Module 1 Business Environments

Module 1 Business Environments Identifies the various components of micro, market and macro business s, and discusses the relationship between the s. Section A: Business Environments Levels of the business Grade 10 Module 1 Summary Notes (Environments) Page 1

The composition of the business The organisation has a negligible effect on the macro Micro 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 Market The market: consumers, their needs, purchasing power and behaviour Suppliers Intermediaries Competitors Substitute products Possible new entrants Labour unions Macro Political and or Physical Economic and/or Ethical Social /Social- Economic Technological Legal Environmental The macro influences the organisation directly, e.g. the effect of interest rates on financial management or legislation with which human resources must comply Grade 10 Module 1 Summary Notes (Environments) Page 2

1. Micro Environments The micro refers to the internal factors that will influence the performance of the business. These include aspects such as: The different business functions; The resources available to the business; and The business policy. All the' elements of the micro are directly controlled by management. Business Functions: There are eight main functions in a business. The entrepreneur must know how to manage all aspects of the business, but if he does not know how to do everything himself, he can employ other people to help in the business. The functions in the business are as follows: Purchasing Production Personnel/Human resources (HR) Administration Marketing Public relations (PR) Financial General management Resources: human resources (employees), financial resources (capital) or physical resources such as raw material or equipment used in the business in order to produce goods and services. The business policy: The business policy refers to a framework drafted by the business to describe its vision, mission, goals and objectives as well as policies and procedures to guide behaviour within the business. 1. The vision of the business can be defined as a "road map" to the future of the business. This "map" is drawn by looking at the history of the business, the current situation of the business and the ideal position the business would like to achieve in future. 2. The mission of the business is a refinement of the vision and specifies the core business function and the reason why the business exists. (Hint: Have you ever heard someone say: "I am on a mission today?" That refers to the things the person would like to do that day. The mission of the business can therefore be described as the basic "things" the business does / the task of the business).. 3. Goals and objectives: Goals are the long-term accomplishments that the business wants to achieve while objectives describe the short-term tasks which must be achieved to assist the business in reaching the long-term goals. Grade 10 Module 1 Summary Notes (Environments) Page 3

Examples of missions, long-term (strategic) goals, functional and operational objectives. Kind of goal or objective Mission The Lodge Hotel Group To provide economical accommodation in urban areas A Hospital To provide a complete range of medical services to patients A University To provide academic instruction and research to serve the needs of the community Long-term (strategic goal 5-10 years) Increase returns from 8% to 12% over the next five years Expand market share from 15% to 25% over the next five years Improve image of economical accommodation Achieve return on total capital of 16% p.a. Establish image as best provider of services Create facilities to accommodate growth of 6% p.a. over next five years Raise contributions by private sector by 10% p.a. over next six years Functional and short-to mediumterm objectives 1-3 years Raise room occupation by 15% over next two years (marketing objective). Increase restaurant turnover by 10% over next two years. Reduce staff turnover by 3% over next three years (manpower objective). o Increase number of beds by 175 over next two years (production objective) Limit increase in patient 5% next year Repay expensive loan over next 18 months (financial objective) Raise teaching productivity by 3% p.a. over next three years Establish image of academic excellence over next 36 months Build up research fund to R50 m over next two years Operational and short-term objectives 1 year at most Launch 6-month advertising campaign aimed at December holidaymakers Take on 200 additional employees for December Extend restaurant hours over Easter weekend Take on additional temporary nursing staff for Easter weekend Increase supply of blood plasma by 30% for Christmas weekend Keep library open until 10 pm during October Next January provide additional student guidance during registration 4. The organisational culture can be described as the values and beliefs that are shared within the business. People's attitudes and behaviour will be guided by the culture in the organisation. If the culture is positive, cooperation and achievement will be the mutual goal, while a negative culture could lead to conflict and employees undermining one another. 5. Structure: The organisational structure refers to the way in which labour, authority, responsibility and other resources are organised to ensure all components will work together to form a system in which business objectives can be met. Grade 10 Module 1 Summary Notes (Environments) Page 4

2. Market Environment The market consists of elements immediately outside the business; therefore management has very little control over the market. 1. The market will consist of suppliers selling the required quality and quantity products to the business at a fair price at the time when they are needed. These products will then be delivered to the place where they are needed. Alternatively the supplier does not have to sell a product, but can also deliver a service to the business. 2. Consumers are the potential buyers of the product. When the product is marketed to the consumer, it is important to keep in mind what the needs and demands of the consumer are as well as the buying power of the consumers in the target market. 3. Competitors are other businesses that sell the same, similar or substitute products to the same target market. It is not only existing competitors that will influence the business's actions, but also potential new entrants to the market. The higher the level of competition, the better the quality of product that has to be delivered to the consumer and the lower the business has to keep the price in order to make it attractive to the customer. 4. A business may decide to form a strategic alliance with another business in order to potentially expand the target market. An example of such an alliance is the agreement between Edcon and Medicross that patients may use their Edgars cards to pay for doctors' consultations at Medicross. This ensures that people who do not have cash or medical aid facilities to pay for the doctor can use their Edgars credit facility to obtain the services they need. This enlarges the potential customer base for sales transactions for both Medicross and Edgars. 5. Agents or brokers act as intermediaries between the business and the consumer and therefore they also form part of the market. In fact all members of the distribution channel can be seen as intermediaries between the manufacturer and the consumer. The wholesaler acts as a link between the producer and retailer, while the retailer interacts with the consumer as the last link in the distribution channel. 6. Non-Government Organisations (NGOs) are usually non-profit organisations that focus on al, social or educational issues. One such organisation is Junior Achievement (JA) which uses sponsorships from businesses to provide entrepreneurial education to both the youth and adults. 7. Industry regulators also form part of the business' market as they control and guide the actions of businesses to ensure consumers are not exploited. Examples of such regulators include the Financial Services Board and the Ombudsman for Insurance. Organisations such as the South African Bureau of Standards (SABS), Council for Industrial and Scientific Research (CSIR), South African Chamber of Business (SACOB) and various trade unions also have different roles to fulfil in the market. Grade 10 Module 1 Summary Notes (Environments) Page 5

3. Macro Environment Developments on the national and international scene, technological advances, economic influences, political pressures and social factors all impact on the business from the macro. P - Political E - Economics S - Social factors T - Technology L - Legislation E - Environmental factors Extended PESTLE or P*E*STLE P - Physical E - Ethical On the political front developments may impact on the businesses of the country. Do we need a better example than our neighbour to the north, Zimbabwe, to see what the impact of politics can be on consumers, businesses and the economy in general? Factors in the economic sphere that are impacting on the business include aspects such as inflation, fluctuating exchange rates (imports and exports), interest rates, unemployment, globalisation and the state of the world economy. In late 2008 the world entered a period of recession which caught up with South Africa in the second quarter of 2009. This means that people in the country are experiencing economic hardship and as a result the general standard of living will be lower due to the reduced purchasing power. Businesses also feel the pressure on their bottom line (profit) as employees demand higher wages while consumers spend less. Socio-economic issues form part of the macro- or external, and especially in the South African context they influence the day-to-day management of the business. It is important to be aware of these issues and how they affect the business. Technology is constantly changing at a rapid pace and this leads to both opportunities and challenges for the business. Think about the impact of technology such as the advancement in computers and the Internet and how this has impacted on the world of business. New production processes also mean faster and mostly more accurate production, but may lead to socio-economic problems such as job losses and unemployment as a result of retrenchments. Legislation (the laws of the country) could have a huge influence on the corporate world should Government decide to introduce new laws. In this regard we may think about labour laws such as Employment Equity or the Credit Agreement Act that stipulates conditions for allowing credit to consumers. Environmental factors such as pollution (noise, water and air), bio-fuels, recycling and nature conservation may also have an impact on the business. Physical factors relate to the immediate of the business. Is it situated in a mountainous area where access is difficult; next to the coast where the weather may affect the products; etc? Ethical factors are becoming increasingly important as businesses are held responsible for the morality of their decisions and the effect that those decisions have on their employees, clients and other stakeholders. Grade 10 Module 1 Summary Notes (Environments) Page 6

Section B: Business Sectors The Private Sector vs. the Public Sectors The Public Sector: The Government owns all the businesses in the public sector. The Government starts these businesses if people in the private sector (entrepreneurs) do not sell these goods or do not render these services in sufficient quantities, or not at all. These businesses are mostly established to provide infrastructure to the country. Example: government hospitals as there are not enough private hospitals to provide for all the health needs of the citizens of South Africa and not all people can afford to go to private hospitals. There are three levels on which the Government is involved in the economy of the country (i.e. the public sector), namely: Central government - e.g. The police force protecting the citizens of the country. Provincial level - e.g. Provincial hospitals/government hospitals for people that do not have medical aid. Local authorities - e.g. Municipalities collecting and removing rubbish. The Private Sector: An entrepreneur is a private person starting a private business. The aim of a private business is to make a profit by satisfying the needs of consumers. The entrepreneur can use his own capital or borrow capital to start the business. In a capitalist society/free market there is competition between businesses. Each business tries to make as much profit as possible. The private sector can be divided into the formal sector and the informal sector. The formal sector can be described as businesses that are included in the Gross Domestic Product (GDP) of the country. The GDP is the total value of final goods and services produced in the country in one year by businesses that the Government knows about and that pay tax to the Government. Businesses in the informal sector are not included in the GDP because the Government does not always know about their existence and can therefore not receive tax from them. Typical activities in the informal sector include: o Trading and hawking, e.g. selling fruit at the traffic light. o Production and construction, e.g. making beaded jewellery. o Services, e. g. cutting hair on the pavement. o Illegal activities, e. g. drug pushers. The informal sector plays a very important role in the South African economy by contributing to economic growth in the following ways: People working in businesses in the informal sector spend their income in the formal sector. Businesses in the informal sector contribute to the GDP even though it is not recorded. For example: A person is selling fruit and vegetables on a street corner. Although this business is not Grade 10 Module 1 Summary Notes (Environments) Page 7

included in the GDP of the country, it contributes indirectly to the GDP because the owner buys his stock (fruit and vegetables) from a business like a supermarket or a farmer that is included in the GDP. New jobs are created and therefore more people are able to earn an income. In this way poverty is combated. The informal sector offers business and training opportunities to entrepreneurs because less capital is usually needed to establish a business in the informal sector than for businesses in the formal sector. There may be a potential to expand the business and get involved in formal sector. Sectors of industry: Primary Sector The primary sector is the first stage in the chain of production. Suppliers in the primary sector will supply raw materials by being involved in activities such as farming, animal husbandry, fishing, forestry and mining. Secondary Sector The secondary sector is the second stage in the chain of production. Suppliers in the secondary sector will supply semi-finished goods to other manufacturers or be involved in processing or manufacturing activities which aim to turn raw materials into products with greater or a different use for the final consumer. Tertiary Sector In the tertiary sector activities are directed at the provision of goods and services and the distribution of goods which are made in the secondary sector. Suppliers in the tertiary sector include, for example, wholesalers who sell the goods that are ready to be used to the retailers who then distribute goods to the final consumer.- Auxiliary services of marketing form part of the tertiary sector which helps businesses sell their products. There are various gaps that exist between the manufacturer of the product and the final consumer of the product. Without these auxiliary services to bridge the gaps, the products will not reach the final consumer. Transport: Bridges the spatial gap and gives place utility to products, e.g. sand has no utility in the desert, but is very important when building a house in Johannesburg. Transport bridges the distance between the producer and the consumer, i.e. the retailer can buy products from all parts of the world and sell them to consumers where there is a demand for them. Utility in a business sense has a different meaning from the word utilise in the English class. In Business a product only has utility when TWO conditions are met: A The product or service satisfies a need; and B Consumers are prepared to pay for it. In other words the business can sell the product or service and generate a profit from it. Grade 10 Module 1 Summary Notes (Environments) Page 8

Storage bridges the time gap because goods are often produced in quantities too large to sell immediately. The time gap between the time of production and the time of consumption must be bridged by storing the surplus products until there is a demand for them on the market. Sorting (collection and redistribution) is performed to bridge the quantity and variety gaps. The wholesalers must collect goods from a number of manufacturers from all over the world and then distribute these goods to retailers. Retailers will buy (collect) from a number of wholesalers to get the variety of goods demanded by the consumers. Goods will then be sold (distributed) to consumers. Grading and standardisation: Manufactured goods can be standardised before large-scale production can take place; what the product must look like, e.g. quality, design, and material, must be specified. All products are then made according to these specifications and will thus be identical (standardised). The quality of agricultural goods cannot be predetermined, because it depends on the climate and many other factors. After the fruit/vegetables have been harvested, all the products of the same quality are grouped together, i.e. graded. Financing bridges the possession gap. The business can borrow money from the bank or get credit from other businesses in order to buy the stock needed. Credit on an open account or trade credit is also known as suppliers' credit. This time the retailer gives credit based on the creditworthiness of the consumer. The risk gap is bridged through insurance. The insured takes out insurance in case something happens, e. g. fire, theft. He will then be indemnified (put in the same financial position than' he was in before the incident took place). Actual sales are the final step in the marketing process (bridging the possession gap). The manufacturer, wholesaler and retailer must take quality, quantity, the type of product and the kind of consumer into account when trying to sell/market the product/service to the final consumer. Grade 10 Module 1 Summary Notes (Environments) Page 9