HR partners should be set in line with their line
manager customers. For example, if an operations director’s objective is to reduce
parts shortages, that might also be a strategic HR partner’s objective.
• Appraisals should be arranged so that HR business partners are appraised jointly by

their HR manager and their line customers.
• An ongoing debate about how HR is performing should be maintained. Ask the

organisation’s leaders, line managers, HR professionals and other functions. All of HR
should be listening and responding to its stakeholders.
6.12 Summary
Human assets are pivotal to business success, and the effective management of people is
a shared responsibility between line management and the HR specialists.
This chapter started off with defining HRM and evaluating HR within a business context.
The HRM process was explained and within this process the HRM system was identified.
Each of the various role players in the HRM system was then discussed.
Besides recruiting and employing new employees, management must also retain these
employees. Aspects such as labour relations, personnel administration and working
conditions were investigated. Lastly, the ways in which HR as a function fits with all the
other functions of a business was explained.
173
Question 1
Sweets from Mars has decided to launch a new energy health bar, low in calories and high in
vitamin content, named Moon Bites. The management team of Sweets from Mars decided to
recruit Billy Joel, a reputable marketing manager, for his powerful marketing skills. Billy Joel
and his marketing team think a fitness and fun day at the Free State Rugby Stadium will help
to create a buzz for Moon Bites.
1. Sweets from Mars has decided to recruit Billy Joel to assist the company in this new product.
Identify the recruitment strategy used by Sweets from Mars when considering Billy Joel for
the post. Justify your answer from the case study.
2. List the other two recruitment strategies that a business can use.
Question 2
Clicks is driven to reward and recognise their staff’s performances and have invested in
providing all employees with an above average fixed salary.
1. Identify two additional compensation components that Clicks will need to consider,
together with an example of each.
2. To keep the staff’s morale high, top management decided to first recruit employees
internally for any new posts available. List two internal recruitment methods that Clicks can
use.
3. List the external recruitment methods any company can use.
4. Explain the difference between a job description and job specification.
Endnotes
1. Willemse, A. Managing your ‘golden egg’ talent. HR Future, May 2007: 27.
2. Price, A. 2004. Human Resource Management in a Business Context. 2nd ed. Hampshire, UK:
Cengage Learning. p. 35.
3. Amos, TL, Ristow, A, Ristow, L & Pearse, NJ. 2008. Human Resource Management. 3rd ed. Cape
Town: Juta. p. 9.
4. Price, Human Resource Management in a Business Context.
5. Nieuwenhuizen, C. (ed). 2007. Business Management for Entrepreneurs. Cape Town: Juta. p.183.
6. Pieters, M. (ed). 2004. Textbook for Human Resource Practitioners. Pretoria: Kagiso.
pp. 151–176.
7. Cascio, WF. 2006. Managing Human Resources: Productivity, Quality of Work Life, Profits. 7th ed.
New York: McGraw-Hill. p. 391.
8. Armstrong, M & Baron, A. 2004. Managing Performance: Performance Management in Action.
London: Chartered Institute of Personnel and Development.
9. Nieuwenhuizen, C & Rossouw, D. 2008. (eds). Business Management: A Contemporary Approach.
174
Chapter 7
PURCHASING MANAGEMENT
Learning outcomes
• explain the crux of the supply chain management approach and the role of purchasing in this
approach
• define the supply chain management approach in your own words
• compare a production-oriented supply chain with a retail-oriented supply chain by means of a
sketch
• describe the supply chain macro-processes
• explain how the traditional purchasing function has changed to fit into the supply chain
management approach
• summarise the process of finding and selecting suppliers in your own words
• list the criteria for the selection of suppliers
• list the most important sources of potential suppliers
• describe ways of obtaining more in-depth information on the shortlisted suppliers before a final
decision on a supplier is made
• explain the weighted-points plan with the aid of an example
• explain the three groups of suppliers in terms of supplier accreditation
• discuss why quality of materials and services are the most important aspect when selecting a
supplier
• explain the nine-step process in the implementation of strategic supplier alliances.
7.1 Introduction
‘One of the most significant paradigm shifts of modern business management is that
individual businesses no longer compete as solely autonomous entities, but rather
within supply chains. In this emerging competitive environment, the ultimate success of
the single business will depend on the management’s ability to integrate the business’s
intricate network of business relationships.’ 1
Because of the rapid development of new products, technology and globalisation, for
the past decade businesses have been forced to improve their services to customers
and reduce costs, while at the same time staying competitive or improving their
competitiveness in the market. The dilemma here is the tension between higher levels
of customer service and the costs of delivering these services. So, new management
strategies were developed in the quest to improve the service, and at the same time,
lower the costs. Strategies included to:
• move away from the ‘silo’ or functional approach
• follow an integrated approach with computer systems and the different organisational
functions working together in multi-functional teams
• limit the total cost of producing the business’s own product or service through
innovative methods (such as business process engineering)
• eliminate duplication and waste between the functions in the business.
Businesses have realised that they can further limit their costs and improve their services
to their customers if they can solicit the co-operation of their suppliers and customers,
hence the development of the supply chain management approach. The concept of this
approach is to:
• form alliances or partnerships with suppliers in the form of informal or formal

agreements
• integrate systems and processes in a quest to limit costs
• reduce duplication and waste in the supply chain
• find innovative ideas to source raw materials or services
• produce and deliver the final product/service to the final customer.
In this supply chain approach, the purchasing function plays an important role as a link
between the internal and external supply chain. So, the purchasing function’s role has
changed from a pure support function to a strategic, value-adding tool in businesses. The
purchasing function has become known as the supply function, which represents the
more strategic role of the purchasing function.
This chapter starts by exploring the concept of supply chain management, and implications
for businesses from a supply (purchasing) perspective. The emphasis in the second part
of the chapter is on finding and choosing the right suppliers, and then forming alliances
with suppliers of strategic materials.
176
Chapter 7 Purchasing Management
7.2 The concepts of supply chain management and

purchasing
7.2.1 Supply chain management
The concepts of the supply chain and supply chain management are equally important.
A supply chain can be defined as:
‘… a set of three or more businesses linked directly by one or more of the upstream
or downstream flows of products, services, finances and information from a source
to a customer.’ 2
or
‘… all those involved in organising and converting materials through the input
stages (raw materials), conversion phase (production or work-in-progress), and
outputs (finished product) of a business. This cycle is often repeated several times
at several places (organisations) in the journey from the initial producer to the
ultimate customer. The finished product of one business is the next business in the
chain’s input.’ 3
The most important characteristics of a supply chain, as highlighted by the above

definitions, are shown in Figure 7.1 on the next page.
In Figure 7.1, the term ‘focal firm’ is used. The focal firm is usually the business where
the most value is created and/or the dominating partner in the supply chain. The Ford
Motor Company, for example, creates the most value (assembles the final product) and
is the most prominent in the supply chain producing Ford motorcars. Edgars will be the
dominating partner in the supply chain of their own brand of clothing.
Now that the concept of the supply chain is clear, one might assume that defining supply
chain management (SCM) should be simple. However, SCM can be viewed from various
perspectives, such as:
• a management-philosophy perspective
• an organisational or network structure perspective
• an implementation tools perspective.
177
‘… all those involved in organising and converting materials through the input stages
(raw materials), conversion phase (production or work-in-progress), and outputs
(finished product) of a business. This cycle is often repeated several times at several
places (organisations) in the journey from the initial producer to the ultimate customer.
The finished product of one business is the next business in the chain’s input.’3
The most important characteristics of a supply chain, as highlighted by the
above definitions, are shown in Figure 12.1.
Focal firm
F
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I
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N
W
A
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M
A Ford Motor
Company C
T
assembly O
E
plant N
R
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Symbol
Material and product flow Supplier network Car dealers
Figurerepresentation
Figure 12.1: Graphical 7.1: Graphicalofrepresentation
a supply chain of a supply chain
In Figure 12.1, the term ‘focal firm’ is used. The focal firm is usually the
Hence, different
business wheredefinitions
the mostare found
value is in the literature,
created and/or theeachdominating
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the authors. The definitions
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Definitions 413
Supply chain management involves the management of the assets and the products, information
4
and fund flows to maximum total supply chain surplus.
178
Supply chain management is a management philosophy aimed at integrating a network (or a web)
of upstream linkages (sources of supply), internal linkages inside the business and downstream
linkages (distribution and ultimate customer) in performing specific processes and activities.
These will ultimately create value for the customer in the form of products and services that are
5
specifically aimed at satisfying customer demands.
Supply chain management is the integration of key business processes from enduser through to
original suppliers that provides products, services and information that add value to customers and
6
other stakeholders.
Regardless of the definition or supply-chain perspective used, each should recognise

that supply chains are composed of processes rather than discrete, often poorly aligned
functions, activities and tasks. A process consists of a set of interrelated tasks or activities
designed to achieve a specific objective or outcome. The supply chain macro-processes
in an organisation are:
• customer relationship management – includes all processes that focus on the interface
between the firm and its customers
• internal supply chain management – includes all processes internal to the organisation
• supplier relationship management – focuses on the interface between the organisation

and its suppliers, which is the focus of this chapter. 7
In concluding the concept of supply chain management, Figure 7.2 (overleaf) provides
a graphical representation of the scope of SCM and supply/purchasing management,
which will put this chapter into perspective.
7.2.2 The development of the purchasing function

As indicated before, developments in management philosophies and practices, such
as supply chain management and technology, have changed the role and execution of
the purchasing function in organisations. The purchasing function in businesses can be
defined as the process of buying and learning the need for:
• purchased materials or services
• locating and selecting a suitable supplier
179
Business Management:
BUSINESS FUNCTIONS:AAn
Contemporary Approach
Introduction
Fourth-tier Third-tier Second-tier First-tier Focal Consumer/

suppliers suppliers suppliers suppliers firm end-users
Figure
Figure 7.2: The scope of supply
12.2: Production-oriented supplychain
chainmanagement as an integrated process
Figure 12.2 is a graphical representation of a production-oriented supply chain,

• such
negotiating the best purchasing terms and following up to ensure on-time delivery
as car manufacturing.
in the most efficient and effective way in order to contribute to limiting the costs and
Suppliers
maximising Focal
profits for the business. First-tier Second-tier Final
firm customers customers customer/
consumer
The concept ‘supply management’ gives recognition that purchasing is not an
administrative task, but has a strategic impact in a progressive approach to managing the
supply base by which suppliers are regarded as extensions of the buying firm and where
they are involved at a strategic level in a long-term relationship, closely resembling a
partnership.8 However, according to Monczka et al 9 ‘supply management’ ‘… can rather
be confusing and “purchasing management” should still be the preferable term, keeping
in mind its more strategic role.’ Additional characteristics of ‘new purchasing’ are that:
• top management recognises the strategic role of purchasing
• purchasing is focused on attaining the overall organisational goals
• other functions and suppliers are involved in major purchasing decisions
• relationships with suppliers have a long-term vision.10
Figure 12.3: Retail-oriented supply chain
180
414

7.3 Suppliers – the most important responsibility of

purchasing
The most important task of purchasing is to appoint the best suppliers for the organisation.
The task includes the search for, evaluation, selection, development and management of
suppliers. Effective purchasing relies on the selection of the right suppliers, particularly
in the supply of strategic materials or services. As a result, the selection of suppliers is
one of the most vital tasks of the purchasing supply function. Competitive prices, reliable
quality, timely deliveries, technical support and good after-sales service are determined
primarily by the choice of the right supplier. For this reason, it is essential for the
purchasing function to proceed systematically and objectively in selecting suppliers.
An important consideration when making this choice is that a long-term relationship

with suppliers of strategic products or services is necessary to ensure effective
purchasing at all times. These products and services will usually be managed through the
integrated supply chain management approach. The interaction between the purchasing
organisation and the supplier thus becomes crucial. Important elements of this type of
relationship are honesty, fairness and frankness.
7.3.1 Finding and selecting suppliers

As indicated previously, with the purchasing of strategic items or services the selection of
the correct supplier is crucial. The purchasing team must ensure not only that the right
supplier is chosen but also that this supplier must serve as a long-term strategic ‘partner’
in the supply chain. With purchasing of non-strategic items or services, supplier selection
becomes an ongoing process.
Existing suppliers have to be constantly reconsidered with each new purchase, especially
in view of changing circumstances and needs. Past performance of an existing supplier
would obviously count a great deal in the selection process. The care taken in the selection
process will be determined by the scope of the transaction, the availability and strategic
value of materials, and whether they are standard or custom-made. Custom-made items
are made for a specific purpose, and are therefore not generally available in the market.
More effort needs to be put into the search and selection of suppliers for these items.
Standard items, however, are freely available at more or less the same quality and price,
and in this case, the choice of suppliers is not particularly important.
181
The process of finding and selecting suppliers starts with compiling a list of suppliers that
may be able to satisfy the need. The list can be compiled from various sources, including
the business’s own supplier register, industrial advertisements, the Yellow Pages, trade
guides, open tenders, shows and exhibitions. The list is then reduced to a short list, taking
into account factors such as financial and technical ability, location, progressiveness,
general reputation and sustainability. The aim is to obtain the best value (of quality, price,
service and delivery) for the business. The final choice of a specific supplier is based
on considerations such as past performance, quality, price, delivery, technical support,
progressiveness, reliability and broad-based black economic empowerment (BBBEE)
score.
Once the choice has been made, the next step is the continuous evaluation of the
performance of the supplier to ensure that it conforms to expectations. Unsatisfactory
suppliers must be eliminated. The objective evaluation of supplier performance is
important because:
• ineffective or unreliable suppliers must be identified
• it leads to an improvement in supplier performance
• it serves as a guideline for the development of suppliers.
7.3.2 Selection criteria for suppliers

Cost, quality and delivery are sometimes regarded as the trinity of supplier evaluation.
These three criteria are probably adequate for certain non-critical and low-value
purchases, but certainly inadequate for others. A possible set of criteria to use in the
selection of suppliers includes:
• quality
• price, cost and cost structure
• delivery
• time
• flexibility
• service
• financial status and risk assessment
• broad-based black economic empowerment (BBBEE) score
182
• operational systems and e-commerce
• technology and process capability
• supply chain management
• environment, ethics and social responsibility
• capabilities, responsiveness and motivation (present and future).
The supplier selection process is a three-stage process with the first two being carried
out consecutively, and the third after a suitable period of time has elapsed. The three
stages are:
• the exploratory stage or pre-evaluation phase
• the selection stage or evaluation phase
• the supplier management (maintenance) stage or post-evaluation phase.
7.3.3 The exploratory stage or pre-evaluation phase

Sources to find potential suppliers
This investigation stage involves identifying possible suppliers and a pre-screening to
reject unsuitable ones with the purpose of creating a pool of potentially suitable suppliers.
There are a variety of sources available to identify suppliers. Many of these can also be
used in carrying out subsequent research on shortlisted suppliers. The most important
sources of information include the following.
Public tenders
If the amount justifies it and the time allows it, there is no better way of making sure that
all potential suppliers are notified of a purchasing need than a public tender.
Internet search engines

Increasing use is being made of Internet search engines. They provide purchasing
managers with a powerful and rapid technique, not only to identify potential suppliers,
but also to provide important information about them.
Company websites
Company websites can often provide a wealth of information, including vision and
mission statements, annual reports, financial statements, product catalogues, new
183
products, brochures, quality systems, equipment, and so on. A company website presents
a purchaser with an increasingly useful technique to attract and create links with
potential suppliers.
Chambers of commerce or business

Chambers of commerce or business can provide very valuable information about possible
sources of supply – local, regional and national. They can often provide information about
bilateral trade agreements if an organisation is considering importing its supplies.
Embassies and consular general officers

These can be very useful for obtaining information about international suppliers.
National associations
There are several national associations and institutes representing various industrial
sectors, as well as professions. These can be contacted in order to obtain a list of
manufacturers or service providers.
Trade directories, trade journals and business directories

Many industries publish directories (usually available on the Web) and journals. The
Yellow Pages and Brabys are two popular business directories that are available in print
and on the Web.
Industrial trade fairs

Many industrial sectors have annual trade fairs (eg the motor industry and the timber
industry) and there are also consumer exhibitions such as the Rand Easter Show.
Financial and industrial newspapers and magazines

Weekly financial publications such as the Financial Mail and FinWeek can provide a wealth
of financial data about suppliers, especially listed companies, as can the Johannesburg
Securities Exchange (JSE), Summit TV and websites such as http://www.FIN24.co.za.
Engineering News is also an excellent source of information.
Other sources include purchasing associations, credit bureaus, existing suppliers and
sales representatives.
184
Pre-screening and rejection to shortlist

The actual process of supplier selection can be long and drawn out, and thus a costly
exercise, especially if it involves visits to potential suppliers. Hence, it is important to
perform an initial screening operation to eliminate suppliers that are unsuitable. The
grounds for eliminating suppliers at this early stage include:
• not complying with the requirements of compulsory documentation such as audited

financial statements, VAT certificates and BBBEE certificates
• not attending compulsory information sessions for tenderers
• a poor financial situation
• previous rejection, such as for poor delivery
• a reasonable risk of interruption in supply.
7.3.4 The evaluation and selection stage

There are several avenues available to purchasing managers to obtain more in-depth
information needed to select suitable suppliers from the pre-screened list in relation to
the selection criteria. Clearly the depth of the investigation and the criteria used can vary
widely depending on the product or service being purchased. Information sources for
supplier research include the following.
Supplier presentations
Suppliers can be asked to do a presentation to a cross-functional team of the organisation
about what they (the supplier) can offer the organisation, which is particularly important
for the purchasing of services.
Supplier visits
Although time-consuming and usually costly, a supplier visit can elicit information about
a supplier that cannot be obtained from a questionnaire (for example, worker attitudes,
safety consciousness, state and age of equipment, overall efficiency of the operation,
and so on). If a cross-functional team visits a potential supplier, it presents an excellent
opportunity not only to obtain first-hand information, but also to carry out an extensive
audit of that supplier. This type of audit can be carried out using a weighted-point
supplier performance evaluation, which will be discussed later.
185
Supplier questionnaires
If it is not feasible to visit a supplier, then the supplier can be provided with a questionnaire
to complete in order to extract information. Extensive use would be made of the selection
criteria in formulating the questionnaire. Supplier provided information is also referred
to as an RFI (request for information). In addition, potential suppliers may provide
limited but valuable information in requests for quotations (RFQs) or requests for
proposals (RFPs).
Evaluation methods range from the informal to the formal. Informal techniques would
include the purchasing manager’s judgement for low-value, non-critical purchases to panel
consensus where a group (eg a cross-functional team) would discuss the relative merits
of each supplier before making a decision. The executive round table is considered to be
a semi-formal method where the purchasing team prepares and delivers a presentation
to the board of directors in order for them to make the choice. The most formal and fair
method is the weighted-point supplier performance rating, where all pertinent criteria
are weighted according to their importance, and each potential supplier is then scored
against them.
After studying the evaluation in relation to the criteria, the purchasing manager or the
cross-functional team will be in a position to approve the supplier or suppliers. This will
be carried out under the purchasing policy guidelines.
7.3.5 The supplier management (maintenance) stage

This stage is part of supplier management. After evaluation, selection and approval of
suppliers, it is essential to maintain and develop them. This is an important period for
a purchaser to motivate suppliers to develop their capabilities and, at the same time,
improve quality and drive down costs. It is also a time for a purchaser to create the
climate of long-term relations by working very closely with the suppliers and providing
assistance wherever possible (for example, anticipated future demand, real-time sales
information about the suppliers’ product or products, and so on).
Supplier performance measurement is an important part of maintaining a relationship

with suppliers. Supplier performance measurement can be done by using the weighted-
point evaluation method with a rating sheet such as the one depicted in Figure 7.3 on page
188. Many organisations base their ongoing measurements on quality, cost reduction,
on-time deliveries, technology and service.
186
The weighted-points plan or system weighs and quantifies scores across different
performance categories. This approach features higher reliability and moderate
implementation cost. The system is flexible because the weights assigned to each
performance category can be changed for different requirements, depending on what
is important for the specific purchase. In Figure 7.3 it is clear that quality (40%) and
cost (25%) are the most important categories for this particular purchase. According
to Handfield et al,11 the key performance categories should be carefully selected, and
weights should be assigned with circumspection. The assignment of weights may be
subjective, and therefore consensus must be reached about the weights through a multi-
functional team.
A set of rules must be in place to compare a supplier’s performance against a

predetermined objective to provide a score for each category. In Figure 7.3 the different
suppliers’ performances were rated on a scale of 1 to 5. There should also be consensus
within a team about the score of a supplier. The weight and the rating of the supplier for
each criterion are then multiplied to get the total score for the particular supplier for the
specific evaluation criteria, eventually adding up to a total overall score for each supplier.
7.3.6 Supplier accreditation

Over a period of time, suppliers who have gone through the selection and evaluation
process successfully can be classified into three groups, namely:
• approved suppliers that have met the requirements of the supplier selection process
• preferred suppliers that have shown that their past performance consistently meets
and exceeds the organisation’s required levels for criteria (such as quality, cost
reduction, delivery and service)
• certified suppliers that have been accredited through an in-depth assessment and
revolving around quality management systems and continuous improvement. This is
the ultimate supplier accolade, and many organisations hold prize-giving functions to
make these awards.
7.3.7 Quality – important determinant of supplier selection

The four main factors in each purchasing decision are the right supplier, the right delivery
time, at the right price and the right quality. Quality is probably the most important of
these factors. Even if the price and the service that a supplier offers are outstanding,
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BUSINESS FUNCTIONS: Chapter
An Introduction
Twelve – Purchasing Management in Supply Chain Management
SUPPLIER EVALUATION
Evaluation Weighting Supplier A Supplier B Supplier C

criteria
Scale Score Scale Score Scale Score
1–5 1–5 1–5
Quality (40)
Systems 10 3 30 4 40 3 30
Defect rate 20 3 60 4 80 4 80
Continuous 10 4 40 5 50 5 50
improvement
Cost (25)
Cost reduction 15 3 45 4 60 4 60
materials
Cost reduction 10 3 30 2 20 3 30
transport
Delivery (15)
On time 10 3 30 4 40 4 40
Fill-rate 5 5 25 4 20 5 25
Service (10)
After-sales 5 3 15 5 25 4 20
service
Complaints 5 3 15 5 25 4 20
resolution
Technology (10)
Process 5 3 15 4 20 5 25
capability
Future capability 5 2 10 5 25 3 15
Total 100 315 405 395
Figure
Figure 12.5: 7.3: A simplified
A simplified weighted-point evaluation11 evaluation12
performanceperformance
weighted-point
423
188
materials or services will not be purchased from the supplier if the quality is in any way
lower than required, because the material or service will not perform the function for
which it was purchased.
Quality is an inseparable part of the other purchasing factors. Top quality is normally
associated with high prices, and high prices are normally associated with top quality.
Quality also determines the number of suppliers. The higher the quality requirements
are, the fewer suppliers there will be to satisfy these requirements. Quality of materials
also influences inventory-holding or the quantity to be purchased. Smaller volumes of
materials can be kept in stock because fewer materials will be rejected during inspection.
In fact, continuous high quality is an absolute necessity in a stockless approach such as
just-in-time (JIT).
It is imperative to control the quality of incoming materials and purchased services. Poor
quality materials and services:
• interrupt the manufacturing process
• expose workers to danger
• have a detrimental effect on the final product
• reduce the satisfaction of consumers and customers of the business
• alter the perception customers have of the business and its products.
Inspection is the normal process used to control quality. It is a method that ensures that
the measurement, design, job performance and quality of materials or services received
satisfy the standards or specifications stated on the order. It also ensures that products
or services are suitable for the purpose for which they have been ordered.
During inspection by quality controllers, samples of delivered materials or services

are subjected to tests. If purchases are made from a supplier that has maintained top
quality standards for years, it becomes unnecessary to inspect its products or services.
The supplier can be certified. It starts with the supplier’s and the buyer’s quality control
functions working together for a specific time. The materials and operation processes
of the supplier are subject to intensive inspection for a certain period. After this, the
supplier is certified and becomes responsible for quality assurance.
189
The South African Bureau of Standards (SABS) has a certification scheme by which
enterprises are encouraged and supported to establish and operate quality-control
systems or quality-assurance programmes. Part of the certification scheme of the
SABS are the well-known ISO 9000 to 9004 and ISO 14000 international standards.
The establishment and operation of these programmes by suppliers is costly. Since the
quality of materials or services is assured, buyers will be prepared to pay high prices,
particularly when high quality is crucial. This is important in the case of integrated
supply chain management where long-term co-operation and integration with suppliers
are sought.
Case study
The cost of incorrect quality of just one part in a vehicle

Toyota announced on 26 January 2011 that it would recall 1.7 million vehicles worldwide over
concerns about possible fuel leakages. The recall followed the discovery of light cracks in engine
fuel pipes. The move saw the world’s largest automaker pull 1.28 million vehicles in Japan and take
over 421 000 in other countries. The news sent shares in Toyota tumbling by 1.87%. The recall was
sizable and costly in terms of administrative, logistics and rework costs and it could have damaged
13
Toyota’s brand name and trust in its technology, which is very important to the company.
7.4 The formation and management of strategic supplier

alliances
Strategic supplier alliances, or partnerships, are formed with suppliers of critical
materials or services with the aim of:
• ensuring long-term availability
• improving efficiency and effectiveness through innovation and elimination of waste

and duplication in the supply chain
• identifying market and improvement opportunities.
The objectives of strategic supplier alliances may include:
• access to new technology
190
• searching for new market opportunities
• improving relations, cooperation and effectiveness.
However, the most important objectives, particularly in businesses that follow the supply
chain management approach or philosophy, should be adding value and limiting costs in
the supply chain in order to provide the end customer with better value and eventually
improve the competitive position of the entire supply chain.
These alliances require:
• extensive collaboration, time and commitment of resources
• information sharing
• confidentiality management
• developing trust
• measuring success
• creating support structures.
Because of the extent of the commitment and involvement, it goes without saying that
a business should not have too many strategic supplier alliances or partnerships. These
should be unique and special. It is therefore obvious that this type of alliance will be
formed only with suppliers of strategic materials or services.
Some of the terms used for the concept of strategic alliances with suppliers include:
partnering, joint ventures, cooperative agreements, collaborative relationships and inter-
organisational partnerships. According to Simchi-Levi et al,14 a strategic supplier alliance
is a multi-faceted, goal-oriented, long-term partnership between two companies in which
both risks and rewards are shared, and that leads to long-term strategic benefits for both
partners. It involves an agreement detailing performance requirements and conditions,
structures to promote successful interaction between parties, organisational alignment,
clear measures of success and high level of mutual commitment.
A complete paradigm shift takes place in the purchasing or supply function when strategic
alliances are formed with suppliers. Table 7.1 (overleaf) shows this paradigm shift.
191
Table 7.1: Paradigm shift in buyer supplier relationships15, 16

Traditional relationship Strategic alliance
• Price determines supplier selection • Multiple criteria for supplier selection
• Short-term contracts or relations with suppliers • Total cost focus
• Many suppliers • Few suppliers
• Little or no sharing of information • Share information, risks and gains
• Competitive negotiations • Open books to partners

With strategic alliances, supply managers are faced with different issues than when
managing suppliers in the traditional way. They are now confronted with issues such
as confidentiality, information-sharing, risk-sharing and the merging of processes and
organisational cultures. The management of risks and extended relationships has become
an important supply issue.
7.4.1 Development and implementation of strategic supplier alliances

A supplier alliance may develop naturally as a result of a long-term relationship and
new demands on the parties to work closer together. A partnership will therefore be
established through the evolution of the relationship starting with a normal purchasing
contract and supplier performance evaluation. The suppliers will improve the quality,
quantity, delivery, price, service, flexibility and supply assurance. After the purchasing
business had been satisfied with the performance of the supplier over a period of time, and
trust between the parties has formed, the purchasing business will rationalise suppliers
– that is, reduce the number of suppliers for a specific material or service and increase
the budget spent with each preferred supplier. When the purchasing business further
rationalises its supply base to just one or two suppliers for a particular item or service,
then supplier alignment takes place. This means that the purchaser’s and supplier’s
systems are linked, communication is improved and a medium-term commitment made.
Lastly, a supplier alliance will develop with the characteristics that are highlighted by
Table 7.1 and throughout the chapter.
In contrast to the natural development of a supplier alliance, the actual need for an
alliance may arise due to external pressures, such as increased competition, technological
developments or a shortage of strategic materials. The need for an alliance may also arise
as a result of a new strategic direction of the purchasing business, or a need to innovate.
192
Whether the need for an alliance arises from market pressure or an internal source, a
process approach should be followed to implement the alliance. This includes:
• preparing the business for the alliance
• identifying and analysing the strategic partner
• establishing and managing the alliance
• evaluating the supplier-alliance’s performance.
A nine-step process for the implementation of strategic supplier alliances is illustrated

in Figure 7.4.
The first step is to ensure that the purchasing and supply strategy is aligned with
the business’s strategic goals and corporate strategies. The concept of supply chain
management and strategic supplier alliance should be an expansion of corporate strategy
and cannot be implemented on its own.
In the second step, a team takes responsibility for planning in detail, creating the
‘infrastructure’ for the management of the process, and implementing the alliance. A
multi-functional team may be the best option because of the broader scope of expertise,
and the fact that the strategic alliance has business-wide (organisational), not functional,
scope.
The third step is to identify the products, materials or services that will justify the use of a
strategic alliance. This could be done by categorising the items, materials or services that
the business needs to purchase to enable them to operate, using the supply positioning
model as indicated in Figure 7.5 on page 195.
The items are categorised by the amount of money spent on them and the risk (the
complexity of the item and/or competition) in the supply market.
Figure 7.5 shows the specific characteristics of the item or service, the supply risk
involved, the amount spent on each category and the appropriate supply strategy for
each of the categories. The critical quadrant is characterised by:
• highly customised and unique products and services, which are crucial inputs to
producing the final product or service of the business
193
the preparation of the business for the alliance;
the identification and analysis of the strategic partner;
the establishment and management of the alliance; and
the evaluation of the supplier-alliance’s performance.
BUSINESS FUNCTIONS:
A nine-step processAn
forIntroduction
the implementation of strategic supplier alliances is
illustrated in Figure 12.6.
Align purchasing and supply strategy with

corporate strategy
Team plan, create process and implement
Identify products/materials and services
Identify candidates
Evaluate probable alliance
Executives give commitment
Negotiate issues
Nurture alliance
Assess performance continuously
Figure 12.6: The implementation process of strategic supplier alliances or partnerships

Figure 7.4: The implementation process of strategic supplier alliances or partnerships
• high amounts spent on the product or service
• 428
a limited number of suppliers operating in the particular market.
The critical quadrant, therefore, contains the items of services that are likely for a
strategic supplier alliance.
194
highly customised and unique products and services, which are crucial
inputs to producing the final product or service of the business;
high amounts spent on the product or service; and
a limited number of suppliers operating in the particular market.
The critical quadrant, therefore, contains the items of services that are likely
for a strategic supplier alliance.
High Leverage Critical

Competitive market Monopoly
Substitution possible Strategic importance
Standard product High value
specifications High spending
High spending
Amount spent
Routine Bottleneck
Competitive market Monopoly
Substitution possible Barriers to enter market
Standard product Substitution difficult
specification Geographical/political
Low spending complexity
Low
Low Risk and complexity High
Figure
Figure 12.7: The supply 7.5: The
positioning model 17
supply positioning model17
Step four is to identify candidates (suppliers) for strategic alliances. As indicated 429
previously, the alliance may be formed as a consequence of a long-term relationship with
a particular supplier. This supplier will then be an obvious candidate for the alliance.
If a business decides to take a new strategic direction (eg a new product), or if present
suppliers are not suitable, then the business will search for a strategic alliance partner on
the open market with an initial investigation of the candidates’ suitability.
The fifth step entails a detailed evaluation of the potential alliance partner. Information
that is needed to select a supplier for the strategic alliance may be collected from
sources such as bank reports, credit bureau ratings, proof of ISO standards, supplier
questionnaires, financial statements, Internet searches on the history of the supplier and
the reputation of its management team, sales representatives, industry associations and
performance records. A visit to the supplier by a multi-functional team consisting of, for
example, representatives of the purchasing, engineering, operations, quality assurance,
and finance functions could be of great value. The key to the successful implementation
of a supplier alliance is choosing a partner wisely. The partner should have a compatible
culture, a common strategic vision and a supportive operational philosophy. It is not
necessary for the organisational culture to be identical. Rather, the strategic intentions
and philosophies should be compatible to ensure that core competencies and strengths
are complementary.
195
The sixth step involves the commitment of the executives of the purchasing business and
the supplier, signing of documents and assigning responsibility for further planning and
implementation of the alliance.
The seventh step is to negotiate various issues with the candidate. Negotiations will
often be used to implement and maintain the partnership agreement. Cost and several
other issues will be the topic of negotiations. These issues include allowable costs,
volumes, asset investment, risk and reward sharing, agreement exit clauses, continuous
improvement targets, performance incentives, capacity, agreement length and renewal,
problem resolution mechanisms, ownership of intellectual property, joint resource
commitment, technological support and assistance, and non-performance penalties.
The eighth step is to nurture the alliance. Common goals and objectives are set and
teams are assigned to take responsibility for the collaborative relationship, for meetings
to promote strategy alignment, to encourage trust, and to demonstrate a mutual
commitment to the relationship.
The ninth step is often seen as part of the previous step. Continuous performance
assessment is an important tool for maintaining the alliance and the entire supply chain.
7.4.2 Managing supplier alliances

Some organisations manage supplier alliances by assigning alliance managers to each
supplier alliance. Others use an alliance board to oversee alliances and co-ordinate
alliance managers in various divisions or different geographic regions.18 Managing the
supplier alliance starts with the implementation process (as explained before). Strategic
goals and tactical and operational objectives should be mutually determined when the
alliance is implemented (see step 8 in the implementation process). These goals must
be tracked, reviewed and updated frequently to make improvements over the long term.
Goals should be translated into specific performance measures that can be continually
tracked.
The performance measurements should be two-way. For example, if the goal is the
reduction of inventory, then it should apply to the entire supply chain. Inventory
should be reduced for both the business and the suppliers. Feedback on performance
can be provided through formal and informal methods. Formal, annual reviews by top
196
management focus on examining and updating strategic goals. More informal quarterly
and monthly reviews by management focus on tracking and reviewing strategic goals
and operational performance.
These enable changes to be made in operating practice in order to achieve strategic goals,
and create an avenue for continuous improvement projects to be identified. Weekly or
daily reviews are by nature more informal. Managed by key contacts, they are intended
to solve specific problems and identify potential opportunities for improvement. These
are critical for resolving and avoiding conflicts and allow key contacts to develop close
working relationships.
The assessment of the supplier alliance should be made in various areas, depending on the
purpose of the alliance. If the supplier alliance was formed to improve competitiveness
(which is the most important aim of supply chain management), the areas to assess
should include assessment of the product, process, quality assurance and the business
organisation.
As for the product, the focus is on establishing and improving its quality and value.
This is done by quality control and inspection. At the process level, the supplier’s (and
purchasing business’s) production processes are closely investigated. The quality of
the product strongly relates to the production process. The quality control process and
state of the machinery are examined in order to identify wastages and non-value-adding
procedures in the production or material flow processes. Assessing the quality assurance
system includes establishing the quality awareness of personnel at all levels within the
functional areas, and examining the development, maintenance and refining of quality
inspection procedures in the supplier’s entire business. On the business’s organisation
level, the supplier is assessed on financial aspects and the quality of the management.
These are crucial for the future of the alliance.
The success of the supply chain depends on the success of supplier alliances in the specific
supply chain. The performance measurement methods for supply chain management
can therefore be used as a basis for measuring the performance of alliances. The most
popular methods are the balanced scorecard and the SCOR model. Based on the balanced
scorecard, the supply chain scorecard contains the dimensions of customer performance,
business processes, financial, innovation and associated metrics in line with the objectives
of supply chain management. Another supply chain performance measurement tool is
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the SCOR (supply chain operations reference) model where reliability, responsiveness,
flexibility, cost and assets performance categories are measured on three different levels.
7.5 Summary
The fundamental aim of the supply chain management approach is to form alliances or
partnerships with suppliers (through formal or informal agreements and integrated
systems and processes) in a quest to limit costs, duplication and waste. It further aims to
find innovative methods to deliver raw materials or services to the business, with the end
goal of producing and delivering the final, quality product or service to the final customer.
In this supply chain approach, the purchasing function plays an important role, linking
the internal and external supply chains. In a supply chain management context, the
purchasing function’s role has changed from a pure support function to a strategic, value-
adding tool in businesses, and is known as the supply function, which represents its more
strategic role. This chapter has examined the concept of supply chain management, its
implications for businesses from a purchasing perspective, and the related management
tools.
In this chapter the most important task of the purchasing function – searching for and
selecting the right suppliers – has been discussed. Purchasers choose suppliers by means
of a process of elimination. The process starts with compiling a list of suppliers that may
be able to satisfy the need. The list can be compiled from various sources. The list is
then reduced to a shortlist, taking into account factors such as financial stability, audited
statements, VAT registration, income tax status and BBBEE certification. Suppliers on the
shortlist are then requested to give a quote or negotiations are conducted with them. The
aim is to obtain the best value (of price, quality, service and delivery) for the business. The
final choice of a supplier is based on considerations such as past performance, quality,
price, delivery, technical support, progressiveness and reliability. Once the choice has
been made, the next step is the continuous evaluation of the performance of the supplier
to ensure that it conforms to expectations. Unsatisfactory suppliers must be eliminated.
There have been changes in the purchasing function from traditional purchasing
to strategic purchasing, or supply management. Traditionally, purchasing regarded
suppliers as adversaries and maintained an arm’s-length relationship with them, which
could be terminated at the first sign of unsatisfactory performance. Supply management,
or strategic purchasing, is a progressive approach to managing the supply base, by which
suppliers of strategic products or services are regarded as extensions of the buying firm,
198
and are involved at a strategic level in a long-term relationship or strategic alliance,

resembling a partnership.
Read the case study and answer the questions below.
Case study
Supplier relations to the next level at Foschini

The Foschini Group (TFG) bought its long-standing clothing manufacturing supplier, Prestige
Clothing, to boost its competitive advantage. Prestige has been a supplier to TFG for 20 years, and
handled 25 per cent of TFG’s local manufacturing. The two companies worked closely together in
the supply chain to set new benchmarks and create ways to shorten lead times, while maintaining
consistent quality and costs. In order to better compete with international low-cost manufacturers,
they signed a service-level agreement a few years ago.
This brought the two companies closer together, and TFG contracted Prestige to increase
the volume of its manufacturing. Prestige became the cornerstone manufacturer for TFG. The
acquisition of Prestige by TFG was the natural next step. The streamlined processes between the
two entities (now in the same group) will ultimately allow for the necessary speed and flexibility for
19
the group to grow market share.
Questions
1. How many and which of the concepts discussed in the chapter could you recognise in the case
study above?
2. What do you think are the reasons for TFG’s purchasing Prestige Clothing?
3. Will supplier evaluation still take place?
4. What do you think the performance measurements will be for the alliance?
5. What kind of integration took place?
Endnotes
1. Lambert, MD. (ed). 2006. Supply Chain Management: Processes, Partnerships, Performance. 2nd
ed. Florida: Supply Chain Management Institute. p. 1.
2. Monczka, RM, Handfield, RB, Giunipero, LC, Patterson, JL & Waters, D. 2010. Purchasing and
Sup-ply Chain Management. Hampshire, UK: Cengage Learning. p. 9.
199
3. Chopra, S & Meindl, P. 2013. Supply Chain Management: Strategy, Planning and Operations. 5th
ed. Essex, UK: Pearson. p. 16.
4. Chopra & Meindl, Supply Chain Management, p. 16.
5. Hugo, WMJ & Badenhorst-Weiss, JA. (eds). 2011. Purchasing and Supply Management. 6th ed.
Pretoria: Van Schaik. p. 17.
6. Lambert, Supply Chain Management, p. 2.
7. Chopra & Meindl, Supply Chain Management, p. 16.
8. Handfield, RB, Monczka, RM, Giunipero, LC & Patterson, JL. 2009. Sourcing and Supply Chain
Management. Hampshire, UK: Cengage Learning. p. 8.
9. Monczka et al, Purchasing and Supply Chain Management, p. 12.
10. Handfield et al, Sourcing and Supply Chain Management, p. 8.
11. Handfield et al, Sourcing and Supply Chain Management, p. 312.
12. Hugo & Badenhorst-Weiss, Purchasing and Supply Management, p. 85.
13. Ito, S. Yet another Toyota recall. IOL Newsletter, 26 January 2011. Available: http://www.iol.
co.za/motoring/cars/toyota/yet-anothertoyota-recall-1.1017247#.VBBassKCnyE. (Accessed
10 September 2014).
14. Simchi-Levi, D, Kaminsky, P & Simchi-Levi, E. 2009. Designing and Managing the Supply Chain:
Concepts, Strategies and Case Studies. New York: McGraw-Hill. p. 247.
16. Leenders, MR, Fearon, HE, Flynn, AE & Johnson, PF. 2002. Purchasing and Supply Management.
12th ed. New York: McGraw-Hill. p. 321.
18. Wisner, JD, Tan, K-C & Leong, GK. 2012. Supply Chain Management: A Balanced Approach. 3rd ed.
Hampshire, UK: Cengage Learning. p. 121.
19. Local clothing sector boosted by TFG acquisition of fashion manufacturer. FMCG Supplier
News, 30 January 2012. Available: http://www.fastmoving.co.za/news/supplier-news-17/
local-clothing-sector-boostedby-tfg-acquisition-of-fashion-manufacturer-1245. (Accessed 10
September 2014).
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Chapter 8
OPERATIONS MANAGEMENT
Learning outcomes
• define operations management (OM) and understand the importance of OM for any
organisation
• understand the nature and dynamics of OM
• link OM with creativity, design, technology and innovation
• explain the essence of OM in terms of value and time
• understand OM as the transformation function
• distinguish the different OM systems in terms of the types of operations
• understand the concepts of OM in terms of process management
• explain OM in terms of productivity and the performance objectives
• understand operations strategy
• explain OM planning and control in terms of demand management and capacity management
• explain OM planning and control in terms of techniques used for forecasting, inventory
management and scheduling
• understand the OM body of knowledge in terms of project management, total quality
management (TQM) and safety, health and environmental (SHE) management.
8.1 Introduction
The aim of this chapter is to establish a learning foundation for what is known as
operations management (OM), or production and operations management (POM).
The broad definition of POM is all those value-adding actions, activities and processes
needed for the fulfilment of customer expectations, requests and needs. Making products
and providing services is the ultimate purpose of business so all managers are, in
fact, operations managers. This chapter focuses on general OM terms, core concepts,
principles and functions.
We are created to be creative. Operations management is challenging and satisfying

because it creates all valuable, therefore sellable, things, and everyone lives by selling
something. Operations management is for those who want to be creative and make
things happen, and not for those who just dream, watch things happen and wonder what
happened.
Operations management passed through several historical stages of development. Stone-

Age implements used for food production became more refined over time, and later metal
was used to make tools for processing food and making clothing and shelter. This phase
overlapped with the development of more modern craftsmanship, including weaving and
pottery. Copper and bronze ushered in a new era of metallurgy – the Bronze Age – and
today we use platinum for computers and jewellery. Private property was introduced,
and laid a foundation for a free-market economy.
Operations management has its origins in the Industrial Revolution. Adam Smith, for
instance, was known for his emphasis on the specialisation of labour. Frederick Taylor,
Henry Gantt and Frank Gilbreth are among the prominent contributors to OM. Henry
Gantt devised charts for scheduling and Frank Gilbreth (and his wife, Lilian) used time-
and-motion studies. Taylor used process analysis, Shewhart used statistical sampling and
Deming applied other statistical methods. The list goes on. The first OM textbooks were
written in the 1950s by Robert Fetter and Elwood Buffa. In the last 100 years, production
management has evolved from a set of newly discovered ideas to a portfolio of developed
and integrated concepts. Frederick Taylor is the father of scientific management with
the accent on the efficient use of time in the workplace. His time studies were taken
to the Midvale Steel Company where he tried to discover the relationship between the
horsepower a man exerts and the tiring effect that this work has on a worker.
Frank Gilbreth is another pioneer in scientific management. As a bricklayer and building

contractor he became interested in saving time by studying needless, ill-directed and
ineffective motions in the construction process. In his most famous study, he analysed the
motions of some bricklayers, and reduced them from 18 to five, and more than doubled
a bricklayer’s productivity without the need to increase his effort. Today, we still learn
from these pioneers, as value and time become increasingly important.
The principle of mass production was invented in ancient Egypt, and the wealth earned
by this led to the founding of the great Egyptian nation state. With the advent of the
Industrial Revolution in the 19th century, a new factor of production began to emerge,
namely industrial technology. Centres of wealth and power shifted to the factory and the
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Chapter 8 Operations Management
industrial sector. In the 20th century, production began to flourish with the invention of
electricity, the internal combustion engine, the steam engine, railways, cars and other
means of transport. Henry Ford was the first to use the assembly line to mass-produce
the Model T Ford.
It is clear that economies are dependent on these inventions. No small or large business
can be a business without a value-added operation. Unfortunately many operations are
not safe and healthy for its employees and/or to the environment. Quality output cannot
occur if human beings and other resources are at risk during and after the production
process.
Operations management therefore also focuses on the science of occupational health

and safety (OHS). Business management centres on OM and without this function, no
other business function is possible. This is emphasised through the devotion of various
qualifications focusing on OM at many tertiary educational institutions in South Africa.
The following section elaborates on the importance and dynamics of OM.
8.2 Operations management is dynamic

Pycraft et al1 provide several reasons why OM is regarded as dynamic. The first is its
importance in terms of adding value and creating products and services upon which
we all depend. This is the very reason for any organisation’s existence. Secondly, OM is
also exciting in terms of creativity and the changes in customer preferences. Operations
management therefore contributes to promoting creativity and building capacity and
capabilities that will allow organisations to respond to so many changes.
8.2.1 The nature of operations

Any machine, factory, workshop, plant, assembly line or combination of these is
associated with an operation. By definition, an operation is something (also referred to
as the technical core) that produces, works, is in action and has a value-adding effect. The
operation of anything relates to a movement, planned campaign, piece of work, project
or something that works. Any event, activity or process where inputs are changed,
improved, converted, transformed or assembled to a planned, designed or anticipated
output is an operation.
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Stevenson2 provides a simple definition for an operation by referring to it as the core or

the ‘engine’ of the organisation. Operations management is responsible for managing that
core. No car, business or institution of any sort can exist without this ‘engine’ – needless
to say; engines differ in size, effectiveness, power, speed, efficiency, and so forth. If an
operation is creative and possesses these characteristics, it is also certainly dynamic.
8.2.2 Creativity is always linked to operations

Operations management (OM) gets as close as we can in business life to the act of creation.
It is concerned with creating the products and services upon which we all depend.
Operations management is about change, creativity, value adding and productivity. Since
this is the very reason for any organisation’s existence, OM should be at the heart of its
affairs.
Operations management involves:
• product and service design
• demand and capacity planning
• production system design
• production planning and control
• improvement, problem-solving and maintenance.
All managers, irrespective of their job title, create products and services for customers.
In that sense, all managers are operations managers. Slack et al3 state how challenging
OM is becoming. Managers have to find solutions to technological and environmental
challenges. There are also pressures to be socially responsible and the increasing
globalisation of markets and knowledge management.
Humans are talented and commissioned to create and recreate. This attribute is important
to overcome all the operational challenges of this imperfect world. Creative ideas can
have a large impact on operations – on processes, concepts, product packages, systems,
technology, infrastructure, layout, resources, and combinations of these operations.
If simple techniques, like learning to think and innovate, can generate ideas causing
significant savings or improvements, then one can understand why OM is associated
with the excitement experienced by innovative organisations. It can have an enormous
financial impact on a business. Researchers therefore need to live in an environment
204
in which ideas spawn new concepts, which in turn lead to new products, patents and
technology or system designs that may lead to new business operations.
All operations have certain process technologies, which assist the transformation process
and make production easier. Here, we refer to all sorts of machines, alarms, gadgets and
gauges to support the primary process. Trolleys, scales, racks, cleaning tools, mechanical
tools, calibration of filters and machinery set-up are a few examples.
Measurement is central to any operation, such as in an inspection process. Quality

demands accuracy, precision, reproducibility and calibration. Some of the gauges used
for inspection are:
• digital gauges
• ring gauges (used to measure outside diameters of parts)
• line-graduated gauges (eg rulers and tapes)
• snap gauges
• gauge blocks (used as a precision measurement standard for calibration of other

measuring instruments).
8.2.3 Creative design is inherently part of operations

Everything that exists started as a design. Good things come from good designs and
good OM. Conversely, bad things usually originate from bad designs. A good construction
business can hardly build a good house if the design is not good. If the design of a house
is not good, the construction will cause endless frustration. It is difficult – or even
impossible – to improve faulty designs of products or systems. If the re-engineering of
a design is not necessary, the original design was not too bad. Operations management
therefore includes the science of design.
Designers must try to design for ease of assembling, joining, coupling and handling (for
example one-way assembly). Other guidelines avoid using special fasteners and fragile
designs. In general, one must design for operability, quality and cost-effectiveness. The
durability of an acrylic product (such as a custom-made hearing protector) makes it
much less costly than a disposable foam earplug over a short period of time.
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8.2.4 Operations are associated with technology and innovation

Technology is associated with new gadgets, devices, machines or processing that make
life easier. Technology involves all applicable operations, materials and knowledge in
order to satisfy a need with a view to improving people’s private or work environments.
This includes discoveries and inventions, provided that they can be applied economically.
In most cases, technology originates when people want to overcome problems, which
leads them to search for a solution. During the research process the conflict must be
managed correctly so that it can lead to the development of a new way to get things done.
Technological innovation follows when an idea is converted into a usable technique or
technical application. Innovation, therefore, refers to technology that is applied for the
first time. Technology refers to the application of existing knowledge to methods.
To give the business a competitive advantage, the process of innovation must be managed
effectively. Innovation may lead to diversifying or eliminating some existing products.
Innovation, in the sense of the development of new markets and products, is important
for the continued existence and growth of technologically sophisticated businesses.
Rapid prototyping (RP) is an example of a computer-based technology for quickly

building physical prototypes. This technology enables businesses to move to a superior
performance curve in terms of faster service and lower cost. Davis and Heineke4 list some
examples of technology applications for automation. These are:
• machining centres where machine tools are changed automatically as part of the
process
• product design using computer-aided design (CAD)
• industrial robots – programmable machines that can perform multiple functions
• flexible manufacturing systems – facilities that are automated to some extent, and
produce a wide variety of products
• information system technology in manufacturing – software systems that help with

enterprise resource planning (ERP), supply chain management (SCM), customer
relationship management (CRM) and new product development (NDP).
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8.2.5 Value and time are of the essence for any operation
No factory produces goods for the sake of staying busy, or transforms or assembles
resources just for fun. All operations managers are value driven, a pursuit during which
the worth of all inputs is increased by each transformation process in the eyes of the next
customer in the process. Hence, the focus of this chapter is on value, and more specifically,
on its main dimension, time and the processes linked by people as value chains.
The purpose of any process is to create, improve or make things usable. Raw iron has a
relatively low value compared to the steel in a vehicle. The economic value of the output
must be higher than the economic value of the input. For the complete supply chain, ‘value
added’ can be described as the difference between the value of inputs at the beginning
of the supply chain5 and the product value at the end of the supply chain. Stevenson6
defines ‘value added’ as the difference between the cost of inputs and the value or price
of outputs.
The essence of any transformation process (be it micro-, macro- or any manufacturing
system) is to add value and eliminate waste. This brings us to the familiar age-old
concepts of productivity, effectiveness and efficiency. All OM concepts relate to optimising
resources, which implies value. Most of these OM principles relate to the well-known JIT
(just-in-time) philosophy.
JIT systems eliminate waste, promote value-adding activities and quality, and focus on
lead time reduction. JIT is also referred to as ‘lean production’ (to use less of everything
and to focus only on adding value). Both JIT and total quality management (TQM) are
seen as part of the same movement to deliver what the internal and external customer
wants. Since TQM is a holistic and integrative approach to quality, it does not exclude any
area of the organisation. It focuses on all resources, processes, products, functions and
other areas, and has several objectives. Quality ‘chains’ and quality ‘circles’ are concepts
that relate to value. A value chain is the ideal series of transformational processes by
which each step increases the value of an item. OM promotes a systematic approach (for
example value analysis) to reducing the cost of a product without impairing its quality,
value or function. OM also teaches the theory of constraints so as to maximise flow rate
through bottlenecks and constraints.
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Schonberger and Knod7 advocate lean production that saves time and space. Principles
that promote value and save time include:
• cutting flow time (lead time, waiting time, etc), distance and inventory (sub-assemblies
and idle work-in-process) along the chains of customers
• cutting set-up, changeover, get-ready and start-up lead times
• just-in-time production, or at the customer’s rate of use
• decreasing cycle intervals and lot size
• knowing and teaming up with the next and final customer, who is referred to as the
next process
• committing to continual and rapid improvement in quality, cost, response time,

flexibility, variability and service
• creating a unified purpose via shared information and team involvement in planning
and implementing change
• reducing the number of product or service components and operations (processes),

and the number of suppliers to a few good ones
• organising resources into multiple chains of customers, each focused on a product or

service (or customer family)
• creating work-flow teams, cells and ‘plants in a plant’
• utilising human resource potential and creativity by investing in human capital or

capacity (as the internal customer) and quality of work life (QWL)
• investing in cross-training for mastery of multiple skills
• maintaining and improving present equipment and human capital before considering
new resources
• automating incrementally when process variability cannot be reduced by other means
• aiming for streamlining and simplicity by making it easy to provide goods or services
without error or process variation
• minimising administration and reporting by recording and processing one’s own data
at the workplace
• ensuring that process owners and front-line improvement teams have the first chance
at problem-solving before experts are brought in.
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8.3 Operations management defined

8.3.1 Operations is the transformation function
Some resources are for the transformation process (transforming resources) while
other resources are being transformed (transformed resources). Any manufactured
product we see around us, sit on, eat, read, wear, buy and enjoy comes to us courtesy
of operations managers who planned and controlled the transformation processes
(production systems) involved. It is clear that OM is a dynamic and creative discipline.
Business life is primarily concerned with creating goods and services, putting OM at the
heart of its existence. Whether micro- or macro-processes are concerned, students will
realise that all managers directly and indirectly transform resources and create products
and/or services for internal and external customers.
All operations should be value-adding processes in which inputs are transformed into
outputs. The single most important input-transforming resource is the human component.
Human beings act upon transformed resources, and are present in all operations.
Productivity depends directly on human capabilities (competence, qualification and
motivation) to produce effectively and efficiently. These capabilities must be maintained
and sustained. Quality of work life (QWL) is one strategy that directly affects operations.
Definition
Operations management (OM) deals with the planning and control of the inputs, process and
outputs of operations.
Planning and control of inputs refer to transforming resources (people, creativity, capital,
R&D, technology, learning, market information and feedback) and transformed resources
(energy, materials and clients). The planning and control of transformation systems refer
to macro-processes, micro-processes, productive systems (service shops, work centres,
assembly lines and job shops) and process technologies. The planning and control of
outputs refer to value, goods and services, improvements, new designs, technology,
delighted markets, competitive advantages, sustainability, and so on. Table 8.1 (overleaf)
provides a better understanding of the transformation process.
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Table 8.1: Examples of transformation processes

Business Inputs Transformation Outputs
type
Hospital Patients, doctors, Medical procedures, therapy, Improved quality of life,
nurses, theatres, service delivery, professional satisfied clients, recovered
rooms, ambulances, handling and care of patients, and healthy patients,
equipment application and administration extended life expectancies
of medicine
Bakery Ingredients (eg Food preparation according to Cakes, pies, and bread
flour, sugar), specifications, machine set-up, ready for delivery
equipment (eg mix ingredients, mould, bake
ovens), trained and pack baked goods
people (eg
bakers who have
knowledge of
recipes)
Custom-made Trained Filters calibrated, soft moulds Workers have personalised
earplugs (eg audiometrists, are transformed to acrylic hearing protectors
Variphone) materials and earplugs, filters and cords (comfortable earplugs),
equipment to make are assembled, names are worn with ease, protecting
moulds, transport embedded, earplugs are neatly them from noise so that
to visit factories, packed, workers are personally noise-induced hearing loss
laboratory fitted, seal test is done (NIHL) is eliminated
8.3.2 Process management is inherent to OM

Operations management (OM) is relevant to all functions of the organisation because
all functions manage processes. In this context, operations refer to an activity, while
operations as a function remains as a part of the organisation that produces products
and services.8 It is therefore important to understand that the transformation process
is not confined to the factory. A process view of the business is important, because an
organisation is only as effective as its processes. Processes cut across departmental
boundaries and this view goes beyond the main manufacturing process. This nested
process concept reinforces the need to understand the interconnectivity of all processes
and operations in the business. This also helps people to understand how their small
contribution adds value to the whole operating value chain, which is the cumulative work
of all the processes in the business. Value to the customer at a loss or expense for the
business is not productive, sustainable or profitable. The people in any operation are the
catalyst that makes the whole operation come alive.9
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Different types of operations systems

Pycraft et al10 summarise the main differences of how operations output vary in terms of
volume, variety, visibility, velocity and variation in demand for output. Process design is
primarily influenced by the volume-variety relationship. For example, project processes
provide low volumes with high variety, while continuous/repetitive processes provide
low variety at high volumes. Again, where service operations are concerned, professional
services offer variety and low volumes, while mass services offer low variety at high
volumes. Operations that can customise their variety of offerings on a large scale will
obviously have an edge.
Process design, however, should not be optimised at the expense of others. It should seek
strategic fit as building blocks for the whole value chain. This also implies that particular
attention must be paid to interfaces and the need for cross-functional co-ordination.11
The basic nature of all operational processes is similar in that they transform input
resources into outputs. Processes have the following characteristics that distinguish
them from one another.
• The number of items that are produced by the operation over a given period of time
determines the process type. The greater the volume of items of one type of product
that is made, the greater the economies of scale benefits that may be obtained through
standardisation and repeatability of the process. The most important implication of
this characteristic of the operational process is its influence over the cost to make a
product or deliver a service. This characteristic may lead to mass production systems
such as repetitive production systems.
• The market segment and product range determine the different items that are
produced by the operation. The more types of products (or greater variety of items)
that are made by the same operation, the greater the flexibility, cost and ability to
provide non-standardised products or services.
• Process velocity refers to process performance in terms of the ratio of total throughput
time for a product in terms of the value-added time. Davis and Heineke12 define value-
added time as that time when work is actually being done to complete the product or
deliver the service.
• The visibility of output refers to how much of the operation’s activities the customer
is exposed to. In high-visibility operations, the customer experiences most of the
value-adding activities firsthand and so must be able to deal with short waiting
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tolerance. In low-visibility operations, the customer does not have much contact with
the operation itself or no contact at all.
• A particular demand pattern for the output of the operation, which may be highly
variable, irregular, non-routine and unpredictable, is another process characteristic.
The important implication of this characteristic is the possibility of a sudden and
dramatic change in the operations capacity required to supply products and services.
Operations likely to receive seasonal variations (for instance, hotel resorts in coastal
locations) must be able to deal with variation in demand levels from full occupancy
during peak season to mostly under-utilisation for the remainder.
All processes have different lead times. Operations management always attempts to
reduce or eliminate lead time elements in a process. The primary lead time elements are:
• queue time (the period for which a job stays in the queue at a work centre)
• processing time (the actual time needed to process the job)
• set-up time (the time needed to prepare equipment for processing a new job)
• waiting time (the idle time between the processing of a job and its transportation to
the next work centre)
• inspection time (the time needed to check whether the job complies with quality
standards)
• transportation time (the time needed to transport the job from one work centre to
the next).
8.3.3 OM performance objectives

Large, well-known companies, such as Mercedes-Benz, General Electric, McDonalds and
Vodacom, are all known for service delivery or other features, such as quality, speed or
cost-effectiveness. These are referred to as performance objectives. The many dimensions
of quality (such as reliability, consistency, low variability, responsiveness and others)
can also be regarded as performance objectives. Even health and safety becomes ‘core
business’ for some businesses, for example mines. It could be a strategic performance
objective such as to eliminate noise-induced hearing loss (NIHL).
In addition to the quality objective, operations managers also contribute to business

strategy by achieving world-class status by other means.
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As discussed in Section 8.2.5, in terms of lean production JIT (and TQM) eliminates waste
and adds value and quality. JIT (just-in-time) is associated with advantages, such as
low lead times, inventory reduction, dependability, speediness, flexibility, low cost and
affordability.
The saying ‘there is no such thing as a free lunch’ can be taken as the bottom line of
the trade-off theory. Operations managers must consider trading off one aspect of
performance against another. This trade-off model of performance has been challenged
to give the best of both worlds to the market. The best example is the quality versus cost
trade-off.
The main job of operations managers is to change whatever in the operation is causing
one performance objective to deteriorate as the other improves. So the trade-off is the
mainstay of continuous improvement.
8.3.4 Productivity is central to OM

If a small business manufactures a table ineffectively and inefficiently it has nevertheless
been ‘productive’ in the sense that it actually produced something, although the output
did not fully justify the input. Hence, we need measures of productivity, since the
operations manager’s key challenge will always be to increase the value of output relative
to the cost of input. More output with the same amount of input increases productivity,
but the same level of output using less input also increases productivity. There are many
configurations, but the bottom line is that sustainable profitability is impossible without
productivity. This means the output value (usable outputs), after being exposed to a
uniquely designed transformation process, must be higher than the value of the separate
pieces of available inputs (resources).
8.3.5 Macro-productivity
Macro-productivity refers to the context of a nation’s entire production. The gross
domestic product (GDP) per capita is the measure of the value of the total output of a
country divided by its total population (seen as the inputs to produce the outputs). A
national economy is made up of individual businesses and the productivity of the country
is the sum of the productivity of all its individual operations. A macro-perspective on
productivity management refers to the country/economy as a whole and the governance
of productivity growth.
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The National Productivity Institute offers many suggestions such as:
• infrastructural programmes and investments
• a well-functioning legal and accounting framework, creating a market-friendly

environment
• research and technology support
• promotion of small and medium enterprises
• export trade stimulation
• education and training policies
• a healthy labour market.
8.3.6 Micro-productivity
Micro-productivity refers to individual business’s operations. It focuses on how well
operations perform in terms of value, effectiveness, efficiency, utilisation, impact and
quality. The first measure is the ability to achieve production. Secondly, productivity is
measured by means of the following quotient: ‘output divided by input’.
Productivity measurement defined

It is imperative to define productivity correctly. Merely saying it is ‘output divided by
input’ is not the whole story. One can be ‘productive’ without really producing usable
output. In other words, we can have high efficiency, but low effectiveness. Effectiveness
is the ‘how good’ or ‘how valuable’ dimension as related to market needs. Productivity
is, therefore, not only efficiency, but also the quality of inputs, resource utilisation and
effectiveness. These are terms associated with quality management, which is vital for
productivity.
These qualitative improvements in inputs are significant because they create sustainability,
durability and stability, and cause output to increase without any additional capital or
human resource inputs. This brings us to a more accurate quotient for productivity:
Output income (ie usable output quantity)

= (P) Productivity
Input expenses (ie available input quantity)

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Productivity is a complex topic because of the different measures of productivity. The

ability to achieve production is simply not enough. For instance, one may produce things
without having a market to sell them to. An entrepreneur may manufacture hundreds of
items without selling many of them. Suddenly the ability to produce has a nasty flavour.
If there is a market, then the ability to produce for that given market is also not enough.
This is because the cost of manufacturing may not be cost-effective. This is another nasty
surprise! Thus a productive system must have the ability to be effective and efficient.
Without these it would be difficult to make sense of productivity. Effectiveness refers to
how good the output of the transformation process is in relation to market needs. This
is the value and quality definition. Productivity is the value of outputs, such as goods
and services, divided by the value of input resources, such as wages, materials and cost
of equipment. Value also has a cost dimension. This means output must be effective and
efficient. The danger is to focus only on efficiency at the cost of effectiveness.
Value-added productivity measurement

The term ‘value-added’ also refers to company-wide productivity in terms of total
sales or ways of looking at total wealth created (not only profit, but also labour costs,
depreciation and taxation) through the company’s production process. This concept
is important because it gives the whole picture of labour costs and how the operation
creates and distributes wealth. All the things done to make the business work boil down
to the pursuit of profit, and the bottom line measure is profit after tax. The financial
statements (the income statement and balance sheet) of a business are used as sources
of data for measuring productivity.
How to increase or improve productivity

This simple formula of productivity (outputs divided by inputs) clearly shows how ‘P’ can
be increased. Possible combinations include:
• keeping output the same but reducing input
• increasing output but reducing input, or
• keeping input the same but increasing output.
External components of productivity improvement

‘External’ in this context refers to factors beyond the control of business management
such as the physical or natural environment, the market and legislation.
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Internal soft components of productivity improvement

‘Soft’ refers to intangible (or mathematically indefinable) factors that are difficult
to change, eg the human resource component in terms of training, culture and the
organisation.
Internal hard components of productivity improvement

‘Hard’ refers to tangible (or mathematically definable) factors that are easy to change,
eg new methods, machines, equipment, process technologies, work measurement and
other elements (resource inputs) of the process.
Humans are extremely resourceful creatures, able to execute procedures and methods
dexterously, and capable of achieving spectacular results. All of a person’s actions require
deliberate, systematic and orderly procedures and methods. In today’s production
process, which is mostly profit-driven, cheap, effective and speedy procedures and
methods are of cardinal importance.
It is important to bear in mind that work study is a management tool based on method
study and work measurement techniques. Work study must be employed to examine
all facets of human labour in a corporate context with the objective of increasing the
enterprise’s efficiency and productivity by means of systematic research. In every
management function the manager can apply work study to make his or her task easier,
particularly where correct decision-making is concerned.
8.4 Operations strategy and operations design

8.4.1 Operations strategy
The operations function is the driver of the corporate business strategy. Strategy refers
to actions or decisions that commit the business to moving in a certain direction or
adopting a position in the market. Carefully made decisions that help the business to
achieve its goals and that have a high impact and particular significance can be regarded
as strategies. Slack et al13 define operations strategy as the total pattern of decisions and
actions that formulate the role, objectives and activities of each part of the operation so
that they contribute to and support the organisation’s business strategy.
The most powerful strategy is to obtain unique capabilities and capacities for competing
through operations that will lead to very high visibility for operations strategy. Some
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strategic choices may include unique technology, choice of process, and infrastructure.
These strategies may be integrated with best management practices such as total quality
management (TQM), just-in-time (JIT), business process re-engineering (BPR) and
others.
A strategy is a broad plan with far-reaching effects that serves as the foundation for
several more specific plans. Operations strategy, therefore, is a carefully chosen plan for
having effective and competitive operations.
The business triad, which affects operations strategy in many ways, consists of:
• customers
• competitors
• internal capability such as resources, innovation, products, process technologies and

other means of operations.
The first two (customers and competitors) usually dictate the third (internal capability).
Business strategy needs to be translated into a lower-level operational strategy (also

referred to as a tactical/functional strategy). The operation puts strategy into practice.
The most creative or original idea may be worthless if strategy is not deployed or
‘operationalised’. A corporate strategy to become more prominent in terms of time-based
competition will need an operation that is more streamlined with fewer bottlenecks,
shorter lead times, quick response, accurate anticipation and effective scheduling. A
marketing strategy to diversify requires a flexible operation, and so on.
Any business will always seek a distinctive competency or competencies – strengths

that set it apart from competitors. This distinctive and core competency is found in the
operations function. These distinct competencies centre on clever operations design. If
the business can be distinctively competent in several ways, the world markets will take
notice. Examples of these distinct competencies, or performance objectives, are efficient
process controls for product and service uniformity, fast response to customer orders
(such as McDonald’s), flexibility and quality. These competencies are important since
they are derived directly from the basic wants of customers, namely: quality, speed,
dependability, reliability, low cost, flexibility, service, respect and predictability.
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Strategy can hardly address everything. Every business will have a unique SWOT
(strengths, weaknesses, opportunities and threats) situation that will dictate strategic
choices and strategic fit. The biggest challenge in life and in business is to obtain balance in
everything. Costly trade-offs make balanced performance important. Financial measures
must be complemented by operational measures. Improve operational measures such as
cycle times, lead times, cost of quality, order-winning responsiveness and defect rates,
and the financial results will follow. The balanced scorecard from Kaplan and Norton14
provides a set of measures that gives top managers a fast but comprehensive view of
the business. This technique links performance measures with the answers to four basic
questions.
• The market: how do customers see us? Is their view our view?
• The internal customer: what must we excel at? Safety, health and the environment?
• The value-adding perspective: can we keep on improving, innovating and creating

value?
• The financial perspective: how do shareholders see us?
These indicate how the value-based concept complements four popular movements
today, namely:
• the total quality school (pursuit of quality ramifies across economic, environmental
and social imperatives)
• the systems school
• the process school (the need to accommodate horizontal workflows/value chains

and strengthen internal interaction and interfacing)
• the balanced assessment school (the need to see measure beyond financial results,
as also proposed by the balanced scorecard).
In general, the OM function has three important strategic roles namely:
• implementer of corporate business strategy;
• driver of corporate business strategy;
• a support to corporate business strategy.15
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8.4.2 Operations design

The operations design for very high volume and very low variety is a continuous mode
of operation. The layout will therefore suit a highly mechanised plant. The operations
design for a unique functional need, low volume (one item) with high flexibility, will
suit a project mode of operation. The layout is temporary with no clear flow lines and,
because the product position is fixed, the layout is referred to as a fixed-position layout.
The same three dimensions (variety, volume and product scope) are used to come up
with a job mode of operations design, batch-operation design, or repetitive-operation
design.
Product design will determine process type (intermittent or continuous), as well as layout
and flow of work. The entire network of micro- and macro-processes will consist of the
basic flow (and layout type), the technologies used (process technologies, equipment
and machines) and job design. Process design is not merely an assembly line. It may
also include network decisions on the capacity level of each operation in the supply
network and – if the business is backwardly integrated into the supply chain – decisions
pertaining to suppliers. Each operation in the network will select a process type based
on the variety–volume characteristics of the operation. Small variety and large quantities
will dictate a specific process type. Process type may then dictate layout type, although
process type and layout type are not always totally deterministic.
8.4.3 Types of productive systems and their characteristics

As mentioned earlier, process characteristics determine the type of operations or
productive system. All transformation systems convert inputs into outputs. All of these
operations share the same OM model, principles and performance objectives. These
systems are also referred to as transforming resources because they convert a combination
of inputs, which are referred to as transformed resources.16 They are designed for the
particular aggregate demand that will determine the system’s dimensions, nature, scope
and scale. This leads to different production system designs, such as service shops, job
shops, production lines, batch operations, mass services, projects and other combinations.
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Table 8.2: Comparison of the characteristics of the three main categories of operations
systems
Continuous or repetitive Job/batch Project
operations system operations operations
system system
Product type Standardised Diversified Unique
Product flow Standardised According to Virtually none
requirements of
particular product
Materials Materials flow determinable, Handling depends Special equipment
handling systemised and often automated on the product, often necessary; high
therefore highly cost
variable and
expensive
Raw materials High turnover Low turnover Variable because of
inventory production time
Work-in-process Small quantities Large quantities Single product
Production cost Relatively high fixed cost; low Relatively low fixed Relatively high fixed
components variable cost per unit cost; high variable cost; high variable cost
cost per unit
Labour Highly specialised routine tasks at Highly skilled High degree of
requirements a specific rate artisans working adaptability to various
without supervision tasks commissioned
and with moderate
adaptability
8.4.4 Relationship between operation system type and layout type

Decisions on the layout type will not merely depend on choosing between the basic
types, but also on understanding the advantages and disadvantages of the different types
or combinations of layouts. The flow of transformed resources will be determined by
both the feasibility and importance of the degree of regular flow. The opposite of this is
high variety (when regular flow is difficult) and low volume (when regular flow is not
feasible). The relationship between basic processes and basic layout types are:
• projects and large jobs = fixed-position layout
• jobs and batch processes = process layout or functional grouping (layout according
to similar processes)
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• large batches and small continuous processes = cell layout
• mass processes or pure continuous repetitive processes = product layout or flow

grouping (layout according to the product).
The layout of the productive unit, therefore, only governs the general configuration of
facilities. Mode shifting is also possible after process re-engineering. This means the
mode of operation design (and layout type) may change from job to project or from
batch to continuous (from custom to commodity). The purpose of effective layout is to
streamline workflow by minimising handling distance and increasing facility utilisation.
The machinery, equipment, workplaces, store rooms, tool racks and other facilities
should be positioned so that they do not impede the flow of production. The four possible
configurations of machinery are:
• plant, fixed assembly points or fixed-position layout in which raw materials are stored
in one spot and all the other means of production are brought to the raw materials
• horizontal grouping of machinery, process layout or functional grouping in which

similar machines are grouped together in sections of their own (eg all sawing
machines will be grouped together as will planning machines, assembly machines
and painting machines)
• vertical layout of machinery, product layout or flow grouping in which machines

are placed in a straight line, one behind the other, and in which the capacities of the
machines are attuned
• any combination of the above methods of grouping machinery.
The physical organisation found at a facility or work centre is a function of its layout. The
layout of the productive unit does not imply that the work or job is already scheduled.
Layout provides a basic routing, while scheduling (using several scheduling techniques)
is the practical day-to-day sizing, line balancing, sequencing, and dispatching of orders
through work centres.
Proper understanding of work stations (offices, floor layout, work cells and centres)
and how they affect human performance (possible strain or injury) are the essence of
ergonomics as part of job design. Repetitive strain injury is fairly rare in South Africa, but
is extremely common in the Western world.
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Slack et al17 describe ergonomic workplace design in terms of:
• anthropometric data such as people’s size, shape, physical strength and other
characteristics
• the neurological aspects of job design that subsist in the engagement of people’s
sensory capabilities when interfacing with their workplaces – usually some sort of
process technology (such as a machine) and its interface with the person to form a
‘machineperson loop’.
8.5 Operations planning and control

8.5.1 Demand management and forecasting
Definition
Operations management (OM) is frequently occupied with matching demand with capacity.
Capacity refers to the limited means of a productive unit to manufacture a certain quantity of
products within a particular fixed period. Production and operations management (POM) may
refer to capacity planning as planning for adjustable (variable) resources, such as labour and
aggregate inventory over the medium term. It should actually also refer to fixed (non-adjustable)
resources. Capacity control refers to the loading of resources and keeping work centres busy but
not overloaded.
Planning for future production capacity occurs in three stages, namely:
• demand forecasting
• attuning the capacity of various machines, resources and/or facilities
• determining strategies for the full utilisation of capacity.
Definition
Demand management implies a good feeling for market needs, accurate market research,
professional anticipation and scientific forecasting.
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The long-term objective (strategic goal) of demand management relates to fixed capacity
planning, while the medium-term objectives (tactical objectives) are more specific
and are used to determine aggregate demand. Usually this is the demand for a group
of products sharing the same capacity in the plant. Aggregate demand is utilised for
adjustable capacity planning. Recording orders is another important component of
demand management. The delivery promise can only be made once the order has been
positioned in the master schedule, which in turn, is dependent on the availability of
finished product assemblies and components (parts).
Definition
Forecasting can be defined as determining the demand for a product produced by the business,
but with a view to accommodating a future event.
People make forecasts all the time and these affect decisions and activities throughout
the organisation. Forecasting is also an important component of yield management,
which relates to the percentage of capacity being used.18 Accurate forecasts can help
managers plan tactics to match capacity with demand so that they achieve high yield
levels. Properly defined forecasts should be timely, accurate, reliable, in meaningful
units, in writing, cost-effective and understandable. Some of the categories of forecasting
techniques are:
• qualitative techniques, which are based mainly on feelings and judgement rather
than data or actual calculations
• time-series analysis, which is quantitative and manipulates the data mathematically

to arrive at a forecast
• causal methods that use a mathematical expression or model to determine a cause-

and-effect relationship
• multi-period pattern projections, which are time-series that produce forecasts for
more than one future period working on the assumption that no trend or seasonal
component is present in the demand pattern
• single-period patternless projections that make use of historical data (to a limited
extent) to forecast only for the next (single) period. The historical data usually reflect
the most recent demand quantities.
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8.5.2 Capacity determinants

Operations capacity is the greatest workload (input) that a business can handle in terms
of demanded transformational output. The ‘Ms’ are used to describe the limits of any
operation. These are methods (also methods of communication), machines, money,
material and manpower (including management). Capacity is made up of combinations
of the Ms and the optimisation of capacity is important to maximise production
ability. Factors such as the learning curve have a huge impact on capacity. Trained and
experienced manpower affects the rest of the capacity configuration in that it determines
how the other Ms are utilised.
According to Stevenson19 the determinants of effective capacity are:
• the design of facilities and locational factors
• product and service design factors
• process factors – process improvements that increase quality and productivity can
result in increased capacity
• human empowerment, skills, conditions of work and conditions of service
• operational factors (process design, scheduling, inventory management)
• supply chain factors.
8.5.3 Fixed-capacity planning

Fixed-capacity planning is the first long-term question facing POM. This planning must
be done thoroughly to place the productive unit on a firm footing from the start. In this
context, the term ‘productive unit’ means the factory, office, bank, shop or any institution
in which goods and/or services are manufactured or provided. The elements of fixed-
capacity planning are:
• occupational safety
• identifying a suitable location
• determining the size of the productive unit
• the layout of the productive unit
• the choice and design of, and specifications for, machinery and equipment.
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The optimal production volume

The short-term productive optimum (optimal production volume) is achieved in the
short term, but the optimal size of the productive unit is achieved in the long term.
Various factors can have a direct influence on the eventual size of a productive unit. The
main factors are:
• the scope of the activities that can be handled with the existing infrastructure (if
the infrastructure is poor, the productive unit will remain relatively small)
• the scope of the economically favourable quantitative ratio (if the business uses
more machinery than labour, the limiting factor will be capital)
• the degree to which the products and processes can be altered to meet demand
(a productive unit may expand its product range when too much surplus capacity
occurs)
• the nature of the competition (competition may be so strong that it prevents the
productive unit from growing)
• the break-even point (the break-even point is that volume of production and sales at
which income from sales equals costs)
• the availability of means of production, such as raw materials, labour, machinery

and equipment.
The optimal size of the productive unit can be determined by the optimal production
volume and the size of the optimal productive unit. The optimal production volume is
achieved in the short term. This refers to the scope of the activities where the productive
unit’s capacity remains constant, and goods are manufactured at the lowest possible unit
cost. This is also known as the short-term productive optimum. The optimal productive
unit size is achieved in the long term. This refers to the scope of activities where the
productive unit’s capacity expands and the production costs per unit are at their lowest.
8.5.4 Match capacity to a change in demand

Where capacity is too small for demand or greater than demand, certain strategies can be
followed to make full use of the production capacity.
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Example
An operations unit consisting of, for example, a single experienced joiner can assemble 12 coffee
tables per week. Demand increases to 20 tables so capacity is too small to satisfy demand for the
product.
If capacity is too small for demand, capacity can be increased by:
• appointing another joiner who can work at almost the same pace as the existing one
• increasing capacity by acquiring additional fixed assets
• introducing overtime
• choosing to differentiate products
• introducing an additional shift
• using temporary means of production (a popular strategy for seasonal productive

units such as holiday hotels that employ additional staff during busy periods)
• generating capacity by a transfer of surplus capacity from other divisions
• reducing the number of products and specialising in one
• obtaining additional machines.
Example
Assume a sub-assembly of the ‘EagleGOLF’ golf cart needs to move through three machines in the
production process as follows:
Work station Machine Capacity golf carts

per day
Extrude D 60
Weld E 20
Paint F 30
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The machines with the smallest capacity (E and F) will limit the capacity of the entire process.
Machine D has surplus capacity, and more machines may be required (given that demand is higher
than capacity). Calculate the smallest value into which each of the three capacity figures (60, 20 and
30) can be divided, and determine how many additional machines are required.
Work station Machine Calculation Additional

machines
needed
Extrude D 120/60 = 2 1
Weld E 120/20 = 6 5
Paint F 120/30 = 4 3
If capacity is greater than demand the productive unit can:
• work fewer shifts
• integrate products
• close a section of the factory
• lay off some of the workers
• phase out the temporary means of production
• move surplus capacity that was brought in from another department back to that
department.
Schedules are statements of volume and timing in different types of operations systems.
Operations scheduling refers to the determination of the quantity of jobs and sequence in
which jobs and activities are to be completed in the manufacturing plant. The scheduling
activity is one of the most complex functions of production and operations management
(POM) because:
• schedulers must deal with different types of capacities/resources simultaneously
• machines and staff will have different capabilities
• the number of possible schedules increases as the number of activities and processes
increases.
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8.5.5 Operations scheduling

Scheduling is associated with timing, routing and loading. The master production
schedule (MPS) is central to OM and is regarded as the core planning document of any
operation. It is a disaggregated plan, and usually indicates the planned production per
time interval (eg per month). The basic activity of scheduling is the pushing, pulling,
routing, sizing and timing of work through work centres. Push and pull control refers to
the system that triggers the work. Material requirements planning (MRP), for instance,
pushes out the work without considering the exact time or use of the customer, while in
a pull system, the pace is determined by the customer as the next process.
The aggregate plan for a small business indicates what final products (families or
product groups) it plans to manufacture. Trapsix Trays, for example, primarily produces
approximately 400 trays per year, but also plans to manufacture 300 chairs and 55 coffee
tables.
Operations scheduling comprises four distinct activities. First, the operations must be
timed and routed. Timing involves making a decision about when a particular operation
will take place, and routing is done to establish the place where, or on which piece of
equipment, the operation will be performed. The second activity is known as dispatching.
This involves issuing a shop order so that the operation can take place. The third activity
concerns control, or establishing the status of the shop order. This is necessary, since the
progress of the shop order must be known at all times. If necessary, a shop order may
have to be expected so as not to delay the delivery of the final product, or to minimise the
lateness on an order. Expediting is the fourth activity of operations scheduling.
Effective scheduling
The nature of scheduling will depend on the type of operations system (eg make-to-
stock, resource-to-order or make-to-order). Planning and control therefore differ for
each product or operation. Slack et al20 refer to the P:D ratios of speculation. D = the
demand time (total length the customer must wait) and P = throughput time, which is
the entire lead time of sourcing, production and delivery. Low-volume operations have
more speculation because of the different variables in the throughput process. For high-
volume make-to-stock operations, the demand time is very short compared to the total
throughput cycle (P). If one compares this P:D ratio to a make-to-order or resource-to-
order P:D ratio, then one can see how different it is. P is slightly longer than D in a make-
to-order operation (see the ‘Noise Clipper’ example, Table 8.3) and P = D in a resource-
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to-order situation. The larger P is compared to D, the higher the speculative activity in
the operation will be.
Effective scheduling may be influenced by the particular operations system, but it will be
characterised by:
• being realistic and allowing for any essential changes
• allowing enough time for all the operations (the time before, during and after
operations)
• having capacity available
• assigning to the workers or operators the responsibility for keeping to schedules.
Apart from the fact that scheduling is much easier in a continuous or repetitive
manufacturing situation, the success of the so-called ‘process operations’ also depends
on a number of other factors, such as:
• avoiding quality problems where possible and assuring reliability of suppliers
• monitoring the process and product design
• rigorous preventive maintenance
• optimal mixes and rapid changeover
• regular schedules and linear output.
Undercapacity scheduling means that less than the total available capacity is scheduled,
for example 95% of available capacity for a particular shift. This means that the required
output for the shift is only 95% of what could be produced at full capacity.
Forward and backward scheduling

The point of departure used in scheduling has a critical influence on the scheduling itself.
The first approach is to begin at the present date and schedule forward according to the
times needed to complete all the operations necessary to complete the order. When all
times have been added, the manufacturer can give the customer an indication of when
the order will be ready. This approach is known as forward scheduling. On the other
hand, in backward scheduling, the required date (or moment) as prescribed by the
customer can be used as a starting point so that the time for each activity is subtracted
from the due date.
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Gantt charts and other techniques

Gantt charts (time charts) are the most commonly used scheduling technique. They are
simple to construct and easy to understand. This chart gives a visual impression of the
progress made on the project or sub-project. The work packages of the job/project with
its work package descriptors (tasks or activities) are on the left-hand side and the work
duration at the bottom.
Another technique that can be applied to schedule any number of jobs on two or three
machines is known as Johnson’s algorithm. The algorithm ensures that the optimal
sequence is found – that is, the sequence that will minimise the total processing time.
Johnson’s algorithm has as its point of departure the existence of a fixed sequence
according to which the job moves through the work centres or machines.
The very simple Johnson’s algorithm is a good example of how powerful an OM technique
can be. This algorithm is widely used in small job shops where volume is low and variety is
high. By determining the optimal processing sequence (that is, which job follows which),
as opposed to scheduling work on a random thumb-suck or first-come-first-served basis,
operations managers can save a great deal of time and other resources.
The jobs in the following example of Noise Clipper (Table 8.3) are cutting, transforming
to acrylic and finally assembling and packaging.
Table 8.3: Five different jobs and three work centres

Noise Clipper Processing time Processing time Processing time
jobs in the cutting in the acrylic in the assembly
work centre 1 work centre 2 work centre 3
P 4 3 7
Q 8 3 6
R 4 2 7
S 3 2 10
T 7 5 6
The steps of the algorithm are:

1. Add the times of work centres 1 and 2 and add the times of work centres 2 and 3.
2. Create two columns: A (total time of 1 and 2) and B (total time of 2 and 3).
3. Choose the shortest processing times. If the shortest time is in column A, schedule that
job first (or as close to first as possible if other jobs have been placed in sequence).
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4. If the shortest time is in column B, schedule that job last in the sequence (or as close
to last if other jobs have already been placed in sequence).
5. Solution: SRPQT.
Jobs Work centre 1 and 2 Work centre 2 and 3

P 7 10
Q 11 9
R 6 9
S 5 12
T 12 11
Following these steps of the algorithm, the optimal sequence therefore is: SRPQT.
Noise Clipper can therefore optimise its time per job and gain additional capacity. If the
sequence is randomly determined by thumb-suck, there will be a large error margin. A
manager who plans to do five jobs on a thumb-suck basis will waste time. If operations
managers do not use this technique, they will waste several hours per week. Applying
this simple algorithm can therefore save a considerable amount of time, thus creating
spare capacity.
8.5.6 Inventory management
Definition
Inventory management is the function of planning and controlling all types of inventory (raw
materials, sub-assemblies, consumables, finished products, and so on).
Inventory management is crucial since capital must be tied up in other investments and
cash, and not in idle stock. The inventory function has several interfaces with purchasing,
warehousing, marketing and OM. The essence of inventory management (planning
and control) is to have just enough inventory at any given time. This implies two major
dimensions, namely timing of inventory and quantity determination. Several techniques
exist for timing (eg MRP, JIT and ROP) and for quantity determination (eg MRP and EOQ),
as explained below.
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The mode of operation will determine the type of timing and quantity planning and
control. Resource-to-order (project operations) will keep no stock. Make-to-order (eg
job shops) will hold the minimum inventory and will obtain inventory according to
the custom order by the client. Make-to-stock (eg batch and repetitive operations) will
do planning and control based on forecasting, safety stock levels and economic order
quantities.
The purpose of inventory management can be set out as follows:
• Control must be exercised over the financial investment in inventory to save on

interest and cost. Keeping inventory goes hand-in-hand with certain cost factors such
as obsolescence, interest on capital investment, physical wear and tear and damages,
transportation and insurance. If inventory control does not enjoy management’s full
attention, these cost factors can take on serious proportions.
• A scientific, factual method to simplify purchases (by using mathematical models)

needs to be created.
• There should be a reduction in possible losses as a result of obsolescence and incorrect

or excessive purchases. Good inventory control turnover rates are necessary.
• Dead or slow-moving stock should be identified.
• Inventory control must serve as a source of information for management decisions.
• Losses should be prevented by controlling all incoming inventory as regards quality,

quantity and the requirements as determined in the purchase order. This is important
since it impacts directly on the quality of the finished product.
• Excessive variety should be avoided. The advantages of standardising and simplifying

inventory must be considered.
• Production should never be delayed because of a shortage of a certain inventory item.

These delays make an extremely bad impression on the customer (internal as well as
external).
• Ordering the most economical quantities through an effective control system is

essential.
• All internal customers (the next process) and external customers should be given
good service.
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Carrying cost
Inventory ties up capital and is referred to as ‘carrying cost’. There are several inventory
carrying cost elements. Total carrying cost usually includes the following, and may be
direct or indirect.
• Direct inventory carrying cost elements are capital cost (interest or opportunity cost)
and holding cost. Holding cost refers to the cost involved in renting storage facilities,
warehouse equipment, electricity, insurance, security, handling, bookkeeping,
warehousing, labour and damage. (Note: I = the annual carrying cost rate, which is
based on the direct inventory carrying cost elements, namely capital cost and holding
cost.)
• Indirect inventory carrying cost elements are the costs attached to obsolescence,
record-keeping, physical stocktaking, inventory planning and control by management.
Other hidden cost elements are the cost of production floor space utilised for
work-in-process, scrap and rework, as well as the cost involved in handling and
containerisation.
Example
The entrepreneurs of custom-made hearing protection devices in South Africa need to be flexible
and adaptable to the high demand of quality earplugs. Assume it would cost R2 750 to rearrange
the Noise Clipper laboratory facilities inside one of their work centres in order to eliminate R5 500
worth of inventory. If I = 0.25, will the rearrangement be worth it?
This is a saving of 0.25 x R5 500 per year (ie R1 375 per year), which means that the R2 750 will be
recovered within two years. Hence, this would be worth considering.
Order cost
Order cost can be defined as the cost that must be incurred to place an order. An item may
be ordered twice, three times or more per year – and even daily in JIT systems. If orders
are placed only twice a year, they will make up 50% of the annual demand. If these orders
are to be manufactured internally, the cost will consist mainly of machinery set-ups.
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Inventory timing by means of the reorder point (ROP)

Inventory timing by means of the reorder point (ROP) can be regarded as the traditional
model. This technique is as old as manufacturing itself. However, it is still a popular
method and is found, for example, in every household. A ROP indicates a certain level of
stocks at which the stock must be replenished or ordered.
There are variations of ROP. The periodic inventory system is used by restaurants,
service stations and other retailers, where inventory is ordered daily or weekly. Some
manufacturers include the ROP in the product. Examples of this are cheque books and
boxes of tissues. The two-bin system is also a continuous inventory system often used in
small warehouses. As soon as one bin is empty an order is placed.
ROPs are calculated according to experience of consumer patterns, rule-of-thumb

judgement or by applying a formula. However, the formula also demands a degree of
judgement, since it incorporates safety stock and demand patterns.
The ROP formula is:
ROP = D(LT) + SS
where
ROP = reorder point
D = average demand per time period
LT = average lead time
D(LT) = average demand during lead time
SS = safety stock.
Example
The one laboratory of Noise Clipper’s average monthly demand for Mr.clEAR cleaning spray (for
occupational hygiene) is 105 litres. If the order lead time is one week and a safety stock of five litres
is applicable, what will the ROP be?
ROP = D(LT) + SS
ROP = 105(7/30) + (105/30)5
= 24.5 + 17.5
= 42 litres of Mr.clEAR cleaning spray
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8.5.7 Material requirements planning (MRP)

Material requirements planning (MRP) plans for various periods in the future, and is
also referred to as a ‘push system’. A simplified example of an MRP exercise is as follows:
The master schedule for three sizes of screwdriver is given in the table below. All three
screwdrivers (2 mm, 7 mm, and Star 5) use the same handle. The item master file shows
that the following planning factors are:
• Batches are set at quantities of 20.
• Safety stock is set at two handles.
• The available inventory is 70.
• The lead time for orders is two weeks.
Question: When will orders be issued, and what will the planned orders be?

Week
Item 1 2 3 4 5
2 mm 10 10
7 mm 18 8 18 8 18
Star 5 8 8 8
Answer: The planned order in the first week must be 20, since provision must be made
for safety stock of two handles; the order lead time is two weeks; and quantities of 20
only may be ordered as follows:

Week
Item 1 2 3 4 5
Gross requirements 36 8 26 18 26
Scheduled receipts
Available inventory = 70 34 26 20 2 16
Planned orders 20 40
8.5.8 Determining inventory quantities

The lot-for-lot approach
The easiest way to determine inventory quantities is to make the batch size equal to net
requirements. Only the quantity required for the parent item is bought or manufactured.
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There is no batching in larger batches. Orders must therefore be placed frequently, which
results in high order costs or set-up costs.
The economic ordering quantity (EOQ) formula

The economic ordering quantity (EOQ) model is one of the oldest, having been developed
by FW Harris in 1915. Although the assumptions are not always applicable in practice,
they are still usually close enough to make the model useful. The assumptions are as
follows:
• Demand (‘D’) is known and constant, with no seasonality.
• The order cost (‘S’ = set-up cost) is known and constant.
• Cost per unit is constant (no quantity discounts).
• The entire batch is delivered at once. Typically, this is the case with purchased items,
but not so with items manufactured in-house.
• The carrying cost (‘I’) is known and constant, and is a linear function of the quantity
ordered.
8.5.9 Break-even analysis

This is a technique for determining the volume at which total revenues are equal to total
cost, or when the cost-to-make equals the total cost-to-buy. One can use this in a make-
or-buy decision, or when two production methods are compared. It may also be used to
determine the profit potential of a new product.
Example
The Noise Clipper laboratory considers a new hearing protection fitment procedure to be offered
at R200 per patient. The fixed cost (portion of the total cost that remains constant regardless of
changes in levels of output) is R100 000 per year. The variable cost (the portion of the total cost that
varies directly with volume of output) is R100 per patient. What is the break-even quantity for this
service?
Solution: One can use the algebraic or graphic approaches. For the laboratory to break even, the
number of patients (‘Q’) must equal the fixed cost per year (‘F’) divided by the unit profit margin
(price minus cost). This gives us the following formula for the break-even number of patients:
F 100 000
Q= = = 1 000 patients (the minimum quantity needed)
P-C 200 - 100
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Break-even case study using the algebraic approach

Noise Clipper has developed and patented a new cleaning device for hearing protectors.
Before trying to commercialise the device and add it to their existing product line, they
wish to get an idea of possible success by determining the minimum break-even demand
or volume. The fixed cost is R56 000 per year, the variable cost per unit is R7 and the
selling price is set at R25. Expected initial demand is ± 415 units per month. Use the
formula to establish the break-even quantity (‘Q’). The answer is Q = 3 111 units. If
demand is 4 980 cleaning tools per year, commercialising should be considered.
8.6 Operations improvement

This function of ‘operations improvement’ is creative and dynamic due to its philosophy
that nothing and nobody is perfect. It is more than quality control, and reaches far beyond
the operations function. The fundamentals of quality are the best vantage point in terms
of understanding quality concepts, designing and assuring quality, and implementing,
sustaining and improving quality. Amongst others, it refers to performance improvement
of all resources, failure prevention and recovery, improving the operation’s reliability,
maintenance and eventual total quality management (TQM).
This section introduces the core concepts of operations improvement.
8.6.1 Leadership for quality

Values precede action and several important foundations are needed before TQM
can be implemented as best practice. Evans21 provides a foundation for performance
excellence in terms of internal organisational quality, customer-supplier relationships,
healthy organisational behaviour (teamwork and effective empowerment of the internal
customer) and an organisational change culture. True leaders have an innate passion for
quality and they lead by their own example and influential power. However, they do need
to take cognisance of a few important issues, namely:
• effective and constant communication
• creating the right attitude and motivation for employees to serve the customers to the
best of their ability
• identifying and developing the abilities of employees so that they can contribute in
the areas in which they are operationally active
• helping employees to understand the basics of sound management.
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A good leader has the ability to see the big picture, strengthen the vision and then
inspire employees to strive for its realisation. Leaders have a big impact on the culture
of the organisation. Leadership hinges on vision, strategy and people empowerment.
Management by fear is a sign of leadership inadequacy.
Leadership determines the components of the quality culture. These non-tangible (or
soft) components include:
• behaviours
• norms
• dominant values
• rules of the game for getting on
• climate.
8.6.2 Continuous improvement through total quality management (TQM)

TQM is a holistic approach to quality at the source. It refers to quality planning, control
and improvement by everyone, everywhere on a continual basis. The three main reasons
why total quality management (TQM) is so popular is that:
• all people find it intuitively attractive
• the principles of TQM make sense unconventionally
• a TQM approach to management can dramatically increase operational effectiveness.
TQM is primarily concerned with the improvement of all aspects of operations

performance. The TQM approach is far more than quality assurance (QA) or the detection
mode of quality control. It is an approach to improving the smartness, competitiveness,
flexibility and effectiveness of the entire organisation. It also removes the burden of
wasted effort from people’s lives by bringing everyone into the processes of improvement
so that results are achieved in less time.22
TQM is a holistic approach to quality

Quality is a need of both the internal customer (the organisation and the operation) and
the external customer. Quality matters to external customers because they want:
• to be respected and do not want any hassles
• a product and service that offer value for money
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• a product and service that are reliable and meet all their requirements
• a product and service that are available on time
• a product and service that improve their quality of life.
The main reason and justification for quality is the fact that quality is absent in people’s
lives and so we seek measures to restore this quality. One way to obtain quality is by
closing quality gaps and applying TQM. Quality management is therefore not only
relevant in business, but in:
• quality of product
• quality of service
• quality of organisation
• quality of processes
• quality of work life
• quality of life
• quality of being (body, soul and spirit).
Quality of product can be defined as:
• conformance to the purchase order
• fitness for the intended function
• the degree to which the client or customer is satisfied
• a total composite of product and service dimensions that meets the customer’s
expectations.
The overview of what quality is shows us that it is not easy to define and is often in the
eye of the beholder. What do people look for when they consider the quality of a product
or service? The best way is to use different quality dimensions.
Examples of quality dimensions pertaining to services are:
• reliability, meaning that one can depend on a service dimension as expected
• responsiveness, which is the willingness of the service provider to meet the

customer’s needs when these needs are expressed
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• competence, which refers to the service provider’s possession of skills and knowledge
to perform the service.
The following attributes relate specifically to goods:
• Performance is the way that a product actually operates. Does it do what it promises
to do?
• Features are the little extras that go with a product and make it unique.
• Reliability refers to the promise that it will perform and keep on performing as
promised over a specific time span (eg the guarantee period).
• Conformance is the meeting of present standards.
• Durability is the length of the useful life of the product – its life span.
• Aesthetics involve the physical qualities of the product that make it pleasant to look
at.
• Perceived quality is the indirect evaluation of quality, for example the reputation of
a specific brand.
8.6.3 Benchmarking
Benchmarking is a good practice on its own, but is usually part of the continuous
improvement drive. There are several types of benchmarking, including:
• generic processes that are similar are compared, regardless of the industry
• internal benchmarking that means comparing internal processes and operations
• functional benchmarking that involves comparisons with similar functions among
industry leaders
• competitive benchmarking that refers to very specific competitor comparisons.
The process to ensure conformance to benchmarks or specifications involves:

• defining the quality characteristic clearly and deciding how to measure each one
• determining a standard for each quality characteristic (note that this standard is not
the ultimate ideal, since perfection may never be possible. Zero defects are always
the target, but a standard may be the range of acceptance of minimum requirements)
• measuring the quality of output against these standards
• identifying quality gaps and initiating corrective action and ongoing improvement.
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8.6.4 Measuring quality costs

Is quality always expensive? Does quality cost or save money? To find out, one needs to
understand the different categories of the costs of quality (COQ).
COQ = CONC + COC
COC (cost of conformance) will lead to a decrease of CONC (cost of non-conformance)

to such an extent that COC and COQ also decrease. The PAF (prevention, appraisal and
failure) model refers to the COQ elements, which are the following broad quality cost
categories:
• prevention costs
• appraisal costs
• internal failure costs
• external failure costs.
It is important to note how increasing quality awareness (and quality level) has a positive
effect on quality-related costs. It is said that quality is not a gift but is ‘free’.
8.6.5 Maintenance and replacement

Machinery and equipment are subject to a substantial degree of wear because their
moving parts are in constant use. Machinery and equipment operating in dusty conditions
are inclined to wear more quickly and require more maintenance.
The consequences of defective machinery and equipment are the following.
• Reduced production capacity. Machinery and equipment failures mean that no

production can take place and this leads to reduced production capacity.
• Increased production costs. Failures in machinery and equipment result in a higher

hourly cost. Machine operators are idle while the machinery and equipment are being
repaired; moreover, the salaries and wages of the maintenance teams, as well as the
cost of replacing the broken components, have to be discounted. Sometimes back-up
machinery must be hired or purchased, which also means extra cost.
• Lower-quality products and services.
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• Threats to safety.
• Customer dissatisfaction.
Mixed maintenance strategies are adopted according to circumstances. Usually it is a

combination of breakdown maintenance, condition-based maintenance (ie one performs
maintenance when the resources require it) and preventive maintenance. These types
may also be categorised as follows:
• corrective maintenance
• preventive maintenance
• centralised maintenance
• decentralised maintenance
• subcontracted maintenance.
8.6.6 Safety, health and environmental management

Operations management (OM) is not only a quantitative subject, but also has a strong
humanitarian side, since many operational solutions lie in employee motivation and
well-being.
Unfortunately, many businesses do not concern themselves about health and safety. This
can be detrimental. Even large mining organisations tend to neglect health and safety.
Today, the role of OM is moving increasingly towards safety, health and environmental
(SHE) management. Many businesses prefer the more conventional term in terms of the
Occupational Health and Safety (OSH) Act 85 of 1993, namely occupational and health
and safety (OHS) management.
A case in point is the new focus on the wellbeing of the ‘internal customer’. Promoting
workplace health is a strategic issue. The changing role of operations managers includes
a new paradigm towards labour and work. Their challenge to create and sustain a
workplace of health and safety excellence is increasing and there is a culture shift towards
the philosophy of work and productivity within a SHE culture.
The behavioural and human approaches to management will support the operations
strategy of sustainable development and social responsibility because it is believed that
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human resources (HR) managers support the organisation as a staff function, and not
in the production and operations management (POM) line function, where most people
work. This means POM has a more direct positive and negative influence on its human
resources than the HR function.
Steenkamp and Van Schoor23 provide a useful framework for OSH management within a
total quality management (TQM) context. It is based on the quality of work life (QWL) of
the internal customer, organisational culture (an OSH personality of the organisation), a
holistic overview of global OSH, the fundamental responsibilities of the OSH function, the
fundamentals of occupational hygiene and the effect of OM on QWL and self-management.
8.7 Operations and the other functions of the business

In conclusion, it must be mentioned that operations management (OM) is viewed
more integrally than in earlier decades. Operations is the driver of business strategy.
All managers, irrespective of their job title, create products and services. All managers,
therefore, either work in a close relationship with operations or directly manage the
operations function.
The operation, like the engine of a car, is central to any organisation. The engine needs
fuel, electricity, maintenance and a driver that determines the route, the direction, the
load and the speed. One can view the operations function as a line function with several
support functions. The operations system’s transformation processes’ ability to function
smoothly depends on several support functions (eg purchasing and marketing). This
co-operation and interface can also be a cause for conflict, especially if things go
wrong. Sound communication and functional integration are crucial for business
success. The operations function is not a silo or factory standing in isolation – it is
increasingly seen as the integral function of any business and supply chain. The operations
function is heavily dependent on:
• research and development
• marketing, demand management and forecasting
• financial management (which can assist OM in many ways, eg costing and make-or-
buy decisions)
• work study, method study, engineering and design
• quality assurance, maintenance and facilities management
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• purchasing and material management
• human resources management (humanity and fairness issues)
• storage, handling and transportation
• quality of work life, health, safety, ergonomics and TQM.
It should be clear that decisions about production processes (the management of the
conversion process) cannot be made in a vacuum and must align with the corporate
business strategy, goals and functions of the organisation. Operations management
(OM) makes decisions that relate to both structural ‘bricks-and-mortar’ issues, as well
as infrastructural and procedural issues.24 Although OM makes things happen, it needs
all other functional areas for support, and only then can it be the intended spearhead
function of the business.
8.8 Summary
The chapter has aimed to condense the comprehensive operations management (OM)
body of knowledge. The dynamics of OM and the inherent importance of creativity
introduced the chapter, and the typical OM principles were listed. OM and process
management were defined, and the OM performance objectives were discussed. The
characteristics of processes were dealt with in detail. Productivity was briefly introduced
and related to OM. This was followed by operations planning and control. Operations
improvement covered the popular themes of quality, total quality management (TQM)
and safety, health and environmental (SHE) management.
Read the case study and answer the questions.
Case study
Hearing Coach Africa

This international company is situated near the Innovation Hub in Pretoria. Hearing Coach Africa
has invented a unique hearing conservation programme, which is being used as a foundation for a
new international standard (ISO).
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The industry at large is in desperate need of such a programme due to thousands of tragic
hearing-loss cases. More workers in the industry are exposed to potentially dangerous noise levels
than to similar levels of any other noxious agent. Factories and mining operations are noisy, and
environmentalists and governments are seeking solutions for noise pollution resulting in noise-
induced hearing loss (NIHL).
The Hearing Coach programme is a holistic and personal one. This implies that the full spectrum of
hearing conservation is covered and that the programme is personal for each worker.
Every worker exposed to noise is managed according to his or her needs and situation. A risk
profile is determined for every worker, and coaching is based on this profile. Education and training
are integral to this programme and the worker is also issued with a personal custom-fit hearing
protector. The hearing protector is also verified in terms of comfort and a seal test to eliminate
leaks. The attenuation is verified by means of the worker’s risk profile and the attenuation needed.
Filters of the hearing protector are calibrated, and real-world attenuation is verified by means of an
attenuation control unit. Owing to the personal nature of the programme, it is based on custom-
made hearing protectors, such as Variphone and Noise Clipper.
Variphone
Variphone is a sophisticated custom-made product with special features. It is a concept that is
integrated with a professional service and maintenance plan. Buyers are actually ‘forced’ to buy
a service contract of the Hearing Coach programme if they consider implementing Variphone.
Features of this unconventional hearing protector are very different from the earmuff or the one-
size-fits-all basic earplugs. The Variphone is durable (made of transparent acrylic material) and has
an adjustable filter (to adjust or calibrate the attenuation level according to noise levels on site),
which also offers ventilation, communication ability and localisation. The filter is not tamper-proof
and needs to be adjusted or recalibrated periodically. The Variphone is cost-effective over the long
term, since workers do not replace it every day and can use it for years.
Variphone needs an effective and efficient operation system because operators (audiometrists)
must visit workers at the plants to do impressions (take moulds), manufacture to specification, and
revisit the plant for personal fitments of the Variphone. This describes the transformation process in
terms of a labour-intensive professional service (appointments, work station set-up, basic training,
impressions, fitments, and so on) and the manufacturing transformation process in the laboratory,
where imprints are transformed to a completed packed acrylic unit with assembled cords and
filters.
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Noise Clipper
The company strives for lean manufacturing and practice principles, such as small lot sizes,
simplicity, working just-in-time (JIT) or at the customer’s rate of use, and decreased cycle intervals.
The product is similar to Variphone and also ideal to be used as part of the Hearing Coach
programme.
The idea was to design and patent a hearing protector for African conditions. It is less sophisticated
and more cost-effective than the Variphone, without compromising on product effectiveness. It
was also decided to offer the Noise Clipper in different colours with each user’s name embedded
in the product, and the filter is a fixed factory setting and tamper-proof (non-adjustable, therefore
it does not demand recalibration and additional servicing costs). This filter was also not calibrated
at the premises of the client. Noise Clipper also developed their own process technologies, such
as the ‘Sealometer’ (for seal tests) and the ‘Calometer’ (to calibrate filters). The operation is labour-
intensive because of the custom-made process and the capacity could be adjusted fairly easily to
meet demand. Noise Clipper’s primary marketing strategy was to do marketing through effective
25
operations.
Questions
1. Hearing Coach Africa provides a professional service. One important element of its programme is a
custom-made hearing protector. Which operations strategy should be considered by Hearing Coach?
Should it consider developing its own hearing protector or should it cooperate with Variphone and/
or Noise Clipper?
2. What type of operations system is used by Variphone? Does it primarily offer a service, a product or
both?
3. Today, the role of operations management (OM) is changing towards safety, health and environment
(SHE) management. Promoting workplace health becomes a strategic issue. Noise negatively affects
tasks requiring accuracy rather than speed, and noise detrimentally affects demanding tasks, especially
those requiring attention to multiple signal sources. Hearing Coach is in the business of preventing
noise-induced hearing loss (NIHL). Explain the meaning of the statement that the value of quality
hearing conservation goes beyond hearing protection.
4. Why does this product need an effective and efficient operation system?
5. The Noise Clipper is similar to Variphone and both are ideal to be used as part of the Hearing Coach
programme. The concept is the same, but the products have some significant differences. These
product differences had several major operational implications. What are they? What influence can
this have on the perception of service in the market?
6. Hearing Coach uses several process technologies, such as the attenuation control unit (ACU),
246
otoacoustic emission (OAE) grams and doze meters. Variphone also uses sophisticated machines, and
it is reported that Noise Clipper developed their own process technologies such as the ‘Sealometer’
(for seal tests) and the ‘Calometer’ (to calibrate filters). What impact can this ability have on cost,
capacity and a marketing strategy in terms of effective operations?
Endnotes
1. Pycraft, M, Sing, H, Phihlela, K, Slack, N, Chambers, S, Harland, C, Harrison, A & Johnston, R. 2010. Operations
Management – Global and Southern African Perspectives. 2nd ed. Cape Town: Pearson.
2. Stevenson, WJ. 2007. Operations Management – International Student Edition with Global
Readings. 9th ed. New York: McGraw-Hill Irwin. p. 4.
3. Slack, N, Chambers, S & Johnston, R. 2004. Operations Management. 4th ed. London: Prentice
Hall. p. 11.
4. Davis, DD & Heineke, J. 2005. Operations Management: Integrating Manufacturing and Services.
5th ed. N.P: McGraw-Hill Irwin. pp. 80–82.
5. Waller, DL. 2003. Operations Management – A Supply Chain Approach. London: Thomson. p. 17.
6. Stevenson, Operations Management, p. 5.
7. Schonberger, RJ & Knod, EM. 1994. Operations Management. 5th ed. Burr Ridge: Irwin.
8. Pycraft et al, Operations Management, pp. 14–15.
9. Slack & Johnston, Operations Management, p. 121.
10. Pycraft et al, Operations Management, p. 17.
11. Krajewski, LJ & Ritzman, LP. 2004. Operations Management – Processes and Value Chains. 7th ed.
New Jersey: Pearson Prentice Hall. p. 91.
12. Davis & Heineke, Operations Management, p. 219.
13. Slack et al, Operations Management, p. 77.
14. Kaplan, RS & Norton, DP. 1992. The balanced scorecard – measures that drive performance.
Harvard Business Review. Available: http://bit.ly/1GHTkPC. (Accessed 10 September 2014).
17. Slack et al, Operations Management, pp. 331–332.
21. Evans, JR. 2008. Quality and Performance Excellence: Management, Organization and Strategy.
5th ed. USA: Thomson. p. iii.
22. Oakland, JS. 2000. Total Quality Management. London: Butterworth-Heinemann. p. 19.
23. Steenkamp, RJ & Van Schoor, A. 2013. Occupational Safety and Health (OSH) – A TQM and Quality
of Work Life Approach. Cape Town: Juta.
24. Davis & Heineke, Operations Management, p. 1.
25. Personal interview with T Pienaar, general manager of Noise Clipper, in 2007.
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Chapter 9
ADMINISTRATIVE MANAGEMENT
Learning outcomes
• explain the role of the administrative function in an organisation
• explain the role of the administrative manager in an organisation
• identify the information needs in an organisation
• explain the relationship between the administrative function and the other functions in an
organisation
• explain the relationship between the administrative function and the other functions in an
organisation.
9.1 Introduction
There are many different views about the administrative function in organisations, but
the common denominator in all these views is ‘information’. Administrative management
has to do with information and the management of information. In some literature this
function is also referred to as ‘information management’.
Administrative management encompasses the processes and resources required to

collect, manipulate, maintain, protect and retrieve information used in an organisation.1
It includes storage and release of information by means of computerised management
information systems, as well as bookkeeping, cost accounting, archive control and
general office organisation. The administrative manager is usually also responsible for
effective communication, office layout, office equipment and furniture, office procedures,
workflow, systems analysis and design, automation, form analysis and controlling staff
relations.
Administrative management can also be seen as managing information through people.

Information is central to all management processes and people are the resources who
make use of that information to add value. Managing information strategically reduces
Chapter 9 Administrative Management
costs, reduces uncertainty or risks, adds value to existing products or services and creates
new value through new information-based products or services.
In most large organisations an administrative manager or information manager

is appointed as one of the functional or middle-level managers. In some smaller
organisations the administrative and other functions such as the financial function are
linked and managed by one person. There are also organisations where each function is
responsible for its own administration. The two job titles of administrative manager and
information manager are used interchangeably. For the purpose of this book, we use the
title ‘administrative manager’.
The administrative function is the section in an organisation that is responsible for

the orderly collection, processing, storing and distributing of information to decision-
makers and managers within the organisation as well as other role players outside the
organisation to enable them to execute their tasks. The services rendered by this function
to all the other functions (such as marketing, operations, purchasing, human resources,
financial and public relations) encompass the supporting functions responsible for
satisfying all the information requirements of an organisation.
In earlier years, administrative management had a limited scope. The primary role of
earlier administrative managers was to supervise employees who performed office or
administrative tasks. Administrative management was not implemented as a separate
organisational function as it is today in many larger organisations.
The administrative manager, whose authority and responsibility are delegated by top
management, is that person responsible for ensuring that the administrative activities,
which are supportive functions, run smoothly and contribute to the effective management
of the organisation.
To enable the management of any organisation to manage the organisation successfully,

they must have usable information in order to make good decisions. No organisation can
be managed without timely, relevant and accurate information.
Managers need information to take decisions, and not only data. Data (plural noun)
refer to facts (words and numbers) about objects, people and events. Data also refer to
unprocessed material that can be seen as potential information. Lessing and Scheepers2
249
consider data to be ‘… objective measurements of the attributes (characteristics) of

entities (such as events, things, people and places)’. Data are generally used by machines
and are useless unless processed to create information.
Information refers to data that have been converted or processed into meaningful and
useful context for specific end users, at a specific point in time, for a specific purpose, and
presented in a specific format. Information is used by managers to initiate actions, make
decisions and manage their sections.
An information system is a group or set of people, procedures and resources which collect,
transform and distribute information in an organisation. There are manual (paper and
pencil), informal (oral) and computer-based (using information technology) information
systems.
The administrative function depends more on technology and technologically oriented

applications and processes today than ever before. This situation is making vast amounts
of information available to the organisation. A few years ago organisations lacked
information, which caused some problems making proper decisions. Today, so much
information is available and all the information they need probably exists somewhere.
The problem now is to find the desired information as soon as it becomes available. To
cope with this dilemma, software has been and is being developed to allow organisations
to integrate a diverse array of functions. These systems assist managers in the decision-
making processes.
9.2 The role of the administrative function within an

organisation
The administrative function is one of the basic functions that usually exists in an
organisation. These functions are general management, administration, sales and
marketing, operations, purchasing (and supply chain), human resources, financial and
public relations.
Administrative management is not merely one position, one office or one department,
but rather the entire management component that works in an administrative
capacity. In other words, all the other organisational functions also perform certain
administrative tasks and activities that are not performed centrally by the administrative
section or department. For example, they all make use of telephone calls, reprography
(photocopying) and handle mail on a daily basis.
250
The administrative function relates to reporting in the widest sense of the word. Although
the focus is on the management information system and its components, it covers the
whole network of records of the organisation, providing information for management
purposes.
The administrative function does not generate an income for the organisation. It is a
function that renders a service, and it provides specialised support to individuals and
other organisational functions, which enables the other organisational functions to be
more cost-effective. It relieves individuals of many of their administrative responsibilities
and enables them to give attention to more important matters. For example, think of
a manager who appoints an office professional to take care of all office tasks such as
filing, typing, correspondence, and so forth, so that the manager can concentrate on
management tasks.
In addition to the managers’ fields of specialisation, information is regarded as the most

important management tool, as well as one of the most fundamental and valuable of the
various organisational elements. Never before have managers had so much information
at their disposal to support their efforts. Most managers will also agree that the
effectiveness with which the information is managed will determine its usefulness. The
administrative function is able to make a significant contribution to the success of the
organisation by providing specialised support in the management of information.
It is crucial for the administrative manager to keep up with technological development

in this field. Technological development is the largest factor responsible for the
considerable increase in the amount of information available to managers. It not only
creates large amounts of new information, but it also makes existing information
more readily available, accessible and convenient to use. Think of the development of
computer software packages that are improved daily to make provision for faster and
better processing of data and/or information.
9.2.1 Administrative activities

The administrative function covers a wide spectrum of administrative activities. The
need of different sections and the amount of information needed in the organisation will
determine which of these activities will be found in the organisation.
251
Think of the development of computer software packages that are improved daily
to make provision for faster and better processing of data and/or information.
1.1.1 Administrative activities
The administrative function covers a wide spectrum of administrative activities.
Administrative activities are quite diverse and could include the handling of information
The need of different sections and the amount of information needed in
in all
theitsorganisation
forms: handling mail,
will filing, indexing,
determine whichcopying andactivities
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In small include the one
handling
often
of information in all its forms: handling mail, filing, indexing, copying and
finds that many other activities are also classified as administration, such as the activities
duplication, and mechanisation. It could even include reception, word processing,
related to sales warehouse
correspondence, management
costing, and deliveries.
credit control, accounting and bookkeeping, and
ordering. In small organisations one often finds that many other activities are
also classified
Administrative as administration,
managers such
must possess as the activities
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forms design, data processing, job analysis, job evaluation, office layout, office
selection, productivity improvement and word processing.
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improvement and word processing.
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Systems analysis and design
Figure 9.1: The position of the administrative function in an organisation

Figure 1.1 The position of the administrative function in an organisation
TheThe
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need
Administrative_Management.indb 6 2013/10/16 12:25 PM
252
efficient flow of information, enabling each function to plan realistically and reach their
objectives in the most efficient manner. There are many alternatives available for staffing
the administrative function.
The positions to manage and execute all the activities in this function will depend on
many factors and is governed by:
• The size of the organisation

The larger the organisations, the more specialised the positions in this function
become. Smaller organisations often combine many of these tasks (for example
finance and administration) into one position.
• The type of industry that the organisation is involved in

It could be in the primary (exploitative organisations), secondary (transforming/
processing organisations) or tertiary (provides final product/service) sectors. The
needs in these sectors are different.
• The policy and philosophy of top management

Do they accept the use of the systems approach and technology? The amount of
money available for technology and the maintenance of the systems often govern
these decisions.
In some organisations consultants are used to design, implement and maintain

information systems. Part-time staff can also be used. These decisions depend on the
need of the specific organisation.
Consultants usually give recommendations, but leave the final decision to the management
of the organisation. Consultants provide the expertise and because they are outsiders,
their recommendations are usually objective. Many are hired on a temporary basis (one
day per week) to maintain the system. One disadvantage in this case is that they are not
available all the time, especially when immediate assistance is needed.
9.3 The role of the administrative manager in an

organisation
From the introduction it is clear that the administrative manager is responsible for
managing the activities in an organisation that relate to information. The administrative
manager is responsible for combining people, technology, material, money and sources
253
of information in such a way that the objectives of the administrative function as well as
the organisation are achieved.
The administrative manager can therefore be defined as the person who is responsible
for managing the administrative function, that is, planning, organising, leading and
controlling all administrative activities and the human resources related to these activities
in an organisation. The administrative manager will also have to take the initiative to
create an information system that can be used by the organisation as a whole.
9.3.1 Objectives of the administrative manager

The administrative manager can be classified as a functional manager and therefore will
form part of middle management. The administrative manager, like any other manager, is
responsible for certain key objectives in the organisation.
According to Quible,4 the most common objectives of an administrative manager are as

follows:
• To ensure that the relevant organisational activities are designed to maximise

individual and unit productivity
For example, developing a system for dealing with mail in the organisation so that the
employees do not waste unnecessary time on tedious procedures. By using a good
system, the overall productivity of the organisation can be increased.
• To provide effective management of the information of the organisation

For example, managing all the information that the organisation requires to be able to
function, in other words, determining what information must be provided by whom,
when, in what format and to whom, to check whether it has been done, and to give the
necessary guidance if the worker does not know how to do it.
• To maintain reasonable qualitative and quantitative standards

For example, the workers know from these standards that it will take them a day to
compile a specific report according to a specific pro forma.
• To provide a satisfactory physical and mental working environment for

employees
For example, ensuring that the employees have adequate equipment such as desks,
computers, chairs, stationery, and so forth, to complete their daily tasks, as well as
254
considering aspects such as office layout and air conditioning.
• To help define duties and responsibilities of employees assigned within the

administrative office management functional area
For example, giving each employee a list of duties or a job description stating the tasks
for which he/she is responsible and to whom he/she must report.
• To develop satisfactory lines of communication

Communication lines should be developed among employees assigned within the
administrative office management functional area, and between these employees
and employees in other areas within the organisation. For example, holding regular
information sessions during which all staff are informed on general matters, and
using memorandums or electronic mail so that the employees can communicate with
one another if necessary.
• To help employees maintain a high level of work effectiveness

For example, setting objectives for employees, with procedures and standards of how
they must complete a specific task. Once the task has been completed, the result is
measured against the set standards.
• To enhance the effective supervision of employees

For example, developing control mechanisms by which the administrative manager
can control tasks or the workers can perform their tasks as they are supposed to.
• To ensure the efficient and proper use of specialised office equipment

For example, by continually keeping up to date with all the new equipment on the
market and if necessary to start using the equipment in the organisation; also ensuring
that all the workers who have to work with the new equipment receive the necessary
training to enable them to do so.
The primary objective of administrative management is to present relevant information,

at the right time, in the right format and at an acceptable cost to specific decision-makers
in an organisation. To attain this objective, data must be captured according to a specific
medium, source documents and data must be stored in the most effective manner, the
most appropriate aids for the administration of the information must be identified and
used, and finally information must be made available to the decision-maker through the
most appropriate medium, for example paper, computer screen, telephone or fax.
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9.3.2 Job duties and the knowledge, skills and abilities needed by an
administrative manager
Job duties
The job duties listed are typical examples of the work performed by positions in this job
classification. Not all duties assigned to every position are included, nor is it expected
that all positions will be assigned every duty. Job duties include:
• plans, organises, directs, and controls all administrative employees, work activities
and services such as record-keeping, mail distribution and other office support
services
• manages the administration of various operations such as warehouse, accounting and

finance, and safety and health
• co-ordinates all other departments on information systems and needs
• identifies, coordinates and controls information and information requirements
• provides assistance with filing and retrieval systems
• maintains the flow of information among departments and functional areas by

documenting and communicating actions and information needs
• evaluates system results with all users and role players
• provides and manages telecommunications and computer systems, including support,

procedures and manuals
• maintains administrative staff by recruiting, selecting and training employees
• manages and co-ordinates workflow and work schedules
• implements technological updates when necessary
• prepares and controls budget and financial reports
• oversees facilities management, which can include office buildings, supplies, furniture
and technological equipment.
Knowledge, skills and abilities

The knowledge, skills and abilities listed are typical examples that administrative
managers should possess. Not all knowledge, skills and abilities assigned to every
position are included, nor is it expected that all knowledge, skills and abilities will be
required for every duty. Knowledge, skills and abilities include:
256
• knowledge of the principles and techniques of administrative management including

organisation, planning, staffing, training, budgeting, and reporting
• knowledge of human resources issues
• ability to analyse and appraise facts and precedents in making administrative

decisions
• ability to formulate policies and procedures based on conceptual information
• ability to establish and maintain effective relationships with all role players
• ability to communicate effectively with all levels within the organisation (written and
verbal)
• needs a strong understanding of accounting/financial principles
• needs to know government legislation related to work
• needs to maintain professional and technical knowledge by attending workshops,

studying professional publications and establishing personal networks.
9.4 The information needs of the organisation

We mention information and the management of information, but to what information
are we referring ? Organisations have different goals, products and managers and because
of this, they will have different information needs. The information needs at the different
management levels within the organisation are also different. Furthermore, there are
external role players that need information on certain aspects of the organisation, and
their needs will differ. Let us consider these different needs starting with the external
role players.
9.4.1 The information needs of external role players

Depending on the type of external organisations you are involved with, you will need a
system to supply them with specific information. These external role players could be
any one or more of the following:
• government requiring information on health, safety, financial and other issues
• governing bodies for certain groups of organisations that need statistics about the
specific industry
• suppliers who need to know about future order quantities
257
• shareholders who would like to know how their organisations are performing
• banks that would like to know how their clients are doing
• any other external person or entity that requires information.
The organisation will have to determine this need and develop a system by which the
relevant information can be collected, processed and distributed wherever and whenever
required. Information could be supplied to the environment in the form of annual and
financial reporting. Supplying the information to the external environment is usually the
task of the manager of the marketing and external relations function.
9.4.2 Internal information needs of the organisation

Information is of course also needed within the organisation to satisfy its own needs.
This information can be gathered from the external environment, as well as from within
the organisation. To survive and compete in the global market, the organisation certainly
needs information about the external environment. This information must be analysed
and the relevant information should be incorporated in the decision-making process. The
information needed at each management level will differ and is determined by the type of
decisions that need to be taken and how quickly the decisions need to be taken.
Information needs of top management

Top management needs information from outside the organisation about the following:
• General economic variables

This is especially important if they are doing business in the global market. The value
of the rand against other currencies can make a huge difference if it drops while you
are in the process of buying goods from overseas. Locally the interest rates can change
and certain materials might become scarce in the future.
• Government Acts and regulations

Depending on the type of industry, changes to the Acts and regulations can force the
organisation to make changes that will cost money.
• Technological changes and new developments

The most recent models of computers are usually faster and can handle more
information. This can give an organisation an edge over their competitors.
258
• Competitors in the market

They need to know how strong the competition is and what they are doing about
marketing and product strategies.
Top management rely on direct information for long-term planning and policy decisions.
For information about the organisation and business itself, they look at changing
consumer patterns, the trends of income and expenditure involved in product lines, the
impact of new technology, and population and other social trends. This and other similar
information influence the long-term decisions that management have to make.
Computerised technology plays an important role in long-term planning. Computerised

information processing, information retrieval and centralised computer facilities provide
management with data and information. Top management can use sophisticated analysis,
forecasting and simulation techniques as a basis for the long-term decisions.
All this information will enable top management to make certain decisions and
counteract any changes by competitors that could affect the organisation negatively. With
this external information available, they can then look internally and decide whether the
organisation is properly aligned to face the future.
The information needs of functional (middle-level) managers

Top management will co-ordinate with the different functional managers and will decide
on proper strategies for the future. The decisions made by top management are then
given through to the functional managers. The functional managers, representing the
middle-management level, need information to enable them to assist top management
in planning, developing and implementing policies as well as to manage their individual
functions effectively.
Information needs of supervisors (lower-level managers)

The supervisors need information to enable them to function on a day-to-day basis.
They need information to control the daily operations. They can obtain this information
from predetermined schedules, Gantt charts, observation, budgets and feedback from
subordinates. This data or information is then processed to enable them to make
meaningful decisions on corrective action or changes if and when necessary. The relevant
information is also given to middle management on a weekly or monthly basis as feedback
on operations, the work processes and productivity. The following table gives examples
of the types of information they need.
259
Table 9.1: Examples of types of information

Functional area External information Internal information
needed needed
Marketing Clients and potential clients: number, Strategies of top management
tastes, preferences, opinions, The products/services and their
expenditure ability, geographical characteristics
situation, markets, market sectors Budgeted and actual sales
and needs quantities
Competitors: their products, prices, Marketing costs
marketing communication
Purchasing and supply Everything about existing and Stock levels
chain potential suppliers Rate of consumption
Quality and prices of raw materials Production quantities
and equipment Machine utilisation
Acquisitions costs
Quality and availability of other
similar products
Operations Suppliers and potential suppliers Budgeted and actual production
Different materials and products quantities
available for production and the Operations costs
prices to acquire it. The application of equipment and
staff
Stock quantities required and stock
quantities available
Human resources Alternative sources of human Staff requirements
resource requirements Leave
All the relevant labour regulations Salary scales
and Acts Conditions of employment
Trends on all facets of the labour Training statistics
force HR needs in other functions
Salaries paid in organisations of the Merit assessment results
same industry Training needs
Finance Capital sources and interest rates Stock levels
Capital movement Turnover
Investment opportunities Information to calculate all the
Creditors and debtors financial ratios to ensure sound
financial management
260
Functional area External information Internal information

needed needed
Public relations Interest groups Products and strategies of the
The image of the organisation organisation to enable them to
project the correct image
The flow of information in the organisation

Managers and employees at all levels of the organisation need information to make
decisions and solve problems in their daily work. Information flows vertically and
horizontally within the organisation. As we have seen, higher-level managers need
information for strategic planning, while middle and lower-level managers need
information for the implementation of these plans and daily operations. Employees need
information to accomplish their tasks.
Figure 9.2 on page 262 illustrates the flow of information and the information needs in
an organisation.
The diagram shows the different management levels of the organisation as a whole.
However, the middle- and lower-management levels consist of the different organisational
functions such as marketing, operations, purchasing, human resources, financial and
public relations. In each of these functional areas employees are executing their daily
tasks, and it is here where data are captured and analysed internally.
The information needed by all these functional areas at the different levels must be
gathered, processed, stored and distributed, communicated or shared when needed.
Those organisations that are quickest at analysing and extracting relevant information to
use in their decision-making process usually have a competitive advantage.
It is not always possible to gather information; mostly, only data are gathered. You cannot
learn much from data. It could be invoices containing figures or just a list of quantities.
This cannot be used for decision-making purposes because it does not mean anything.
Information (converted data) could be, for example, the turnover figures for the past 12
months. This information could be used by the relevant manager to make decisions.
261
Managers and employees at all levels of the organisation need information
to make decisions and solve problems in their daily work. Information flows
vertically and horizontally within the organisation. As we have seen, higher-
level managers need information for strategic planning, while middle- and
lower-level managers need information for the implementation of these plans
BUSINESS
and dailyFUNCTIONS: An Employees
operations. Introductionneed information to accomplish their tasks.
Figure 1.2 illustrates the flow of information and the information needs in an
organisation.
Intelligence information Public information is

is gathered from the distributed to the external
external environment environment
Top management
Formulate strategy,
policies, long-term plans
and objectives. Make
strategic decisions
Middle-level (functional) management

Formulate tactical plans and objectives
Provide functional strategy and guidelines for
first-line managers
Lower-level managers (supervisors)

Implement operational plans and objectives; make
on-the-spot decisions; transact day-to-day business operations
Information flows vertically and horizontally within the organisation to facilitate

decision-making
Figure Figure
1.2 External and internal
9.2: External information
and internal needs ofneeds
information an organisation
of an organisation
14
9.4.3 Requirements of useful information
Information must comply with the following requirements to be valuable to decision-
makers:
Administrative_Management.indb 14 2013/10/16 12:25 PM
• Information must be correct and accurate to contribute to effective decision-making.

If not, incorrect deductions and conclusions may be drawn.
• Information must be timely. If it is not available on time, it is worthless or it delays

decision-making. The longer it takes to trace a problem, the more difficult it becomes
to correct. A fact yesterday may no longer be one today.
• Information needs to be complete. A compromise must be reached here between

conciseness and completeness. It is therefore important to know what the specific
need is. Partial information can be very misleading.
262
• Information must be summarised where possible and presented in an acceptable

form. Graphs and diagrams should be used wherever possible. Decision-makers do
not have time to work through long documents.
• Information needs to be relevant. A sifting process is necessary. It must be replaced by

new information to keep up with changes. Never collect unnecessary information. It
must pertain to the problem at hand.
• Information needs to be clear and as detailed as required, presented in a predetermined

sequence and relevant or required format.
• The cost of providing information must be relatively economical.
• Information must be collected from various quarters so that decisions can be

approached from various points of view.
Managers need information that complies with these requirements. The administrative
function ensures that the information is disseminated to the other functions in the
organisation.
9.5 The relationship between the administrative function

and the other functions in an organisation
As we have mentioned, in most large organisations we find the following functions that
operate at middle-management level: administration, marketing, operations, purchasing
and supply chain, human resources, financial and public relations.
In smaller organisations you will also find these functions, but very often they are
combined and one person manages two or even three of these functions. In a one-man
concern the owner will of course manage all the functions. To enable the managers of
these functions to make meaningful decisions, they require certain information. It is
the responsibility of administrative managers to make information that these function
managers do not have, or collect themselves, available to them. It is also essential that
the administrative manager be aware of the different levels of management in the
organisation, the types of decisions made at each level, and the need for management
information required at the particular level, so that useful and relevant information is
communicated to the different levels and sections.
263
An information system needs to be created to facilitate the gathering of relevant

information from all the functions and different levels of management. This system must
then be able to process the information and store it so that it can be extracted easily.
The information system now has the information stored and also the requirements or
needs of the different functions. These two aspects (the available information and the
needs of the functions) must be matched by the system. The administrative manager
must make sure that the relevant information is sent to those who require it for decision-
making purposes. This complete process must be co-ordinated and managed by the
administrative manager.
If the information is complete, accurate, on time and logical, the average management
decision will be very precise. When the information is inaccurate, unsuitable or obsolete,
the decisions cannot possibly be any better. The decisions that must be made by the
different functional managers may be simple or complex. Simple decisions refer to
routine decisions that are made daily with the minimum of information as input. This
type of decision occurs at various levels in the hierarchy and requires a specific type of
management information. The administrative manager must satisfy these requirements.
9.6 Summary
To survive today in this changing business world we find ourselves in and with all these
challenges facing us, one can see that the administrative manager has to be a person
possessing many different skills. The task of the administrative manager has grown
over past years to make this function one of the most crucial in most of the large
organisations. Even smaller organisations are not as productive as they can be because
of the mismanagement of information.
Administrative managers must make use of the available technology to assist them in
managing all the available information. Decisions taken with insufficient information can
be very damaging to an organisation. On the other hand, the right information at the right
time can give an organisation a competitive advantage in any industry.
The administrative manager must stay abreast of any developments in the administrative
and technological fields. Computer equipment is part of the information system of the
organisation, as well as part of the administrative manager’s job specification on personal
decision-making and problem-solving.
264
The administrative manager must be able to implement changes. This involves identifying
opportunities and implementing change when necessary. Changes and new developments
must be communicated and implemented in the proper manner.
The administrative manager has become much more than just another office manager.
Owing to the information explosion and technological progress, this function has become
crucial in most organisations. As you have seen in this chapter, it needs a multi-skilled
person to manage this function effectively. It is not just about managing the administrative
function, but also co-ordinating the information needs of the organisation.
1. Discuss the role of an administrative manager in a large organisation.
2. List the objectives of an administrative manager.
3. Make a list of all the possible job duties of administrative managers.
4. Discuss the information needs of each functional area within an organisation.
5. When would information be useful?
6. Explain why the administrative manager must perform an important role as a change agent.
Endnotes
1. Slovensky, DJ, Garrie, RL & Paustian, PE. 2006. Information Management: Medical Practice
Management Body of Knowledge Review Series. Alabama: Medical Group Management
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2. Lessing, N & Scheepers, C. (eds). 2006. Information Is a Management Issue. Johannesburg: ISIC.
p. 11.
3. Quible, ZK. 2005. Administrative Office Management: An Introduction. 8th ed. New Jersey:
Pearson Education. pp. 8–9.
4. Quible, Administrative Office Management, p. 4.
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273
INDEX
The index is in letter-by-letter order. Page numbers in bold font indicate definitions; page numbers in
italic font indicate figures and tables.
A blogs 83, 93, 97, 99–101, 102

Boardman, Tom 145
accidents 170–172
brand names 58, 190
accreditation of suppliers 187
break-even analysis 236–237
Acts see legislation
case study 237
administrative management 11, 12, 248–253,
broadcast media 79, 84, 87–88
252
business environments 15–36
and information resources 257–263, 260–261,
case study 37–38
262
characteristics 17–18
objectives and tasks 253–257
macro-environment 15–16, 16, 18, 21, 26–36
and other business functions 252, 263–264
market environment 15–16, 16, 18, 20–26, 62
advertising products
micro-environment 15–16, 16, 17, 18, 19–20
see also job advertisements
business plans 71, 139–141, 173
and consumer protection 34
as marketing strategy 41, 42, 45, 56, 60–61
as PR strategy 76–77, 81, 83, 87, 89–91, 103 C
application forms 158, 159 capacity planning 222–227, 222
assessment centres 158 capital 2, 122–126, 125, 129, 137, 139
assets and inventory management 231, 232–233
and availability of credit 135 career management 164–165
and capacity planning 226 carrying costs 232–233, 236
as collateral 130, 130, 140 case studies
current and non-current 121–122, 126 break-even analysis 237
and solvency of business 128 business environments 37–38
as source for own capital 123 business-supplier relations 199
associations and institutes 35, 156, 184 financial management 142–143
automation 206, 208, 220, 248 marketing strategies 67–68
operations management 244–247
B product quality 190

public relations and society 104–109
balanced scorecards 197, 218
public relations strategies 73–74
benchmarking 240
certification
benefits and incentives for employees 156,
BBBEE 185, 198
167–168
of products 190
black economic empowerment (BEE) 182, 185,
of suppliers 187, 189
198
chambers of commerce 35, 184
collateral 130, 130, 140 culture 50, 52, 53, 91

communication see also social environment
see also integrated marketing communication current assets 121–122, 126
(IMC) customers see consumers
as management function 7, 8
as marketing strategy 59–61
as PR strategy 74–75, 77, 85, 92, 93
D
compensation for employees 149, 166–168, 167 decision-making
competitors in consumer-buying process 49, 50, 54–55
and marketing strategies 62, 63–64 and information resources 258, 261–263
need for information on 40, 258–259, 260 as management function 6–7, 8, 43, 216, 255
part of business triad 217 delegation of tasks 4, 6, 6, 7, 9, 65
part of market environment 16 delivery of products
types of 24–25 and choice of supplier 182, 185, 187, 188, 192
conceptual skills 8 as marketing activity 45
consumer behaviour 49–55 and operations management 223, 228
consumer markets 22, 47 and purchasing management 179
consumer protection 34–35 demand management 222–223, 222, 243
consumers demographic factors 29–30, 89
buying behaviour 24–25, 29–31, 49–55, 50, 88 development of employees
consumer needs vs profitability 23, 176 see also training
disposable income 21–22, 25, 27, 28, 29 and human resource management 147, 148,
as target market 41, 48 149, 163–164, 165
control function 5, 6, 13 and public relations management 77
in administrative management 254, 255, 256 diagnostic skills 8
in human resource management 149 digital radio 88
in marketing management 65 directories
in operations management 222–237 advertising in 91
in public relations management 76, 78 as source of suppliers 184
coordination of tasks 3, 4, 6, 10 discipline 6, 7, 148, 149, 170
in administrative management 252–253, 256, discussion forums 93, 97, 101
264 disposable income 21–22, 25, 27, 28, 29
in human resource management 163–164 distribution of products 42, 61
in marketing management 65 as marketing variable 47, 48, 49, 50, 57
in operations management 211 during product lifecycle 62, 64
in public relations management 104
corporate advertising see advertising products E
corporate image 75, 80–81
economic environment 16, 26, 27–28, 27, 36,
creativity 149, 154, 201–205, 217
258
creditors 124, 125, 126, 134–135, 140
and HR development strategy 164
creditworthiness 120, 140–141
and marketing strategies 59
crisis management 82
emails 93, 94, 95
cross-functional teams 185, 186
276
Index
employees first-line management see operational

compensation and rewards 145, 148, 149, management
166–168, 167 fixed assets see assets
development and training 28, 66, 147, 148, folk media 91
149, 163–164, 165, 166, 255 forecasting 222–223, 223, 232, 243, 259
placement of staff 146, 161 foreign capital see outside capital
promotion 148, 152, 154, 161, 165, 166 Foschini Group (case study) 199
recruitment and selection 146, 149, 153–161 functional departments 10, 11, 19, 65–66
working conditions 35, 146, 168, 169, 170–172 functional management 9, 10, 11, 13, 249, 254
employment agencies 155 information needs 259, 260–261, 262, 264
e-newsletters 94, 95–96, 101
entrepreneurship 3, 4, 19
ergonomic workplace design 172, 221–222, 224,
G
254 Gantt charts 229, 259
evaluation general management 11, 13, 19, 66
of suppliers 181–190, 188, 196–197 Gilbreth, Frank 202
of work performance 148, 149, 152, 165–166, government markets 23
166 grading of products 45
exchange marketing activities 46 gross domestic product (GDP) 213–214
exchange rates 27, 36, 45
external business environments see macro- H
environment; market environment
health and safety issues 170–172, 242–243
and operations management 203, 212
F Hearing Coach Africa (case study) 244–247
Facebook 85, 86, 96, 98, 101 human resource management 11, 12, 145
feedback 5, 48, 196–197, 259 see also development of employees; training
finance functions 146–147
forms and sources of 128–135, 135–138 information needs 260
problems in obtaining 138–141 job descriptions and specifications 150–152,
financial management 11, 12, 117–118, 119 152, 162, 255
case study 142–143 maintenance activities 168–172
examples of financial activities 119–120 and other business functions 172–173
financial concepts 121–128 staffing policies 147, 148, 149, 153–163, 257
financing decisions 135–138 system and processes 147–149, 147, 148, 149
information needs 260 human resources 2, 4
problems in obtaining finance 138–141 and employee recruitment 153–154
financial resources 2, 4, 136 and operations management 204–205, 208,
long-term finance 129–131, 129 209, 216
medium-term finance 131–133, 131
short-term finance 124, 125, 126, 128, 129,
133–135, 133
financial structure of a business 126, 139
277
I interviews
for jobs 158, 159, 160
IMC see integrated marketing communication
as PR strategy 79, 87, 93
(IMC)
inventory management 224, 231–236, 231
incentives and benefits for employees 156,
167–168
income see disposable income J
industrial markets 22–23 JIT (just-in-time) systems
Industrial Revolution 202–203 and operations management 207–208, 213,
inflation 17, 27, 28, 36 217, 231, 233
information management see administrative and product quality 189
management and profitability 59
information resources 2–3, 4 job advertisements 151, 155–156, 157
for external role players 257–258 job descriptions and specifications 150–152,
for management 40–41, 258–263, 260–261, 152, 162, 255
262 job interviews 158, 159, 160
innovation 61, 63, 190, 206, 217 Johnson’s algorithm 230–231
see also technological environment
Instagram 86
institutes and associations 35, 156, 184 K
in-store media 90, 91 KFC 60–61, 101
integrated marketing communication (IMC) 73,
75, 81, 85, 104
L
interest rates
labour relations 146, 149, 149, 168–169, 173
and economic environment 26, 27–28, 258
Labour Relations Act 66 of 1995 169
and inflation 17
layout types 219, 220–222
paid by businesses 129–130, 131–132, 137
leadership function 2, 5, 6, 13
and political environment 33
in administrative management 254
internal business environment see micro-
in marketing management 65
environment
in operations management 237–238
international economies 36
lean production see JIT (just-in-time) systems
international environment 16, 36–37
legislation 33, 82, 216, 257
international markets 23, 40
Labour Relations Act 66 of 1995 169
international politics 36
Occupational Health and Safety Act 85 of 1993
international technology 36
172
Internet
Skills Development Act 97 of 1998 164
see also media; search engines; websites
Skills Development Levies Act 9 of 1999 164
and consumer behaviour 88
LinkedIn 86
and marketing function 41, 47, 59, 60, 61
liquidity 66, 128, 137
and online recruitment 155
loan capital see outside capital
and purchasing function 195
lobbying 82
interpersonal skills 8
long-term finance 129–131, 129
278
Index
M marketing orientation 40, 42–43

market research 45, 48
machinery
and consumer behaviour 51–52
as fixed asset 121
and Internet use 41
and operations management 205, 221, 224,
and operations management 222
225, 233, 241
and pricing strategies 59
and quality control 197
markets 21–23
macro-environment 15–16, 16, 18, 21, 26–36
composition 29
macro-productivity 213–214
geographic location 30
magazines 60, 76, 77, 89–90, 156, 184
market segmentation 47, 55–56, 67
maintenance
mass media 84, 86–92
of human resources 168–172
material requirements planning 234–235
and operations management 204, 229, 237,
measurement
241–242, 243
in operations management 205
of supplier relations 186–187
of productivity 214–216
Mambo’s Plastic Warehouse (case study) 37–38
of quality costs 241
management 5
of supplier performance 186–187, 196–197
see also demand management; functional
of supply chain performance 197–198
management; operational management;
work measurement 216, 252
strategic management
media
career management 164–165
controlled and uncontrolled 85–86
and communication 7, 8
forms of media 84–90, 85, 96
crisis management 82
internal media 92
and decision making 6–7, 8, 43, 216, 255
online vs traditional 83–84
general management 11, 13, 19, 66
online PR tools 74–75, 93–103
levels of 9–10
relations with PR managers 79–80
management skills 1–2, 8–9
support media 90–92
administrative managers 256–257
traditional vs online 83–84
market environment 15–16, 16, 18, 20–26, 62
media rooms 74, 93–95, 94
marketing management 11, 12, 41–42
medical examinations 158, 160
see also consumers
medium-term finance 131–133, 131
case study 67–68
microblogs 97, 100
activities and strategies 45–49, 48
micro-environment 15–16, 16, 17, 18, 19–20
control and leadership functions 65
micro-productivity 214–216
environment 48–49
middle management see functional management
information needs 40–41, 260
mission statements
marketing mix 56–61
on company’s website 183
orientation and concepts 39–43, 44
and human resource function 165
need for 43–45
and leadership function 5, 6
and other business functions 40, 65–66
and marketing function 40, 47, 48
production and consumption gaps 43–45
part of micro-environment 16, 19
and product life cycle 61–65
and planning function 4, 6
and public relations 75
use of blogs 100
279
monitoring information needs 260

as human resource function 149, 163–164 and layout types 219, 220–222
as marketing function 55, 59, 60, 61 nature and creativity of operations 201–205,
of media 86, 100, 101, 103 217
as operations management function 229 and operations improvement 237–243
motivation and other business functions 243–244
and accident prevention 171 performance objectives 212–213
and consumer behaviour 49–50, 50 strategy and design 216–219
as management function 6, 7, 237 technology and innovation 206, 217
and operations management 242 transformation processes 3, 4, 210, 210, 219
and productivity 209 types of operations systems 211–212,
219–220, 220
value and time factors 207–208
N opinion leaders 50, 52, 53–54, 53
Nando’s 61 oramedia 92
National Productivity Institute 214 order costs 233, 235, 236
natural environment 16, 32–33, 216 organising function 3, 4, 5, 6, 13
natural resources 1, 2, 19, 32 and administrative management 254
Nedbank 145 and marketing 65
networking 82–83, 138, 175, 257 and public relations 76
newspapers orientation of staff 146, 149, 153, 161–163
advertising for jobs 155, 156 outdoor advertising 90
and public relations function 76, 79, 83, 88–89 outside capital 36, 124–125, 124, 125, 126, 129,
as source of suppliers 184 136, 137, 139
Noise Clipper 230, 231, 233, 234, 236 own capital 123–124, 125, 129, 137, 139
case studies 237, 246–247
P
O packaging of products 33, 42, 51, 58
Occupational Health and Safety Act 85 of 1993 PepsiCo (case study) 67–68
172 performance management 148, 149, 152,
online media 74–75, 83–84, 88, 93–103 165–166, 166
online monitoring tools 83, 103 performance objectives 212–213
online press releases 102–103 personnel administration 146, 169–170
online public relations strategies 74–75, 93–103 personnel manuals 170
online recruitment websites 155 physical environment see natural environment
operational management 9–10, 11, 13 physical resources 2, 3, 4
information needs 259, 262 placement of staff 146, 161
operations management 11, 11, 201–203, 209 planning function 4, 6, 13, 259
see also inventory management; productivity; in financial management 140–141
scheduling in operations management 222–237
case studies 237, 244–247 in public relations management 76, 78, 104
and capacity planning 222–227, 222
280
Index
political environment 16, 33–35, 36, 169, 195 profitability

pollution 30, 33 vs consumer needs 23, 176
population trends 29–31, 259 and financial function 66, 127–128, 137
press releases 79, 83, 95, 101, 102–103 and marketing function 43, 48, 59
prices and operations management 213
and choice of supplier 181, 182, 192, 192 promotion of employees 148, 152, 154, 161, 165,
and distribution channels 61 166
as marketing variable 47, 50, 57, 59 promotion of products
and product life cycle 63, 64 as marketing strategy 47, 56, 59–61, 62, 63
and product quality 189–190, 241 as PR strategy 73, 81–82
and purchasing function 66, 187, 260 psychometric testing 158, 159
and value gap 45 publications 77, 80, 86, 90
print media 79, 84, 89–90 public relations management 11, 12, 72
process design 210–212, 219, 224 see also media
product forms 25 case studies 73–74, 104–109
production and operations management see characteristics and functions 75–77, 76–77
operations management and communication 74–75, 85, 92, 93
production factors 16, 19–20, 146, 169 information needs 261
productivity as management function 103–104
and administrative function 252, 254, 259 new meaning of PR 73, 75
and operations management 202, 204, 207, online public relations strategies 74–75,
209, 213–216, 224, 242 93–103
and planning function 4 PR process 77–78, 77–78
product mix 57–58 ‘publics’ and ‘stakeholders’ 72–73
product quality and society 104
see also total quality management (TQM) tools and techniques 78–83
case study 190 public tenders 182, 183
and choice of supplier 181, 182, 186, 187–188, purchasing management 11, 12, 179–180
188, 197 see also suppliers of resources and services;
and consumer behaviour 30, 50, 56 supply chain management
as marketing variable 42, 44, 50 information needs 260
and prices 189–190, 241 and prices 66, 187, 260
products pure marketing see marketing orientation
see also advertising products; delivery of
products; distribution of products
certification 190
Q
grading and standardisation 45, 58, 195, 211, quality control 189–190, 197, 237, 238
220 quality of products see product quality
life cycle 61–65 questionnaires 186, 195
packaging 33, 42, 51, 58
storage 39, 46, 117, 233, 244
product safety 34
281
R short-term finance 124, 125, 126, 129, 133

characteristics 134
radio media
and liquidity 128
advertising for jobs 155
skills see management skills
online stations 88
Skills Development Act 97 of 1998 164
and public relations function 76, 77, 85, 87–88,
Skills Development Levies Act 9 of 1999 164
91, 96
social environment 16, 29–31, 52–54
real simple syndication (RSS) 93, 94, 102
social media 74, 85, 86
recruitment and selection of staff 146, 149,
monitoring 103
153–161
as online PR tool 94, 96–101, 96, 97
reference groups 50, 52, 53, 53
Soil for Life 105, 107
references 158, 159
solvency 66, 128
reorder points (ROP) 234
South African Bureau of Standards (SABS) 35,
resale markets 23
190
research
sponsorships 76, 81
see also market research
staffing policies 147, 148, 149, 153–163, 257
and operations management 204–205, 206,
see also employees
214, 216, 243
Standard Bank 107
as problem-solving technique 7
case study 73–74
and public relations function 76, 77, 79
standardisation of products 45, 58, 195, 211,
resource suppliers see suppliers of resources and
220
services
statutory provisions for businesses 34–35, 163
return on equity (ROE) 127, 137
stock see inventory management
return on total investment (ROI) 127, 128, 137
storage of products 39, 46, 117, 233, 244
rewards for employees 145, 148, 149, 166–168
strategic management 9, 11, 13, 49
rural areas 30, 91
information needs 258–259, 262
and operations management 216–219
S suppliers of resources and services 25–26
safety see health and safety issues case study 199
sales orientation 40 business-supplier alliances 190–198, 192, 194,
scheduling 202, 221, 224, 227–231 195
SCOR model 197 – 198 selection and evaluation 181–190, 188,
search engines 183 196–197
search engine optimisation (SEO) 83, 94, 102 and short-term financing 124, 125, 134–135
seasonal products supply chain management 176–179, 178–179,
and financial function 126 180
and financial management 115 measurement tools 197–198
and operations management 212, 223, 226 supply chains 177, 178, 197
and storage 46 support media 90–92
service suppliers see suppliers of resources and SWOT analysis 40, 218
services
282
Index
T transformation processes 3, 4, 209–210, 210,

219
target markets
transit advertising 91
and choice of media 60
Twitter 85, 86, 96, 100–101
and consumer behaviour 41, 48
and market segmentation 47, 55–56
and opinion leaders 53 U
and pricing strategies 59 urbanisation 30, 31
and product life cycle 61–64
and public relations function 83
taxation 33, 34, 126, 137, 215 V
Taylor, Frederick 202 Variphone 210
technical skills 2, 8, 154 case study 245–247
technological environment 16, 27, 31–32, 36, vision of a business see mission statements
258
and administrative management 251
W
and innovation 206, 217
websites
and marketing function 59
as controlled media 85, 86
television stations 88
as PR communication tool 93–95, 93, 94
and advertising 83, 91
and search engine optimisation 83, 94,
and marketing function 60
101–102
and public relations function 76, 77, 87, 93, 96
and selection of suppliers 183–184
tenders 182, 183
Woolworths 59
tests for employees 158, 159
case study 105–108
time management skills 8, 9
working conditions 35, 146, 168, 169, 170–172
top management see strategic management
work measurement 216, 252
total quality management (TQM) 207, 217, 237,
work performance see performance management
238–240, 243, 244
workplace design 172, 221–222, 224, 254
trade creditors 124, 125, 126, 134–135, 140
work study 216, 243
trade cycles 27, 28–29
trade directories and journals 155, 184
trade fairs 184 Y
trademarks 25
YouTube 86
trade unions 34, 35, 160, 169
Yuppiechef (case study) 105–109
training
consumers 30
employees 28, 66, 148, 149, 163–164, 166, 255
information needs 260
managers 165
and operations management 208, 214, 216
and public relations function 77, 93
283

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BUSINESS

A van Noordwyk, NMJ Fernandes & JH van Zyl (editors)

Business_Functions.indb 3 2012/01/18 12:53 PM

First published 2012

Juta and Company (Pty) Ltd

PO Box 14373, Lansdowne 7779, Cape Town, South Africa

© 2015 Juta & Company (Pty) Ltd

ISBN 978 1 48511 181 8 (Parent)

Project manager: Marlene Rose

Typeset in Cambria, 10pt

Chapter 2: The Business Environment – Andreas de Beer 15

Chapter 7: Purchasing Management – Prof Hannie Badenhorst-Weiss 175

Chapter 8: Operations Management – Prof Rigard J Steenkamp 201

Chapter 9: Administrative Management – Prof E Ferreira 248

We hope you enjoy the journey.

The Consulting Editors

Annemarie van Noordwyk is a lecturer in the Department of Business Management at

Naquita Fernandes is a junior lecturer in the Department of Business Management at

INTRODUCTION TO BUSINESS MANAGEMENT

For managers to navigate businesses in today’s turbulent environment, they require

1.2 Nature of management

financial statements of the business, statistics of the business and so on.

An organisation’s resources, or inputs, should be transformed into certain outputs. These

Inputs Transformation Output

Human Physical transformation Achievement of goals

Entrepreneurship Job creation

The functions of management do not occur in a tidy step-by-step sequence. Managers do

1.3 Definition of management

Management is the process of utilising an organisation’s resources to achieve specific objectives

Figure 1.2: Definition of management3

1.4 The additional management functions

Some problem-solving techniques are:4

• the nominal group technique

• the Delphi technique.

1.5 Management skills

• Time management skills

1.6 Managerial levels

1.6.1 Top management

1.6.2 Middle management

1.6.3 First-line management

generally report to senior/middle management and they supervise operative employees.

1.7 A perspective on business functions

In large organisations, a functional manager will manage a department. Functional

Effective functional management requires that the objectives of each functional

The functional departments in a business can be represented diagrammatically as seen

Figure 1.3: Functional classification of a business

1.8 The difference between the general management

1.8.2 Operations management

1.8.3 Financial management

1.8.4 Purchasing management

1.8.5 Administrative management

1.8.6 Marketing management

1.8.7 Human resource management

1.8.8 Public relations management

1.9 Interaction of general management with other

These four fundamental functions of management are performed on all levels of

THE BUSINESS ENVIRONMENT

2.2 The business environments

The organisation has a limited effect on the

Micro-environment Market Macro-environment

The macro-environment influences the

Figure 2.1: The composition of the business environment

The following example contains a summary of the most important variables in