Lesson 1: The Business World and Business Management- Notes

The Business World and Business Management

This lesson covers the role of business in society, how businesses in a market economy use limited resources to satisfy needs, an overview of economic systems, and the purpose and nature of business management.

1.1 Introduction

Businesses transform resources into goods and services to meet society’s needs.
Businesses are closely linked to the society in which they operate.
The lesson provides an overview of prevailing economic systems and how business organizations function in a market economy.
The purpose and nature of business management are examined.

1.2 The Role of Business in Society

Businesses transform resources into goods and services to meet society’s needs.
Businesses provide employment, boosting the economy by providing incomes that can be spent.
Businesses increase the level of taxation for local communities.
Businesses decrease poverty levels.
Businesses contribute to a country’s economy by bringing growth and innovation.

The roles of businesses in society:

Provide employment
Supply products and services which satisfy consumer needs/wants
Preserve natural resources
Generate income
Social responsibility
Influence the country’s economy
Provide taxes to the government
Businesses act as a social platform, providing a place to meet or interact.
Societal needs and values influence what a business does (e.g., environmental awareness).
Businesses influence the physical environment, consumers, the economy, and competitors.
Society influences businesses through social responsibility, consumerism, and prevention of environmental damage.
Businesses influence society by developing new products (e.g., the impact of the electronics industry).
The success of businesses has a major impact on the prosperity of a society (e.g., Sasol in Secunda).

1.3 Needs and Need Satisfaction

Human beings have unlimited needs, but society has limited resources.
Choices must be made on how best to utilize resources.
Most people have limited resources (money) and must decide how to utilize them to obtain the greatest satisfaction possible.
The decision to obtain the greatest possible benefit with limited resources is known as the economic principle.

1.3.1 Maslow’s Hierarchy of Needs

Management needs to know what society’s needs are.
According to Maslow, all people have the same basic needs, but not everybody strives to satisfy the same needs.
In countries with severe famine, people will direct a great deal of their energy towards the satisfaction of physiological needs such as hunger and thirst.
Once these needs are satisfied, people will strive to satisfy the next level of needs (i.e. security needs) and so on.
Human needs are classified in a hierarchy where the lowest, more basic needs must be satisfied before the higher needs can receive attention.

Maslow’s Hierarchy:

Physiological needs: Basic survival needs such as food, water, clothing, shelter, and sleep.
Safety and security needs: Needs for protection from violence and theft, health security, and financial security.
Social needs: Need for love, community and belonging, including friendship, family bonds, belonging to social groups, intimacy, and relationships.
Esteem needs: Ego-driven needs referring to prestige, achievement, recognition, and status.
Self-actualization or self-realization needs: Desire to reach full potential; can only be met once all other needs have been satisfied.

1.3.2 Society’s Scarce Resources

We live in a world of scarcity because the amount of goods and services that people would like to consume will always exceed the amount that can be produced.
Scarcity applies to everyone and every society.
Since scarcity is a relative concept, there will always be wants which are not fully satisfied.
People’s wants are continually expanding and changing.
Wants are human desires for goods and services which are unlimited. Needs are necessities which are essential for survival, like food, water, shelter, and so forth.
Even with limitless spending power, scarcity exists because time is limited.
Time is a prime example of a limited resource.

Production Factors:

Resources available to manufacture goods or provide services.
- Human resources or labor:
  - All intellectual, physical or other human productive efforts.
  - Includes manual labor and the services of those who follow a profession (e.g. doctor, lawyer, teacher, etc.).
- Capital:
  - Machinery, tools, and buildings which humans use to produce goods and services.
  - Real capital (equipment) not money
- Natural resources or land:
  - Gifts of nature including climate, mineral resources, soil, metals, forests, and water.
  - Raw materials in the production process.
- Entrepreneur:
  - Combines natural resources, labor, and capital in the production process to make a profit.
  - Innovator with new goods or new production techniques.
  - Bearer of risk.
  - Takes non-routine decisions in the management of the enterprise.
Entrepreneurs foresee opportunities in a dynamic business environment, combine expertise and resources to provide products and services.
Society is confronted with the fundamental economic problem of how to ensure the highest possible satisfaction of needs with the limited, scarce resources available. This is known as the economic principle.
People have unlimited wants which they strive to fulfil. The individual is continually confronted with choices – unlimited wants have to be satisfied with limited means.
Factors of production are scarce and when they are used for the production of a certain good, it means that these factors cannot be used for the production of another good or goods. A decision to produce more of one good also means that less of another good can be produced.
Within a society, needs satisfaction occurs within a cycle

1.4 The Main Economic Systems

The world is divided into three basic economic systems: the free-market economy, socialism and the command economy.
Socialism is in the middle, between the two extremes.
Free-market economy (capitalism):
- Each individual is free to choose his or her own economic activity.
- Private individuals mostly own the society’s resources.
- Freedom of association and the right to strike.
- The profit motive is recognised and there is free competition.
Command economy (communism):
- The state (the government) owns almost all of the country’s resources.
- The state decides what products and services should be manufactured/provided, who should be employed where, what each person should earn, and so on.
Socialism:
- Individuals may own private property and choose their own form of economic activity.
- The state also owns many of the country’s resources and plays a far greater economic role than in a free-market system.
No country in the world has an economy that is a pure capitalist economy, or a communist economy, or a socialist economy.
Some countries therefore have a mixed economy.
Mixed economy: A combination of private enterprise, government ownership of resources and government planning of the economy.

1.5 The Need-Satisfying Institutions of the Market Economy

The functioning of the South African economy is affected by need-satisfying institutions such as business organisations, government institutions and non-profit-seeking institutions.
Business organisations (profit-seeking businesses):
- Aim is to conduct business in such a way that it will lead to a profit for the owners.
- Can be sole proprietorships, partnerships, closed corporations or companies.
- Most are privately owned, but the state also owns business organisations (public corporations).
Government organizations (state-owned enterprises - SOEs):
- Do not operate on a profit-seeking basis.
- Referred to as government departments.
- Provide a service to society and obtain their funds from Treasury.
Non-profit-seeking organizations:
- Privately owned organizations that do not strive to make a profit.
- Seek to obtain just sufficient income to cover their costs.
- Sports clubs, welfare organizations and religious organizations usually fall into this category.

1.6 The Nature of Business Management

Economics studies the “management of the national economy” and Business Management studies the “management of a need-satisfying institution”.
Economics studies the broader area of economic problems in the community, whereas Business Management focuses on the problems of individual organisations in the same community.
Business Management entails the study of how to manage a business as productively as possible.
The economic principle states that the business must strive to attain the highest income with the lowest cost, with the difference between the income and cost being the profit.
The economic principle applies as much to non-profit-seeking businesses as it does to profit-seeking businesses. The difference is that any form of profit is ploughed back into the community for which the non-profit- seeking organisation is working.
The business organization performs a number of activities, such as researching markets to find out whether there is a need for the product of the business; acquiring and processing raw materials in the manufacturing process; and appointing people to operate the machinery in the manufacturing process. Capital must be obtained and the income generated must be managed, while creditors must be paid and workers remunerated.

Functional Areas of a Business:

Human resources management: Manages all the staffing requirements and is responsible for organizing the management structures.
Marketing management: Responsible for establishing the need-satisfying products and services and making them available to customers.
Purchasing and supply management: Responsible for all the purchasing and distribution logistics required by the organisation.
Operations management: Responsible for transforming the organisation’s resources into the final goods and services that are sold to customers
Financial management: Focuses on the monetary requirements for running the organization.
Information management: Responsible for maintaining, implementing and controlling technology in the organization.
General management: Is at the centre of the organisation and deals with the planning, implementation and control of activities (management functions) that are needed to run the business.