Principles of Business Management 2 nd Edition Edited by JOHAN STRYDOM Contributors Marolee Beaumont Smith Andreas de Beer Maggie Holtzhausen Jerome Kiley Danie Nel Cecile Nieuwenhuizen Theuns Oosthuizen Sharon Rudansky-Kloppers Rigard Steenkamp OXFORD UNIVERSITY PRESS SOUTHERN AFRICA
Table of contents Preface xxv PART i INTRODUCTION TO BUSINESS MANAGEMENT i I Business and its challenges 3 Johan Strydom Purpose of this chapter 3 Learning outcomes 3 1.1 Introduction 7.. 4 1.2 What is a business? 4 1.2.1 Business and profits 5 1.3 The economic principle 6 1.4 The factors of production 7 1.4.1 Natural resources 7 1.4.2 Human resources 8 1.4.3 Capital 9 1.4.4 Entrepreneurship 10 1.5 The economic systems in which businesses operate 11 1.6 South African businesses and the changing social contract 12 1.6.1 The expectations of business-related stakeholders 14 1.6.2 The expectations of opinion-related stakeholders 15 1.6.3 The expectations of public-related stakeholders 15 1.6.4 Corporate social responsibility 16 1.6.5 The current social contract of a South African business. 17 1.7 The parts of this book 19 Case study: Shoprite 2010 annual report how the Shoprite group is interacting with its stakeholders 21 Summary 23 Glossary 24 Multiple-choice questions 26 References and end-notes 27 Answers to multiple-choice questions 28
PRINCIPLES OF BUSINESS MANAGEMENT 2 The business environment 29 Jerome Kiley Purpose of this chapter 29 Learning outcomes 29 2.1 Introduction 29 2.2 The systems approach 30 2.3 The organisational environment 31 2.3.1 The micro-environment 33 2.3.2 The market environment 34 2.3.3 The macro-environment 36 2.3.3.1 The natural environment 37 2.3.3.2 The technological environment 38 2.3.3.3 The social environment 39 2.3.3.4 The political environment 40 2.3.3.5 The economic environment 40 2.3.3.6 The international environment 42 2.4 Conducting a SWOT analysis (study of the parts) of a business's environment 43 Case study: Pick n Pay 45 Summary 47 Glossary 48 Multiple-choice questions : 50 References and end-notes 51 Answers to multiple-choice questions 52 PART 2 MANAGEMENT TASKS 53 3 The task of management 55 Theuns FJ Oosthuizen Purpose of this chapter 55 Learning outcomes 55 3.1 Introduction 55 3.2 What is management? 56 3.3 What is a manager? 56 3.4 Organisations in which managers work 57 3.5 Levels of management 58 3.5.1 Top management 59 3.5.2 Middle management 59 3.5.3 First-level management 59
Table of contents \ 3.6 Management tasks ; 60 3.6.1 Planning 60 3.6.2 Organising 61 3.6.3 Leading 61 3.6.4 Motivating 62 3.6.5 Controlling 62 3.7 Areas of managements 63 3.7.1 Production and operations managers 63 3.7.2 Logistics managers 63 3.7.3 Information-technology managers 63 3.7.4 Financial managers 64 3.7.5 Human-resources managers 64 3.7.6 Marketing managers 64 3.7.7 Public-relations managers 64 3.7.8 Administrative managers 64 3.8 Management skills 65 3.8.1 Conceptual skills 65 3.8.2 Human skills 65 3.8.3 Technical skills 66 3.9 Management competencies 66 3.10 Management roles 67 3.10.1 Decisional roles 67 3.10.2 Interpersonal roles 68 3.10.3 Informational roles 69 Case study: Toys for Africa 70 Summary 71 Glossary 71 Multiple-choice questions 74 References and end-notes 74 Answers to multiple-choice questions 75 Planning 76 Sharon Rudansky-Kloppers Purpose of this chapter 76 Learning outcomes 76 4.1 Introduction 76 4.2 Why planning is necessary 77 4.3 The planning process 77 4.3.1 Setting goals 79
PRINCIPLES OF BUSINESS MANAGEMENT f A 4.3. i. i The mission statement of the organisation 79 4.3.1.2 The environment of the organisation 82 4.3.1.3 The values of management 82 4.3.1.4 The experience of management 82 4.3.2 A hierarchy of goals 82 4.3.2..1 The mission statement 82 4.3.2.2 The strategic goals 83 4.3.2.3 The tactical goals 84 4.3.2.4 The operational goals 84 4.3.3 Criteria for setting effective goals 84 4.3.4 Developing action plans 86 4.3.4.1 Strategic plans 87 4.3.4.2 Tactical plans 87 4.3.4.3 Operational plans 87 4.4 Implementing the selected plans 87 4.5 The full circle 88 Case study: Medical scheme takes action 88 Summary 89 Glossary 90 Multiple-choice questions 91 References and end-notes 92 Answers to multiple-choice questions 92 5 Organising 93 Andreas de Beer Purpose of this chapter 93 Learning outcomes 93 5.1 Introduction 93 5.2 The organising process 94 5.2.1 Gathering information 94 5.2.2 Identifying and analysing activities 94 5.2.3 Classifying activities 94 5.2.4 Allocating staff 94 5.2.5 Assigning authority and responsibility 95 5.2.6 Facilitating (encouraging) work 95 5.3 Principles (basic rules) of organising 95 5.3.1 Co-ordination 95 5.3.1.1 The chain of command 95 5.3.1.2 Unity of command 95
Table of contents 5.3.1.3 Span of control 96 5.3.2 Authority 97 5.3.2.1 Line authority 97 5.3.2.2 Staff authority.77 97 5.3.2.3 Line-and-staff authority 97 5.3.2.4 Functional authority 97 5.3.2.5 Project authority 97 5.3.3 Responsibility 99 5.3.4 Accountability 99 5.3.5 Delegation.-, 99 5.3.5.1 Centralisation and decentralisation 100 5.3.6 Specialisation 100 5.3.7 Divisionalisation 101 5.3.7.1 A divisional structure based on business functions 101 5.3.7.2 A divisional structure based on products 102 5.3.7.3 A divisional structure based on geographic location (place on the earth) 103 5.3.7.4 A divisional structure based on projects 103 5.3.7.5 A divisional structure based on consumer or client needs 103 5.4 Organisational structures 106 5.4.1 The line organisational structure 106 5.4.2 The line-and-staff organisational structure 106 5.4.3 The functional organisational structure 107 5.4.4 The divisional organisational structure 108 5.4.5 The matrix organisational structure 108 5.4.6 The teams organisational structure 108 5.4.7 The network organisational structure no 5.5 The changing organisation no Case study:jonny Happy Feet Limited in Summary 113 Glossary 113 Multiple-choice questions 114 References and end-notes 115 Answers to multiple-choice questions 115 6 Leading 116 Maggie Holtzhausen Purpose of this chapter 116
f PRINCIPLES OF BUSINESS MANAGEMENT : Learning outcomes 116 6.1 Introduction 116 6.2 The three components of leadership 118 6.2.1 An interactive framework of leadership 118 6.3 Leadership versus management 119 6.4 A brief history of leadership theories 121 6.4.1 Earlier leadership theories 121 6.4.1.1 Trait theories 122 6.4.1.2 Behaviour theories 122 6.4.1.3 Situational approaches 122 6.4.2 Newer leadership approaches 122 6.4.2.1 A re-birth of earlier trait theories 123 6.4.2.2 A move towards leadership-follower approaches 124 6.4.2.3 Other leadership perspectives (theories) 125 6.5 Leadership tools 126 6.6 Leadership and diversity 127 6.6.1 Leadership and gender 127 6.6.2 Leadership and culture 127 6.6.3 Integrating diverse leadership styles 129 6.7 Worldwide leadership trends 129 Case study: Me, myself as manager and leader 130 Summary 131 Glossary '. 131 Multiple-choice questions 132 References and end-notes 133 Answers to multiple-choice questions 135 7 Motivating 136 Jerome Kiley Purpose of this chapter 136 Learning outcomes 136 7.1 Introduction 137 7.2 What is motivation? 138 7.3 The needs and expectations of employees 138 7.3.1 Individual differences 138 7.3.2 The needs of individuals 139 7.3.2.1 Maslow's hierarchy of needs 139 7.3.2.2 Alderfer's ERG Theory 140 7.3.2.3 McClelland's Needs Theory 141
Table of contents 7.3.3 The expectations of employees 142 7.3.3.1 Expectancy Theory 142 7.3.3.2 Equity Theory 143 7.4 Managing employee's motivation 143 7.4.1 Directly influencing employee behaviour 143 7.4.1.1 Goal-setting Theory 143 7.4.1.2 Behavioural modification (change) 144 7.4.2 Facilitating (helping to bring about) employees' good performance 146 7.4.2.1 The quality-of-work-life approach 146 7.4.2.2 Herzberg's Two-Factor Theory 147 7.4.2.3 The job characteristics model 147 7.2.4.2 McGregor's Theory X and Theory Y, and the selffulfilling prophecy 148 7.5 Monitoring employee morale 149 7.6 Practical motivational strategies 149 Case study: SA's top employers as voted for by students 150 Summary 152 Glossary 153 Multiple-choice questions 156 References and end-notes : 157 Answers to multiple-choice questions 158 8 Controlling 159 Theuns FJ Oosthuizen Purpose of this chapter 159 Learning outcomes 159 8.1 Introduction 159 8.2 Types of control 160 8.2.1 Pre-control 160 8.2.2 Concurrent control 161 8.2.3 Post-control 162 8.3 Sources of control 163 8.3.1 Individual self-control 163 8.3.2 Group control 164 8.3.3 Organisational control 164 8.3.4 Stakeholder control 164 8.4 The control process 164 8.4.1 Developing performance standards 165
PRINCIPLES OF BUSINESS MANAGEMENT 8.4.2 Measuring actual performance 166 8.4.3 Comparing actual performance with performance standards 166 8.4.4 Reinforcing good performance, and correcting if necessary 167 8.5 When to use a control measure 167 8.6 Financial controls 169 8.7 Quality controls ; 169 8.7.1 Total quality management 169 8.7.2 Quality circles 170 8.7.3 Six Sigma 170 8.7.4 Benchmarking 170 8.7.5 Continuous improvement 170 8.7.6 Reduced cycle time 170 8.8 The balanced scorecard 171 8.9 The benefits of controlling 171 Case study: Environmental management controls at African giant hotel and entertainment group -African Skies 172 Summary 174 Glossary 174 Multiple-choice questions 176 References and end-notes 177 Answers to multiple-choice questions 178 PART 3 THE FUNCTIONAL AREAS OF MANAGEMENT 179 9 Operations management 181 Rigard Steenkamp Purpose of this chapter 181 Learning outcomes 181 9.1 Introduction 182 9.2 A brief history of operations management 182 9.3 Operations management is the core function of any organisation 183 9.4 Effectiveness, efficiency, and productivity 183 9.5 Operations strategies 185 9.6 Product design and operations design 186 9.7 Operations planning and control 189
Table of contents 9.7.1 Reconciling (dealing with opposites) supply and demand (give and take) 189 9.7.1.1 Loading 189 9.7.1.2 Sequencing 190 9.7.1.3 Scheduling 190 9.7.1.4 Monitoring 192 9.7.1.5 Addressing bottlenecks 192 9.7.2 Demand management 193 9.7.3 Fixed-capacity planning 193 9.7.4 Adapting capacity to a change in demand...; 193 9.7.5 Inventory management 194 9.7.6 Material-requirements planning 197 9.7.7 Make-or-buy decisions 198 9.7.8 Operation improvement 198 9.7.8.1 Quality and quality management 198 9.7.8.2 Statistical process control 199 9.7.8.3 Maintenance and replacement 200 9.7.8.4 Safety, health and environmental management 200 9.8 Project planning and control 201 9.8.1 Project planning and Gantt charts 201 9.8.2 Network analysis 202 Case study:the lean paradigm at L'Oreal 203 Summary 204 Glossary 205 Multiple-choice questions 208 References and end-notes 210 Answers to multiple-choice questions 210 10 Logistics management 211 Danie Nel Purpose of this chapter 211 Learning outcomes 211 10.1 Introduction 212 10.2 Defining logistics management 212 10.3 The objectives of logistics management 213 10.3.1 Minimising total logistics costs 213 10.3.2 Increasing customer service 214 10.3.3 Trade-offs between minimising costs and optimising service 214
PRINCIPLES OF BUSINESS MANAGEMENT 10.4'Activities of logistics 215 10.4.1 Purchasing management 216 10.4.2 Order processing 217 10.4.3 Inventory management 218 10.4.4 Transportation 221 10.4.5 Warehousing 224 10.4.6 Materials-handling and packaging 224 10.5 Integrated logistics 225 10.6 Reverse logistics 227 10.7 Global logistics. 228 Case study: Using distribution centres to improve customer service 229 Summary 229 Glossary 230 Multiple-choice questions 232 References and end-notes 233 Answers to multiple-choice questions 235 11 Financial management 236 Marolee Beaumont Smith Purpose of this chapter 236 Learning outcomes 236 11.1 Introduction... 236 11.2 The functions of financial management 237 11.2.1 Analysing the financial position of a business 237 11.2.2 Managing the assets of a business 237 11.2.3 Managing the liabilities (what is to be paid) of a business 237 11.3 The core principles of financial management 238 11.3.1 The cost-benefit principle 238 11.3.2 The risk-return principle 238 11.3.3 The time-value-of-money principle 239 11.4 Analysing financial statements 239 11.4.1 The balance sheet 239 11.4.2 The income statement 241 11.5 Ratio analysis 242 11.5.1 Liquidity ratios 243 11.5.1.1 The current ratio 243 11.5.1.2 The quick ratio 244
V Table of contents 11.5.2 Asset-management ratios 244 11.5.2.2 Inventory turnover 244 11.5.2.3 Average collection period 245 11.5.2.4 Total asset turnover 245 11.5.3 Debt-management ratios 246 11.5.3.1 The debt ratio 246 11.5.3.2 The gearing ratio 247 11.5.3.3 The interest-coverage ratio 247 11.5.4 Profitability ratios 247 11.5.4.1 The gross profit margin., 248 11.5.4.2 The profit margin 248 11.5.4.3 The return on total assets 248 11.5.4.4 The return on equity 249 11.5.5 Applying ratio analysis 249 11.6 Break-even analysis 249 11.6.1 Fixed and variable costs 250 11.6.2 The break-even point 251 11.6.3 Some limitations of break-even analysis 253 11.7 Financing capital requirements 254 11.7.1 Short-term financing 254 n.7.1.1 Trade credit 254 11.7.1.2 Bank credit 255 11.7.1.3 Factoring of trade receivables 256 11.7.2 Long-term financing 256 11.7.2.1 Equity funding '. 257 11.7.2.2 Long-term bank loans 257 11.7.2.3 Financial leases 257 n.8 The cash budget 258 11.8.1 Preparing a cash budget 260 11.9 Managing trade receivables and inventories 260 11.9.1 Managing trade receivables 260 n.9.1.1 Credit policy 261 11.9.1.2 Credit terms 261 11.9.1.3 Collection policy 261 11.9.2 Managing inventories 263 11.9.2.1 The optimum level of inventory holdings 263 Case study: Financial ratio analysis of Polokwane Printing Company 264 Summary 266
r PRINCIPLES OF BUSINESS MANAGEMENT J Glossary 266 Multiple-choice questions 269 References and end-notes 270 Answers to multiple-choice questions 270 12 Human-resources management 271 Maggie Holtzhausen Purpose of this chapter 271 Learning outcomes 271 12.1 Introduction 271 12.2 The role of human-resources management 273 12.3 The human-resources management process 274 12.3.1 Strategic human-resources planning 275 12.3.1.1 Job analysis 276 12.3.1.2 Human-resources forecasting 277 12.3.2 Staffing the organisation 278 12.3.2.1 Recruitment 278 12.3.2.2 Selection 281 12.3.2.3 Induction 284 12.3.3 Developing and assessing the organisation's human resources 284 12.3.3.1 Training and development 285 12.3.3.2 Performance management 287 12.4 Maintaining the organisation's human resources 288 12.5 Important trends in human-resource management 290 Case study: Oyster Bay Lodge 291 Summary 294 Glossary 294 Multiple-choice questions 296 References and end-notes 297 Answers to multiple-choice questions 299 13 Marketing management 300 Sharon Rudansky-Kloppers, Johan Strydom Learning outcomes 300 13.1 Introduction 301 13.2 The nature of marketing 301 13.3 Marketing thinking through the years 304 13.3.1 The production era 304
^ Table of contents 13.3.2 The sales era 304 13.3.3 The marketing era 304 13.3.3.1 Profit orientation 305 13.3.3.2 Consumer orientation 305 J3-3-3-3 Social responsibility 305 13.3.3.4 Organisational integration 307 13.4 Consumer behaviour 308 13.4.1 Determinants of consumer behaviour 308 13.4.1.1 Individual factors 308 13.4.1.2 Group factors 309 13.4.2 The consumer's decision-making process 311 13.4.2.1 Awareness of an unsatisfied need or problem 311 13.4.2.2 Gathering information on how best to solve the problem 311 13.4.2.3 Evaluating all possible solutions 311 13.4.2.4 Deciding on a course of action 312 13.4.2.5 Post-purchase (after purchase) evaluation 312 13.5 Marketing research 312 13.5.1 The marketing-research process 313 13.5.1.1 Step 1: Defining the problem 313 13.5.1.2 Step 2: Developing hypotheses 313 13.5.1.3 Step 3: Collecting data 314 13.5.1.4 Step 4: Processing, analysing and interpreting information 315 13.5.1.5 Step 5: Compiling a research'report and making recommendations 315 13.6 Market segmentation, target marketing and product positioning 315 13.6.1 Market segmentation 316 13.6.1.1 The market-aggregation approach 316 13.6.1.2 The single-segment approach 316 13.6.1.3 The multi-segment approach 317 13.6.1.4 Using variables to describe the market structure 317 13.6.2 Target marketing 318 13.6.3 Product positioning 319 13.7 The product decision 319 13.7.1 Definition of a product 319 13.7.2 The product concept 319 13.7.3 Classification of consumer products 320
PRINCIPLES OF BUSINESS MANAGEMENT r ; J 13.7.3.i Convenience products 320 13.7.3.2 Shopping products 321 13.7.3.3 Specialty products 321 13.7.3.4 Unsought products 321 13.7.4 Brand decisions 321 13.7.4.1 Brand loyalty 322 13.7.4.2 Packaging decisions 324 13-7-5 Product strategies 324 13.7.5.1 Product differentiation 324 13.7.5.2 Product obsolescence 325 13-7-5-3 The product portfolio 325 13.7.5.4 The development of new products 325 13.7.6 The product life cycle 326 13.8 Distribution decisions 327 13.8.1 Selecting the distribution channel 328 13.8.2 Factors that play a role in the determination of a distribution channel 329 13.8.2.1 The type of product.. 329 13.8.2.2 The type of market 329 13.8.2.3 The existing distribution channels 330 13.8.3 Channel leadership 330 13.8.4 Market coverage 331 13.8.5 Logistics (also called physical distribution) 332 13.9 Price decisions 333 13.9.1 Price defined 333 13.9.2 The price-determination process 334 13.9.3 Adaptations of the final price 335 13.10 Marketing-communication decisions 336 13.10.1 Marketing communication defined 336 13.10.2 Advertising 337 13.10.2.1 The advertising message 337 13.10.3 Personal selling 340 13.10.4 Sales promotions 340 13.11 Public-relations management 340 Case study: Pick n Pay moving forward 342 Summary 344
V Table of contents : Glossary 344 Multiple-choice questions 350 References and end-notes 351 Answers to multiple-choice questions 351 PART 4 ENTREPRENEURSHIP AND THE BUSINESS PLAN 353 14 Entrepreneurship 355 Cedle Nieuwenhuizen Purpose of this chapter 355 Learning outcomes... 355 14.1 Introduction 355 Case study: Dimension 5 Business Services Group (Pty) Ltd 357 14.2 The economic impetus of entrepreneurial business 358 14.3 Who is an entrepreneur? 359 14.3.1 Ingenuity 359 14.3.2 Leadership 360 14.3.3 Calculated risk-taking 361 14.4 The entrepreneurial process 361 14.5 Temporary entrepreneurs versus growth-orientated entrepreneurs 362 14.6 Entrepreneurship, management and leadership in entrepreneurial businesses 362 14.7 Types of entrepreneurial business 363 14.7.1 The informal business sector 364 14.7.2 The micro- and small business sector 364 14.7.3 The medium and large business sectors 366 14.7.4 Franchisors and franchisees 367 14.7.5 Corporate entrepreneurship 368 Case study: Craig Lyons 369 Summary 370 Glossary 370 Multiple-choice questions 371 References and end-notes 372 Answers to multiple-choice questions 373
PRINCIPLES OF BUSINESS MANAGEMENT 15 The business plan 374 Cedle Nieuwenhuizen Purpose of this chapter 374 Learning outcomes 374 15.1 Introduction 374 15.2 Identifying an opportunity 375 15.3 Performing a feasibility study 375 15.4 Performing a viability study 376 15.4.1 Establishing who the consumers would be and what their needs are 376 15.4.2 Developing the mission or purpose statement of the business 378 15.4.3 Defining the business goals and business objectives... 378 15.4.4 Determining the business's share of the total market. 379 15.4.5 Calculating the income of the business 380 15.4.6 Calculating the expected net profit of the business to determine if the business idea is viable 381 15.4.7 Calculating the break-even point 382 15.5 Developing the business plan 384 15.5.1 The contents and framework of a business plan 384 15.5.2 Key elements of a business plan 385 15.5.2.1 The cover sheet 385 15.5.2.2 The table of contents 385 15.5.2.3 The executive summary 385 15.5.2.4 The business team : 386 15.5.2.5 The analysis of the macro- and market environment and the positioning of the business in the market 386 15.5.2.6 The history and profile of the business 387 15.5.2.7 The products and/or services plan 387 15.5.2.9 The marketing plan 388 15.5.2.9 The production or operational plan 388 15.5.2.10 The financial plan 388 15.5.2.11 The implementation timetable 390 15.5.2.12 The summary and concluding remarks 391 15.5.2.13 The appendices and references 391 15.6 Determining the resources and starting the business... 391 Case study: Afrique Cosmetics executive summary 392 Summary 392
Table of contents Glossary 393 Multiple-choice questions 394 References and end-notes 395 Answers to multiple-choice questions 395 Index 396