The composition of the business environment

Transcription

1 Gr 11 Bus Studies Notes on Module 1: Business Environments (LO1) Compare and describe the extent to which a business can control and influence the micro, market and macro business environments. The composition of the business environment The organisation has a negligible effect on the macro environment Micro environment Vision, Mission and goals of the organisation The organisation and its management functions, e.g. marketing, financial and production management The resources of the organisation, e.g. human resources, capital and physical Organisational culture Structure Choice of strategy Market environment The market: consumers, their needs, purchasing power and behaviour Suppliers Intermediaries Competitors Substitute products Possible new entrants Labour unions Macro environment Political environment and or Physical environment Economic environment and/or Ethical Social /Social- Economic environment Technological environment Legal Environmental The macro environment influences the organisation directly, e.g. the effect of interest rates on financial management or legislation with which human resources must comply Ms J Cansfield Gr 11 Bus Stud. (LO1: Business Environments) Page 1 of 25

2 Control over the business environments 1. Controlling the micro environment The micro environment consists of the business itself, and management has almost complete control over it. The components or variables in the micro environment, namely business strategies and objectives, business functions, management tasks and business resources, are controlled by management. Included in the micro or internal environment are the business s employees and the corporate culture. It is within the micro environment that management plans, organises, leads and controls the activities of the business. 1.1) Controlling business strategies and objectives The management of a business decides what the objectives and plans of the business will be. Objectives could include: to satisfy the needs of customers, to reach specific sales or production targets, or to be socially and environmentally responsible. Strategies or plans are developed to deal with the risks that the business will encounter when it works towards reaching its objectives. Important factors when maintaining control over the micro environment are effective financial systems, as well as effective operational methods for the day-to-day running of the business. 1.2) Controlling the business functions and management tasks The different business functions make up another set of variables within the micro environment which interacts with the external environments. Although management has a great deal of control over the business functions, there are certain aspects that cannot be controlled or where the business has to adhere to certain regulations, for example, legislation that prescribes labour practice and advertising standards. Other than these, management has total control over how effective the business functions will operate, and their decision-making will have a major influence on the success of the business. For example, developing an effective marketing campaign, creating a pleasant and healthy work environment, setting up budgets and controlling expenses, choosing appropriate and modern technology for the administration function. It is clear that the management task is of vital importance in ensuring that the business s micro environment operates productively, profitably and responsibly. 1.3) Controlling the resources The business must utilise its resources as effectively and efficiently as possible in order to achieve its objectives. Once again, the control of the resources depends on effective management. Resources that the business has control over include: Physical resources such as machines, stock and vehicles. Financial resources such as cash, capital and debtors. Human resources which involves the selection and placement of employees, skills development and training and remuneration policies. Information resources, for example, information on sales, budgets and market research. 1.4) Controlling the Organisational Culture Control in terms of integrity and honesty. Management must set a standard and example, that will inspire and motivate employees to follow suit, and create a work environment where people respect one another and authority, have pride in their work and take responsibility for their actions. Ms J Cansfield Gr 11 Bus Stud. (LO1: Business Environments) Page 2 of 25

3 Activity 1 1. Working on your own, answer the following questions in your workbook. 1.1 Define the term micro environment in your own words. 1.2 Describe the eight business functions and briefly explain the extent to which a business can control each one of the business functions. 1.3 Besides the business functions, name the other micro environmental variables. 2. Controlling the market environment The market environment is the direct external environment in which the business operates, and includes variables such as the consumers, suppliers, competition, labour unions and intermediaries. The market environment is very important as it presents both threats and opportunities to the business, therefore having a direct influence on the success or failure of a business. Bear in mind that the market environment is influenced by the macro environment, and that changes in the macro environment will affect even the smallest business in the market. Management does not have control over the market environment, but can influence the market if they have a well-planned and wellimplemented strategy. 2.1) Influencing consumers (the market) Consumers have a major impact on the business, as they have the buying power. Business management does not control the behaviour of the consumer, but should rather try to influence the customers to buy their products instead. In order to do this, a business has to do market research in order to get to know its target market well, and must strive to satisfy the needs and desires of the customer. There are various factors that influence the behaviour of the consumer. When advertising its products and/or services, the business should take these factors into consideration, for example, cultural, social and psychological factors. Buying decisions made by the consumer are also influenced by personal factors such as age, gender, occupation, lifestyle and personality. Management must also remember that consumers buying decisions are directly influenced by the macro environment. Economic factors, political issues, population growth and socio-economic issues will influence the market environment (consumers), and eventually these will have an influence on the products and services that the business offers its customers. 2.2) Influencing suppliers Suppliers provide the business with the resources to produce products or provide services, and could include manufacturers, farmers, processors, mines, wholesalers and retailers. The business must be able to depend on its suppliers and ensure that it is able to buy the right quality and quantity of raw material, semi-finished goods or finished goods, at the right price and at the right time. If a business does not have reliable suppliers, it will not be able to compete successfully in the market environment. Management has no control over the suppliers, but can influence the following instead: price, through special payment agreements; the policy of the supplier by negotiating with a supplier to change the content of a product to better suit the needs of the customer; and professional relationship it has with its suppliers through long-standing agreements, trustworthiness and keeping the supplier informed about the needs, tastes and habits of the consumer. 2.3) Competitors Competition in the market environment can be described as a situation in which businesses who sell the same product or service compete for the support of the same customers. Businesses also compete for materials and capital, as well as for labour, especially for workers with skills that are hard to find. Ms J Cansfield Gr 11 Bus Stud. (LO1: Business Environments) Page 3 of 25

4 The management of a business cannot control the behaviour of its competitors, but must have thorough knowledge of its competition and how it affects the business. Examples of the information that should be available to management are: Who are the competitors and where are they situated? What products/services do they offer? What is their reputation in the market? How big is their market share? What business practices do they follow? If management has the necessary information, it enables them to make better business decisions regarding the competition and, in doing so, ensures the successful survival of the business in the marketplace. Always bear in mind that competition is not a negative factor; it keeps the profits of businesses within reasonable margins, promotes higher productivity, encourages innovation and creativeness, and the consumer benefits from competition because it results in lower prices and better service. 2.4) Labour unions Labour or trade unions are there to protect and promote the interests of the individual worker or groups of workers. Workers believe that being a member of a trade union will help them to improve their situation and their standard of living, and decrease any frustration or problems that they might have at their place of work. In South Africa, where labour legislation is very stringent and the relationship between management and the trade unions often involves conflict, there is a need for both parties to compromise and ensure that the decisions taken are to the benefit of the workers and the business successful survival. Management has no control over the trade unions, but can influence their activities and decisions by implementing labour legislation effectively and ensuring a safe and positive working environment. Management can also influence the behaviour of the trade unions by making use of legislation that is there to protect the employer, for example, getting a court interdict when workers go on an illegal strike. 2.5) Using intermediaries Intermediaries (also known as middlemen ) help to bridge the gap that exists between the producer and the consumer, and help businesses to sell, promote and distribute their goods. Examples of intermediaries are wholesalers, retailers, agents, representatives and banks. Wholesalers and retailers buy and resell products, distribution firms help the business with warehousing and transport, banks and insurance companies help the business with financing and insurance, and agents and representatives help the business to market and sell their products or services this is known as indirect marketing. In some cases these tasks are performed by the business itself, but more and more businesses choose to outsource these tasks to outside contracting firms. Management does not have control over intermediaries, but can influence them in many ways. For example, businesses can influence banks to extend their opening hours. 3. Controlling the macro environment Apart from the market environment which has a more direct effect on the business, the business also operates in a larger macro environment with variables that have a direct and indirect influence on the business. These variables are uncontrollable, bringing about continuous change that has an important influence on the market and micro environments. Although the business has no control over the macro environment, there must be strategic plans in place to ensure that the business can adapt to change and still reach business objectives. Therefore, it is important that management knows of the trends and changes in the macro environment, and has reliable information upon which to base their decisions. The macro environment consists of six variables: the technological, economic, sociocultural, physical, political and international environments. Ms J Cansfield Gr 11 Bus Stud. (LO1: Business Environments) Page 4 of 25

5 3.1) The political environment / Legal The business enterprise is influenced by the country s politics and government decisions and regulations. The politics of the governing party will steer development and economic policy in a certain direction. In South Africa, the government aims at maintaining a market economy, private ownership and freedom of speech. The government influences the macro environment through the annual budget, legislation, taxes, import tariffs, health regulations, import control, promotion of exports and government spending. Management must study the activities, legislation and measures of the government and stay informed about political trends. 3.2) The economic environment The economy of a country is influenced continuously by other factors in the macro environment, for example, technology, politics, social and international environments, and the physical (or ecological) environment. These, in turn, lead to changes in the rate of economic growth, employment levels, inflation, consumer income and the exchange rate. Ultimately, the relationship between all these different aspects results in the prosperity or adversity of a country and, in turn, has an important influence on the business and its management. Management has no control over economic forces. However, a measure that can be taken is to improve productivity. All the production factors should be used more efficiently in order to produce a high output. This will in turn contribute towards job creation and help to improve the economic growth of the country. 3.3) The socio-cultural environment A business is influenced by the socio-cultural environment in which it operates people are products of a society, they are members of a particular community and they adopt the culture of the society. Culture is the sum total of the way of life of a group of people and includes aspects such as language, values, faith, expectations, laws and customs. Culture and social circumstances influence the individual s lifestyle and therefore, consumer spending. However, culture is not static, and a community s values, expectations, habits and way of life will change over time. A business is at the centre of social change and should keep up with the influences of social trends. Management needs to develop strategies and programmes to deal with social influence, for example, the HIV/Aids epidemic. Other social trends that have an influence on business are demographic change, urbanisation, the changing role of women, crime and consumer rights. Social problems, such as HIV/Aids and poverty, bring about change in the environment and management cannot afford to ignore these influences. Businesses can influence the social environment by becoming involved in social responsibilities such as health, education and job creation. 3.4) The technological environment Technology may be defined as the knowledge needed to do something. doing can be something traditional like making butter, or something in the new millennium, like using your latest internet facility. Therefore, technology is not just about the latest ipod or cellular phone, but is also involved in every process of a business, from manufacturing, marketing, to managing. Technology determines how a business makes it products or serves its customers, and it also affects the business s markets and the business s ability to compete in the market environment. Therefore, management must be aware of technological changes and innovation, as these have an effect on the whole business, and in many cases, the whole industry. Technological change or innovation can create significant opportunities and help a business to gain a competitive advantage. Ms J Cansfield Gr 11 Bus Stud. (LO1: Business Environments) Page 5 of 25

6 Think about the opportunities created by the Internet, and how it has changed the way people do business or banking! A business must manage technology effectively to ensure higher productivity, greater competitiveness and continuous growth. 3.5) The physical environment The physical or ecological environment consists of limited natural resources and includes water, air, climate, the oceans, soils, minerals and the fauna and flora in a country or region. The natural resources of a country need not only be conserved and maintained for future generations, but should also be managed well as they provide the raw materials for several industries and businesses. For example, South Africa is rich in minerals and this factor creates a favourable environment for the mining industry. However, at the same time, the mining industry has a major responsibility to look after the environment in terms of air, water and soil pollution and should take great care in rehabilitating natural areas once mining operations come to an end. The physical environment presents opportunities as well as threats to the business, and management cannot ignore the important role the physical environment plays in the survival of the business, as well as in the quality of life of others including man, animals and plants. Thus it is crucial that management takes responsibility for the effect of business activities on the natural environment. A pro-environmental approach has solid business advantages: favourable perceptions of the business by outsiders as well as pro-active conservation efforts to counteract diminishing natural resources. 3.6) The international environment The activities of all three sectors work together, with support from government, to ensure that the economic system functions, and that production, distribution and consumption are healthy and operational.. Every product goes through one or more stages of processing and, depending on the complexity of the product, it moves through different industries and economic sectors. This route that the product follows from raw material stage, right through to the final product, is called the industrial column. Most business enterprises are affected in some way by what happens internationally. When the World Trade Centre was attacked in 2001, it had an influence on various industries such as tourism and air travel. Although this event took place in another country, many Southern African businesses in the tourism, hospitality and travel industries were influenced as the number of bookings and tourists showed a decline for a long period afterwards. However, the global economy also offers vast opportunities to the entrepreneur and many South Africans are doing business internationally, marketing their unique products overseas and making their talents, knowledge and experience available to international and multinational organisations. The business has no control over this environment, but can improve quality, technology and price to make it more competitive in the global markets. Activity Define the following terms in your own words: Consumerism Interest rate Intermediaries Multinational business Ecological environment Culture Ms J Cansfield Gr 11 Bus Stud. (LO1: Business Environments) Page 6 of 25

7 3.2 Discuss how business managers/owners should attend to the following important issues in the social-cultural environment. Choose two for your answer: Unemployment HIV/Aids Education The changing role of women 3.3 Write a paragraph about the importance of conserving and managing our country s resources. Why do you think it is important, and how can you make a difference? Relationships in business We have seen that the management of a business does control the micro environment, and that they can influence the market environment. As far as the macro environment is concerned, management has to have strategic planning in place to be able to change with the times with technology and the political situation so that they can have a positive influence on the conservation of natural resources. In the business world, it is very important to form relationships with parties that are interested in the business, and with those that have an interest in the business. These relationships can help the entrepreneur to combat some of the influences from the three business environments. These relationships can take the form of power relationships, networking or lobbying. A. Power relationships Power relationships refer to forms of empowerment such as black empowerment (BEE) and the empowerment of employees. The aim of BEE is to ensure broader participation in the economy of black people to achieve sustainable development and prosperity. BEE is required by law and companies have to go through the BEE process in their organisations. Black Economic Empowerment should become part of the business s strategy to gain a competitive advantage and for the business to be sustainable. Power relationships can also refer to the empowerment of employees in an organisation. Through negotiation and trade union representation, the business can grant workers the right to determine their own destiny by making them part of the decision-making process, for example, by giving them shares in the business. Sharing of power between management and the workers could help managers to improve quality, motivation and commitment from employees, and this would lead to higher productivity. B. Networking Networking means establishing relationships with individuals, groups or other businesses that can contribute to the success of the business. It is important for the entrepreneur to know about networking, and to develop networking skills. A network may be defined as interactions between individuals, groups of people or large organisations. Business networks share the following characteristics: they are win-win situations for both parties they follow certain fixed patterns they provide human and physical resources for initiating and maintaining business. There are different types of networks that the entrepreneur could be part of, for example, social, personal, extended and electronic networks. Social networks refer to communication and the exchange of information between different groups, this could take place in informal or formal circumstances. Individual networks refer to those direct relationships between the entrepreneur and those with whom he/she does direct Ms J Cansfield Gr 11 Bus Stud. (LO1: Business Environments) Page 7 of 25

8 business, and communication mostly takes place face-to-face. Extended networks refer to organisations or businesses that communicate and exchange information. Electronic networking refers to the use of technology in networking communication, for example, through electronic mail or the Internet. It is also important that the entrepreneur or business owner build relationships with government and important role players in society in the same way he/she builds relationships with consumers, suppliers and intermediaries. Networking plays an important role in the growth of a business and has other functions such as: increasing the entrepreneur s level of aspiration helping to identify opportunities providing practical assistance providing emotional support providing a sounding board for ideas. C. Lobbying Lobbying means persuading individuals or groups who have decision-making power, to support a position that you believe is right. When management does strategic planning, it is important to identify other stakeholders whose co-operation or influence could be important to the success of the business. Lobbying can be used to influence anyone with power, for example: female employees can lobby management to provide pre-school care for their children at their place of work shoppers can lobby the manager of the local supermarket to extend shopping hours conservatives can lobby the President to bring back the death penalty an environmental group can lobby against the building of a new road in an environmentally sensitive area. Mostly, lobbying is used by organisations to persuade politicians or others with power and influence to support the organisation s position. Large organisations have made government relations part of their public relations function and, quite often, specific people are appointed for the purpose of lobbying. Smaller businesses can make use of consultant lobbyists to undertake the lobbying function for them whenever necessary. There are some basic principles for effective lobbying: the lobbyist must be clear on his/her issue, facts and position lobbying is only used for important issues that could improve life for all employees as well as the community the right people must be targeted who has the power to make a decision? a lobby group should be built and others with the same position to support the issue should be mobilised blackmail, bribery, gifts or favours to persuade someone should never be used these are corruption, not lobbying. Activity In your own words, describe what the following means to you: black economic empowerment empowering employees 4.2 Write a paragraph on the important role that networking plays in the growth of a business. Ms J Cansfield Gr 11 Bus Stud. (LO1: Business Environments) Page 8 of 25

9 Identify and discuss how a business constantly needs to adapt to the challenges of the micro, market and macro business environments The business enterprise functions in a complex, dynamic and rapidly changing environment. For a business to be successful, management must understand the environment they operate in and how these changes will influence the business enterprise. Problems and opportunities are complementary when a problem arises, management must find new and innovative ways to deal with it. 1. Challenges in the micro environment Management has complete control over the micro environment, and this environment should be managed effectively if a business wants to deal successfully with the challenges of the external environment. However, there are factors that can upset the stability of the internal business environment, and management must be able to adapt to these changes. 1a. Business vision, mission, goals and objectives A business must have a clear vision, which must be evident in its mission statement this is what gives the business its direction and purpose. Without proper goals and objectives, management cannot set strategies and there will be no effective business operation. Management and employees should all understand the vision and mission of the business, and these will help to bring them together as a team, each member contributing to the achievement of the business s goals. 1b. Employer and employees There are many factors regarding the labour force of a business that can unsettle the micro environment. In today s business world, it is important that employees should be part of the decision-making process, and management should respond to this challenge, and work with employees, motivating them, transferring skills and giving them every opportunity to do their work to their full potential. Management should improve work satisfaction of workers by offering market- related remuneration packages, creating a pleasant and safe work environment and favourable working relations. The employees also have a responsibility towards the business and must strive to deliver quality products or service. Both management and employees should promote a culture of entrepreneurship, be creative and respect and evaluate new ideas and methods. An important factor concerning the labour force is industrial action such as strikes and the go-slow issue. Especially in South Africa, the cost of labour has increased to such an extent that employers are forced to retrench workers in order for their business to be profitable. Industrial action is a powerful method for the workers to tell their employers about their issues. If strikes and go-slows are not handled effectively between management and trade unions, they could be damaging to both employer and employee. Management and leadership In order for a business to be successful, its top, middle and lower managers must be skilled and knowledgeable. Functional managers, for example, the marketing or financial manager, must be skilled in the technical aspects of their jobs, as well as in interpersonal skills. At all levels of management, the manager must be a motivator and a role model to his/her staff, and the manager and staff must work together as a team. In this way, much more will be achieved, and work satisfaction will be higher, which again leads to higher productivity. Ways in which management can prepare for challenges and change is to have knowledge of the environment for decision-making purposes, Ms J Cansfield Gr 11 Bus Stud. (LO1: Business Environments) Page 9 of 25

10 changing existing strategies or coming up with new ones, adapting or redesigning the structure of a business. In order for a business to be successful and grow, it needs to have strong leadership. In the competitive world of business, the activities of the business leader must be focused on adapting to change and maintaining a competitive edge. Leadership means acknowledging the needs and goals of your subordinates, motivating and inspiring subordinates and leading by example. 1c. Resources All four factors of production (natural resources, human resources, finances and entrepreneurship) are controlled by management in the micro environment. These resources should be utilised optimally by the business and changed to suit the needs of the business. However, it is important that the business does not exploit or waste the resources to its own disadvantage, or to that of its employees and the community in which it operates. 1d. Business Culture It is of vital importance to encourage a culture of entrepreneurship in today s business world. This will give a business the competitive edge, helping it to adapt to change, and turning problems into opportunities. 2. Challenges in the market environment The market environment is the direct external environment in which the business operates, and consists of suppliers, competitors and consumers. Management cannot control the market environment but they can influence the market environment or adjust to the influences coming from this environment. In order to do this, management has to scan or explore the market environment continuously. Investigation or exploration of the market environment consists mainly of analysing the industry and the business s competitors. The competitive edge of a business is determined by the interaction between the business and its market environment. Investigating the market environment Market (External) Environment When looking at the market environment, Porter s Five Forces model is useful. This model investigates: The level of rivalry in the market; The availability of substitute products; The threat of new entrants that may join the market; The power of suppliers; and The power of buyers. In addition to what is covered in Porter s model, it should be mentioned that other models exploring the market environment also include trade unions as a point of focus. Different models can be used to scan the market environment. The model used in a business is not important, but rather that the business scans the environment to pre-empt events. Ms J Cansfield Gr 11 Bus Stud. (LO1: Business Environments) Page 10 of 25

11 2(a&b). Level of Rivalry in the Market and Substitute Products: Although Porter separates competition (rivalry) from substitute products, we will look at them together and just classify them as first-, second- or third-level competitors. Competitors may be more than the businesses selling the same product. Simba Chips does not only compete with all other crisp manufacturers [other brands), but also with snack mixes such as peanuts, rice cakes and savoury biscuits. And how about popcorn? Is it possible that it even competes with chocolate and other types of candy? It is in the business s best interests to find out as much as possible about competitors. These issues may include ownership structures, location(s), any information about financial performance that may be available, their products including patents, quality, brand loyalty, new products, market share, promotion strategies, distribution channels, employees, organisation culture and morale as well as any other information that may be relevant. Doing a competitor profile is not illegal (no spying ); it is merely getting to know your enemy so the business can pre-empt any actions and adapt its own strategies to be more successful. It is, however, not only the current competitors that should receive some attention. One should also look at future competitive threats in order to establish what the threats and opportunities are in the market environment. 2c. The Threat of New Entrants to the Market The greater the opportunity for profits in the market, the more likely it is that there will be new entrants in the market. The same is true if there is currently little competition or if there are currently not enough suppliers of this product or service to meet consumer demand. The threat of new entrants is, however, diminished if there are certain barriers to entering the market. Some of these barriers may include brand loyalty from existing consumers, Government policies (e.g. BEE requirements to get contracts), huge capital outlay or limited distribution channels. Although these barriers are to the advantage of existing operators in that particular industry, it also makes it more difficult for a business to branch out through diversification. 2d. The Power of Suppliers When we look at suppliers, the first thought is usually in terms of suppliers of raw materials or products to be sold. This is of course very important because in order to be successful the business needs the right quality and quantity of material at the right time (without delays) at a reasonable price. Otherwise it becomes impossible to compete. Consider the costs involved if the business has a stock-out and the supplier cannot deliver: There will be a loss of production because there can be no production without material. The business will suffer a loss as a result of idle time, i.e. time when machines and labour cannot be utilised to their full capacity. If a business has run out of stock, it becomes very difficult to negotiate discounts when placing orders. This presents an opportunity cost for the business. Customer goodwill may be lost. The customer may either temporarily or permanently switch to a competitor. It is necessary, however, also think a little wider and consider the power that suppliers of financial resources have. And what about labour suppliers? What will happen for example if the trade union organises a strike? Ms J Cansfield Gr 11 Bus Stud. (LO1: Business Environments) Page 11 of 25

12 2e. The Buyer (including Intermediaries) The buyer may include more than the final consumer of the product or service. The business may also supply goods to intermediaries in the distribution channel, e.g. agents, wholesalers or retailers. If the business does sell to intermediaries, there are some techniques that can be applied in an effort to control these intermediaries: Sole agency: The manufacturer gives the wholesaler the sole right to sell the product in a specific area. The wholesaler will get commission on goods sold. In return the wholesaler will sell at the price prescribed by the manufacturer and the wholesaler also agrees not to sell similar goods from other manufacturers. Contract system (price binding): The manufacturer offers a discount to the wholesaler/retailer but once again the dealer (wholesaler/retailer) has to sell the product at the price prescribed by the manufacturer. If contract is not honoured, the dealer is blacklisted and the manufacturer will no longer allow him to sell the product. Financial control: The manufacturer gives the dealer financial assistance, e.g. the manufacturer pays the dealer s licence, allows the dealer to use his premises or helps the dealer to pay rent. The manufacturer has control over the dealer and can force the dealer to sell only his goods. For example: Petroleum and oil companies can help garages selling their brand of petrol by supplying capital. If the business sells to the final consumer, it is important to know who the buyers are in terms of their demographics (e.g. age, income, gender, education and occupation) and their geographic profile, but we can also segment the target market using lifestyle criteria such as hobbies, recreation, political beliefs and cultural background, to name but a few. The business has to use the most appropriate criteria when doing market segmentation as a geographical profile may or may not help to determine who consumes alcohol, for example. In this instance a geographical profile would only be useful to identify regions where there is a high concentration of people following the Muslim religion but additional information may be required to decide where to establish a liquor store (as opposed to deciding where not to establish the liquor store). This type of information can be obtained by doing primary research or through secondary research. Activity 5 Select a business of your choice and apply Porters Five Forces model to describe the market environment in which the business operates. Chambers of Commerce as role players in the marketing environment: Local Chambers of Commerce can be affiliated with a national body, the South African Chamber of Business (SACOB), which represents more than 100 Chambers of Commerce and Industry in South Africa with a membership exceeding businesses. SACOB aims to assist the different Chambers of Commerce and their members in developing business in the communities in which they operate SACOB sees itself as the voice of business. Ms J Cansfield Gr 11 Bus Stud. (LO1: Business Environments) Page 12 of 25

13 Purpose / Objective / Services / Advantages of Chambers of Commerce: Regional development The overall economic development of a specific region can be achieved not only by stimulating trade in that region but also by stimulating trade with other regions. Bargaining power Chambers of Commerce can be seen as the voice of businesses in a particular area. Because all the businesses work together, they have more bargaining power when it comes to negotiating municipal regulations and laws, e.g. trading hours. Arbitration - helps to settle disputes amongst members. Statistical information that may help businesses, e.g. age distribution and purchasing power in a particular area, is made available to members. Keep a blacklist of debtors for the information of members. Eliminate competition amongst members if this competition could be harmful to the over all functioning of commerce in the region, e.g. introduce uniform shopping hours. Community development is achieved by providing training courses and by assisting in 3. Challenges in the macro environment There is a vast array of sources describing challenges in the macro environment. The macro environment cannot be controlled by business management. However, this environment can have a huge influence on the business enterprise. The business needs to adapt to this environment, and management needs to identify those issues that are likely to have an impact on the success of the business, and investigate the macro environment for threats and opportunities. 3.1) The political environment The political environment is filled with complicated variables which are uncontrollable and difficult to forecast. Business management must continuously assess the political environment and be knowledgeable about the Government s policies on the economy, education, international relations, the environment and the provision of infrastructure and services. In South Africa the government aims at maintaining a market economy, private ownership, and freedom of speech. The government influences the macro-environment through the annual budget, legislation, taxes, import tariffs, health regulations, import control, promotion of exports and government spending. The government is involved in the economy also as a major supplier of goods and services such as health and education, as well as being a major buyer of goods and services. Business management has to stay informed, especially with regard to the government s economic activities in the macro-environment. This is an absolute necessity in cases where the government intervenes in the economy: for example when the government sold South Africa s international currencies to stabilise the value of the Rand in 2001, or when it changes the interest rate or levels of taxation. Political instability (even in the countries surrounding us) makes international companies reluctant to invest in South Africa. Some players in the political environment: Tito Mboweni; Trevor Manuel 3.2) Challenges in the economic environment The economy of a country is continuously influenced by other factors in the macro environment, for example, technology, politics, social and international environments, and the physical or ecological environment. These in turn lead to changes in the rate of economic growth, employment levels, inflation, consumer income and the exchange rate. Ultimately, the relationship between all these different aspects Ms J Cansfield Gr 11 Bus Stud. (LO1: Business Environments) Page 13 of 25

14 results in prosperity or adversity for a country, and thus has an important influence on the business and its management. It is important that each symptom or feature of the economic environment gets the attention of management. For example, in the case of inflation: management needs to assess the impact it has on the resources that a business needs to produce a product or service. Management must not only determine the past and present economic cycles of their specific industry, but must try to determine the economic cycle for the next year in order to plan properly. Economic forces such as the inflation rate, interest rates, exchange rates and consumer spending influences the demand in the market. This in turn would imply new approaches toward price determination, marketing communication and even-product policy. The government has a great deal of economic power and business managers need to know how their business could be affected by government economic decisions. The main ways in which the government can influence the economy are: through taxes and government spending (fiscal policy); through interest rates (monetary policy) and policies aimed at expanding businesses, increasing productivity and employment (supply side policies). Examples of supply side policies include privatisation, improved training and education and increased competition in all industries. Some of the economic challenges faced by businesses in South Africa include unemployment, shortage of skills and trades people, low productivity, equal opportunity and empowerment, successful entrepreneurship and a need for knowledgeable and qualified managers. Every business should strive to make a profit, whether it is a small, one-man concern or a large organisation. To be able to do so, they must cut down on inputs, and at the same time increase output. To increase output successfully all the available production factors should be used more efficiently for example better machinery, well trained employees, motivation and effective management. Just as management must continually assess the technological environment and be ready to respond to change and innovation, they must also assess the economic environment not just the local economy, but also global economic trends and issues that could have an effect on the economy. An example is the National Credit Act which was signed into law by the President on 15 March 2006, and governs the application, assessment and maintenance of credit granted by credit lenders to consumers within the Republic of South Africa. The main purpose of this act is: to promote and advance the social and economic welfare of South Africans; to promote a fair, non-discriminatory, controlled, competent, sustainable, responsible, efficient and accessible credit marketplace; and to protect consumers. What is the National Credit Act? The National Credit Act (NCA) protects your rights as a consumer by regulating the granting of loans or credit. In short, it makes responsible lending a shared responsibility between you and your credit provider. By making your credit or loan applications transparent, fair and easy to understand, it gives you the knowledge and power to manage your debt effectively and pay it back comfortably. The Act reminds you that you have both the right and responsibility to understand and question how your credit agreements are structured; what payments you will be required to make, and what the terms and conditions involve. Ms J Cansfield Gr 11 Bus Stud. (LO1: Business Environments) Page 14 of 25

15 3.3) The socio-economic/cultural environment Culture is the sum total of the way of life of a group of people, and includes aspects such as language, values, faith, expectations, laws and customs. Cultural and social circumstances influence the individual s lifestyle and therefore, consumer spending. Culture is however not static, and a community s values, expectations, habits and way of life will change over time. A business is at the centre of social change and should keep up with the influences of social trends. This is because it affects management indirectly through people as consumers and employees. Management needs to develop strategies and programmes to deal with the socio-cultural environment and should never underestimate its effect on the business or organisation. Culture influences businesses in many ways and brings new challenges: women becoming more independent, attitude changes towards marriage and large families and large-scale urbanisation South Africa now has more people living in urban areas than in rural areas. Culture, together with political power, plays an important role in the attitude of the workforce. Management has to be aware and knowledgeable about the values, expectations and customs of their employees, as human resources are any business most valuable resource. One social problem which concerns and influences South Africa and other African organisations is the HIV/Aids epidemic. This disease is devastating families and communities, leaving a legacy of hopelessness and desperation. In South Africa, which has one of the largest numbers of people living with Aids in the world, businesses must develop strategies and programmes to deal with HIV/Aids in the workplace. South African organisations are legally obliged to support HIV/Aids patients and this alone has had major cost implications for businesses. Another problem created by the Aids situation is that it has a negative impact on foreign investment in South Africa. Investors are not interested in investing in labour-intensive industries such as mining, transport and manufacturing because organisations will soon have to deal with a workforce where one third is infected by HIV/Aids. An organisation can lose important executives as well as twenty-five to fifty percent of its workforce. HIV/Aids also creates a generation of orphans who are dependent on the government and private institutions for care and support another burden that organisations have to help carry. Aids orphans, many of whom have become caretakers for their orphaned siblings, do not or cannot gain access to education, which in turn will have an enormous impact on the future economy in South Africa. The high crime rate in South Africa is another challenge for businesses in the socio-cultural environment. Crime has a negative effect on foreign investment and costs South African businesses millions of rands. Businesses could also choose not to operate in certain areas where there is a high crime rate which could have a negative effect on these areas, causing even more social problems. Unemployment is another challenge that is closely linked to crime in the country unemployment means there are many potential customers with no money to spend. Market-related education and job creation is therefore of great importance to the future wellbeing of our country. There are many challenges from the socio-cultural environment that stare business management in the face they cannot be ignored as they could lead to the failure of the business. Business does have a social responsibility towards its employees and the communities in which it operates. The customer trusts and supports the business and the business needs to give back to the community. 3.4) Challenges in the technological environment: Challenges in the technological environment are mainly as a result of the fast rate of technological change and innovation. Technological change starts with research and development. This brings new products, processes, methods and management approaches. Technology necessitates change and, in today s business world, can be seen as the single most important factor that impacts on the business environment. Ms J Cansfield Gr 11 Bus Stud. (LO1: Business Environments) Page 15 of 25

16 For the small business, it could be difficult to access the latest technology because of cost implications. Lack of skills and knowledge also make it difficult to utilise new technology to the optimum. In larger organisations, new technology is more easily absorbed and implemented as the large organisation has the capacity to keep up-to-date with new developments and has the financial ability to acquire the latest technology. Technological change creates opportunities and threats for the business. Therefore, management has to devise strategies to respond, or better still, to be proactive. The biggest single impact of advanced technology is increased productivity. The ability to produce more and better products and services leads to keener competition. As a result, businesses have to reassess the effectiveness of several factors in determining work performance, such as: business strategy, organisational structure, production methods, division of work and management instruments. Failure to introduce or respond to technological changes will leave a business with old-fashioned methods of letter-typing, record-keeping and communication with suppliers and customers, and with manual methods of stock control. All of these factors will make the business less efficient and less competitive. The following are examples of specific challenges that are brought about by the technologically advanced world in which we live and work. Using technology to create even better products and services: this challenge is really all about satisfying the customer and winning and retaining new customers. Technology now enables the entrepreneur to customise products and services for individual clients from coffee to motor vehicles! There must be continuous assessment and analysis of potential change in important current and future technologies. Think, for example, about the influence that technology has on the banking and financial industry. Businesses must continually identify important technologies and technological trends that have an impact on their industry: for example, technological innovation in the manufacturing industry. Continual assessment must take place with regard to the competitive impact of important technologies. Assessment of the impact of technology on the socio-cultural environment and how it impacts on the business. For example employees working from home, social and communication patterns changing as a result of advanced technology, the marketing possibilities of new technologies and the effect of technology on the consumer and his/her lifestyle. A story regarding the impact of technology What are we going to do? said Baby Tiger to Mama Tiger in the jungle. Here comes a hunter, and he has five rifles, three special sighting scopes, and the latest device to allow him to see in the dark! Hush! answered Mama Tiger and she taught her cub how to sneak up from behind and pounce. The hunter was never heard of again... All of which goes to prove that technology may be fine, but it will never be a substitute for a good basic education. Ms J Cansfield Gr 11 Bus Stud. (LO1: Business Environments) Page 16 of 25

17 Technological trends In a developing country like South Africa, managers should continuously assess technological trends in such areas such as: Water: South Africa s water reserves can sustain 80 million people. Therefore it is important to assess and improve water technology regularly. Minerals: Minerals are non-renewable resources and it is thus imperative that these resources are processed as effectively as possible. Marine: Effective utilisation of coastal and oceanic resources is important in the sustainable development of the country. Agriculture and veterinary science: Monitoring technological advancements in these areas will help to sustain and preserve Africa s wildlife and tourism. Medicine: Improvements in medical technology will help prevent epidemics and support the sporting industry. Transport: Improving public transport will increase productivity because more people will be able to get to and from work. Power: Technological advancements in the power industry could lead to the development of cheaper power sources, like solar power. 3.5) Legal Legislation The political or state environment primarily influences the business environment as a regulatory force. By implementing laws, the politics of the governing party will steer development and economic policy in a certain direction. Later in this module we will look at some of the laws that businesses have to implement: the Labour Relations Act 60 of 1995, the Skills Development Act and the Employment Equity Act 55 of Other legislation that has a direct impact on business operations includes the Environment Conservation Act 73 of 1989, the Occupational Health and Safety Act 85 of 1993 and the newly-implemented National Credit Act. The changed political scenario in South Africa has allowed for the economic empowerment of people of all races and both genders, especially those who had no privileges under the previous political rule. Black empowerment is required by law and organisations have to introduce it into their strategic planning. The challenge of Black Economic Empowerment (BEE) is the importance of communicating it throughout the company hierarchy and ensuring that individuals throughout the company are made accountable for the BEE effort. BEE should not be artificially applied to the advantage of only a few privileged black people, because this would lead to resistance by all employees. 3.6) Environmental, physical or ecological environment The physical or ecological environment consists of limited natural resources, usually flora and fauna. It includes water, air, climate, the oceans, soils, minerals and the fauna and flora in a country or region. The natural resources of a country must not only be conserved and maintained for future generations, but should also be well managed as they provide the raw materials for several industries and businesses. South Africa is rich in minerals and this creates a favourable environment for the mining industry. At the same time however, the mining industry has a major responsibility to look after the environment in terms of air, water and soil pollution and should take great care in rehabilitating natural areas once mining operations come to an end. The physical environment and the important role that it plays in the survival of the business cannot be ignored by management and employees. Over the last three decades there has been a growing awareness of how sensitive and irreplaceable the natural environment is. Many bird, animal and plant species have become extinct, and huge natural areas all over the globe have been destroyed for the purpose of economic gain. Ms J Cansfield Gr 11 Bus Stud. (LO1: Business Environments) Page 17 of 25

18 The world s oceans are in danger of being over-utilised and polluted to the point of no return. In the process many fish and sea-mammal species have also been destroyed or depleted. The issue of global warming has become a major concern and many countries have implemented legislation to help curb the destruction of the ozone layer. If the world and its people do not make a serious effort to conserve and rehabilitate the natural environment, there could be disastrous results for many generations to come. The rising temperature of the earth s surface could have devastating consequences for South Africa in terms of food production and water resources. Southern Africa faces famine on an unprecedented scale unless it can increase food production. This offers many challenges to the agricultural industry and management has to have strategies in place to address this threat. Natural gas, coal and oil reserves have a limited lifetime and the implications of these limitations are farreaching. Innovative and environmentally-friendly solutions have to be found to replace current energy sources and have to be affordable and accessible to the man on the street. It is vital that, as South Africans, we protect our resources, including our marine life which is threatened by illegal fishing companies. The entire society has to pay to clean up pollution and to dispose of waste products properly. It would be to the advantage of both businesses and communities if these problems were reduced by producing products that pollute the environment less and by using production methods that are environmentally-friendly. Consumers are now increasingly looking for environmentally friendly goods and therefore it might be more profitable to make goods that are less damaging, even if they cost more to produce. The existence of powerful pressure groups such as Greenpeace also has an important impact on the image and sales of organisations. When they publicise the damaging activities of which some companies are guilty, this gives these companies a negative press and can lead to consumer boycotts and loss of contracts from people concerned with the environment. Businesses have to face up to the environmental challenge and work with communities to conserve and rehabilitate the environment. This is not just true for large conglomerates or organisations, but also for small and medium businesses. 3.7) The international environment The international environment is complex, as every country has its own laws, cultures, and economic and political challenges. The globalisation of markets and manufacturing has increased international competition and the emphasis is on knowledge-based industries with a focus on specialised skills and the expertise of a business employees. Globalisation has led to more choice and lower prices for the consumer. Management must look for ways of increasing efficiency and productivity. Many businesses merge with foreign businesses, making it easier for them to sell in foreign markets. In many ways the world has become one large market rather than a series of separate markets and the same goods and services can be found in many countries throughout the world. In order for South Africa to become a bigger player in the international environment, businesses will have to produce more goods to export. This will increase South Africa s foreign income and strengthen the value of the Rand. South Africa s low productivity level is a huge challenge for both management and employees unless South Africans concentrate on working harder and increasing their knowledge skills, other countries will always be able to sell their products in our country at a lower price than that at which we can produce locally. Ms J Cansfield Gr 11 Bus Stud. (LO1: Business Environments) Page 18 of 25

19 The international environment offers many opportunities and challenges and many uniquely South African products have been very successful in foreign countries. It is, however, important that any locally manufactured products that leave our shores must be of the highest quality and must be maintained with continuous market research, innovation and uniquely South African creativity. South African products and franchises are exported and sold all over the world Activity 6 It is impossible to start developing strategies until the problems you are dealing with have been identified. In this exercise you are going to brainstorm various issues affecting the business from the macro environment perspective in twos, and then in your groups you are going to develop some strategies to cope with selected issues from this list. Break into two s and brainstorm other factors that could affect the macro environment of a business. Do this in table form: Macro environmental Factors Possible Challenges Possible Strategies for addressing problems Activity 7 Did you know? The SA government has been steadily reducing tariffs on imported clothing. The result has been that consumers have been buying more imported clothes and less locally produced clothes. This leads to local factories closing, or cutting on production, and many workers have been retrenched. 7.1 Give a definition of globalisation in your own words. 7.2 How can the government use tariffs to protect the clothing industry? 7.3 What seems to be the main reason for costs of production to be higher in South Africa than in China? 7.4 Do you think it is fair of Woolworths to consider legal action if the DTI proposal is implemented? Substantiate your answer. 7.5 Do you think globalisation has been to Africa s, and specifically South Africa s, advantage? Explain your answer. 7.6 Would you support the Buy South African Campaign, even if it meant paying higher prices for goods or settling for inferior quality? Support your answer. 7.7 Define productivity in your own words. 7.8 If you improve productivity, then cheaper Asian imports won t hurt your local manufacturing and textile industries, said Shigo Takenaka. Discuss this statement within the framework of all the information that has been given in the articles above. Ms J Cansfield Gr 11 Bus Stud. (LO1: Business Environments) Page 19 of 25