,CHAPTER 1
The business world and
business management
Peet Venter
The purpose of this chapter
This chapter discusses the role of business in society and explains how a business
organisation in a market economy employs the various resources of a nation (its natural
resources, human resources, financial resources and entrepreneurship) in order to satisfy
the need for products and services. The chapter gives an overview of the prevailing
economic systems in the world and explains how the business organisation functions in a
market economy.
Learning outcomes
On completion of this chapter you should be able to:
•explain the role the business organisation plays in making available the products and
services society must have to exist and thrive
•describe the needs of society and how a business organisation satisfies those needs in
a market economy
•distinguish between the world’s three main economic systems
•explain the interface between a business organisation and a market economy
•describe the nature and purpose of business management as a science, where the
enabling factors, methods and principles of the business are studied to ensure the
efficient functioning of a business organisation
•comment on the development of business management as a science
•distinguish between and comment on the different management functions.
1.1Introduction
In a market economy, the business world can be seen as a complex system that involves
transforming resources into products and services. These products and services must
meet the needs of people in exchange for a profit. This description of business
emphasises four different elements:
•human activities
•production
•exchange
•profit.
These elements are discussed in detail in section 1.2, but first consider the case study
below. As the case study illustrates, the profit of a business is dependent on their ability
to efficiently deliver goods and services that society needs. However, where the
management of the organisation fails, and it is further influenced by players and factors
outside of their direct control, such as regulators and customers, it can lead to
,disastrous consequences. Businesses also have to trade off the demands of
divergent stakeholders, such as employees, government, regulators and suppliers to
strive for sustainability and the best interests of the society they serve.
CASE STUDY: PRASA ON THE BRINK OF COLLAPSE 1
The urban passenger rail services operated by the Passenger Rail Agency of South Africa
(Prasa) have long been a backbone of the urban transport system, transporting millions of
workers to and from their workplaces every day. But by 2018, Prasa was reported to be on
the brink of financial collapse, and it was losing commuters who had lost confidence in its
ability to deliver on its core mandate of providing an efficient, safe and timeous urban train
service.
The continued decline in operating performance by the rail unit has shown a
corresponding effect on passenger patronage which dropped to 372 million passenger trips
per annum‚ against 448 million passenger trips the previous year, negatively impacting on
Prasa’s fare revenue and contributing to a loss of R928 million‚ up from a R554 million loss
the previous year.
Prasa’s acting CEO‚ Sibusiso Sithole‚ said the rail division’s disappointing performance‚
where only 33 per cent of its targets were achieved‚ posed a serious challenge in positioning
rail as the mode of choice for the commuting public. In fact, commuters were so frustrated
that they often reverted to violence, burning train carriages and further crippling the Prasa
fleet.
Prasa’s problems did not end there. Fruitless and wasteful expenditure incurred stood at
R988 million for Prasa and R992,2 million for the group, pointing to the governance
problems facing the entity. It was also facing a clampdown from the Railway Safety
Regulator (RSR) due to not meeting safety conditions and even operating without a safety
permit at one point. To add to its woes, the theft and vandalism of cables and components
aggravated the challenges of maintenance, resulting in increased numbers of rolling stock
unavailability and unreliability. This negatively affected the delivery of a safe‚ clean and
secure train service.
The board of Prasa faces a difficult challenge, and needs to urgently attend to the
uncertainty relating to the growing concern by ensuring financial viability and sustainability of
the agency, and addressing the governance and leadership instability characterising it.
1.2The role of business in society
The business world is a complex system of individuals and business organisations that,
in a market economy, involves the activity of transforming resources into products and
services in order to meet peoples’ needs. These products and services are offered to the
market in exchange for profit. This description of business emphasises four different
elements:
•Firstly, business involves human activities. Business organisations are managed by
people. While businesses may own property, machines and money, all of these are
managed or operated by people.
•Secondly, business involves production. Production is the transformation of
certain resources into products and services, as illustrated in Figure 1.1. This may
be, for example, the conversion of flour, sugar and butter into bread, or the
conversion of bricks, sand, cement, wood and steel into a house. Even services are
produced. For example, in a hospital, beds and medicine are converted into a health
service. An airline transports passengers to their required destinations, and as this
happens, the passengers become part of the transformation process.
•Thirdly, business involves exchange. Businesses produce products and services, not
for their own use, but to exchange for money or for other products and services.
, •Finally, business involves profit. Few individuals or business organisations can
continue producing products and services without earning a profit. Profit is the
reward for meeting people’s needs, and it enables businesses to pay for resources
and to make a living. However, profit has to be earned in a way that is fair and
sustainable, and that is why the board of Prasa finds itself in the precarious position
of trying to turn around a business facing challenges on many fronts.
Figure 1.1: How entrepreneurs transform a nation’s resources into products and services
Some businesses produce predominantly tangible products such as bread, cars,
houses or bicycles. Other businesses produce predominantly services such as
entertainment, communication, insurance or transport.
Business is the means by which society endeavours to satisfy its needs and improve
its standard of living by creating wealth. At the heart of all business activity are
entrepreneurs, who start new ventures and thereby create jobs, economic growth and,
hopefully, prosperity. No one invented the business world. It is the result of activities
related to meeting the needs of people in a market economy.
The most important characteristic of the business world in the developed countries
of the West and Asia is the freedom of individuals to establish any business of their
choice and to produce, within limits, any product or service the market requires. This
system, in which individuals themselves decide what to produce, how to produce it and
at which price to sell their product, is called a market economy (or market system).
This is the prevailing economic system in South Africa.
The market economy is a complex system comprising various types of small and
large business organisations that collectively mobilise the resources of a country to
satisfy the needs of its inhabitants. These businesses group together to form industries.
Figure 1.2 shows the composition of the South African business world in terms of major
industry sectors and their contribution to the economy.
Figure 1.2: The composition of the South African business world in terms of sector
contribution to GDP2
Source: Statistics South Africa. 2018. Gross Domestic Product: Second quarter 2018. Statistical Release
P0441. Available at http://www.statssa.gov.za/publications/P0441/P04412ndQuarter2018.pdf [Accessed 17
October 2018].
The business world or economic structure of South Africa resembles that of many
industrialised countries, with a formal and informal sector. In the formal sector, large
businesses such as Standard Bank, Naspers, Vodacom, Anglo American, Tiger Brands
and many other large public corporations – 375 of which are listed on the Johannesburg
Securities Exchange (JSE) – are responsible for most of South Africa’s economic activity.
As market economies develop, they tend to become less dependent on primary
economic activities like mining and agriculture and more dependent on services. In
1920, for example, agriculture and mining combined contributed about 37 per cent to
the gross national product (GNP), compared to the 32 per cent contributed by the
The business world and
business management
Peet Venter
The purpose of this chapter
This chapter discusses the role of business in society and explains how a business
organisation in a market economy employs the various resources of a nation (its natural
resources, human resources, financial resources and entrepreneurship) in order to satisfy
the need for products and services. The chapter gives an overview of the prevailing
economic systems in the world and explains how the business organisation functions in a
market economy.
Learning outcomes
On completion of this chapter you should be able to:
•explain the role the business organisation plays in making available the products and
services society must have to exist and thrive
•describe the needs of society and how a business organisation satisfies those needs in
a market economy
•distinguish between the world’s three main economic systems
•explain the interface between a business organisation and a market economy
•describe the nature and purpose of business management as a science, where the
enabling factors, methods and principles of the business are studied to ensure the
efficient functioning of a business organisation
•comment on the development of business management as a science
•distinguish between and comment on the different management functions.
1.1Introduction
In a market economy, the business world can be seen as a complex system that involves
transforming resources into products and services. These products and services must
meet the needs of people in exchange for a profit. This description of business
emphasises four different elements:
•human activities
•production
•exchange
•profit.
These elements are discussed in detail in section 1.2, but first consider the case study
below. As the case study illustrates, the profit of a business is dependent on their ability
to efficiently deliver goods and services that society needs. However, where the
management of the organisation fails, and it is further influenced by players and factors
outside of their direct control, such as regulators and customers, it can lead to
,disastrous consequences. Businesses also have to trade off the demands of
divergent stakeholders, such as employees, government, regulators and suppliers to
strive for sustainability and the best interests of the society they serve.
CASE STUDY: PRASA ON THE BRINK OF COLLAPSE 1
The urban passenger rail services operated by the Passenger Rail Agency of South Africa
(Prasa) have long been a backbone of the urban transport system, transporting millions of
workers to and from their workplaces every day. But by 2018, Prasa was reported to be on
the brink of financial collapse, and it was losing commuters who had lost confidence in its
ability to deliver on its core mandate of providing an efficient, safe and timeous urban train
service.
The continued decline in operating performance by the rail unit has shown a
corresponding effect on passenger patronage which dropped to 372 million passenger trips
per annum‚ against 448 million passenger trips the previous year, negatively impacting on
Prasa’s fare revenue and contributing to a loss of R928 million‚ up from a R554 million loss
the previous year.
Prasa’s acting CEO‚ Sibusiso Sithole‚ said the rail division’s disappointing performance‚
where only 33 per cent of its targets were achieved‚ posed a serious challenge in positioning
rail as the mode of choice for the commuting public. In fact, commuters were so frustrated
that they often reverted to violence, burning train carriages and further crippling the Prasa
fleet.
Prasa’s problems did not end there. Fruitless and wasteful expenditure incurred stood at
R988 million for Prasa and R992,2 million for the group, pointing to the governance
problems facing the entity. It was also facing a clampdown from the Railway Safety
Regulator (RSR) due to not meeting safety conditions and even operating without a safety
permit at one point. To add to its woes, the theft and vandalism of cables and components
aggravated the challenges of maintenance, resulting in increased numbers of rolling stock
unavailability and unreliability. This negatively affected the delivery of a safe‚ clean and
secure train service.
The board of Prasa faces a difficult challenge, and needs to urgently attend to the
uncertainty relating to the growing concern by ensuring financial viability and sustainability of
the agency, and addressing the governance and leadership instability characterising it.
1.2The role of business in society
The business world is a complex system of individuals and business organisations that,
in a market economy, involves the activity of transforming resources into products and
services in order to meet peoples’ needs. These products and services are offered to the
market in exchange for profit. This description of business emphasises four different
elements:
•Firstly, business involves human activities. Business organisations are managed by
people. While businesses may own property, machines and money, all of these are
managed or operated by people.
•Secondly, business involves production. Production is the transformation of
certain resources into products and services, as illustrated in Figure 1.1. This may
be, for example, the conversion of flour, sugar and butter into bread, or the
conversion of bricks, sand, cement, wood and steel into a house. Even services are
produced. For example, in a hospital, beds and medicine are converted into a health
service. An airline transports passengers to their required destinations, and as this
happens, the passengers become part of the transformation process.
•Thirdly, business involves exchange. Businesses produce products and services, not
for their own use, but to exchange for money or for other products and services.
, •Finally, business involves profit. Few individuals or business organisations can
continue producing products and services without earning a profit. Profit is the
reward for meeting people’s needs, and it enables businesses to pay for resources
and to make a living. However, profit has to be earned in a way that is fair and
sustainable, and that is why the board of Prasa finds itself in the precarious position
of trying to turn around a business facing challenges on many fronts.
Figure 1.1: How entrepreneurs transform a nation’s resources into products and services
Some businesses produce predominantly tangible products such as bread, cars,
houses or bicycles. Other businesses produce predominantly services such as
entertainment, communication, insurance or transport.
Business is the means by which society endeavours to satisfy its needs and improve
its standard of living by creating wealth. At the heart of all business activity are
entrepreneurs, who start new ventures and thereby create jobs, economic growth and,
hopefully, prosperity. No one invented the business world. It is the result of activities
related to meeting the needs of people in a market economy.
The most important characteristic of the business world in the developed countries
of the West and Asia is the freedom of individuals to establish any business of their
choice and to produce, within limits, any product or service the market requires. This
system, in which individuals themselves decide what to produce, how to produce it and
at which price to sell their product, is called a market economy (or market system).
This is the prevailing economic system in South Africa.
The market economy is a complex system comprising various types of small and
large business organisations that collectively mobilise the resources of a country to
satisfy the needs of its inhabitants. These businesses group together to form industries.
Figure 1.2 shows the composition of the South African business world in terms of major
industry sectors and their contribution to the economy.
Figure 1.2: The composition of the South African business world in terms of sector
contribution to GDP2
Source: Statistics South Africa. 2018. Gross Domestic Product: Second quarter 2018. Statistical Release
P0441. Available at http://www.statssa.gov.za/publications/P0441/P04412ndQuarter2018.pdf [Accessed 17
October 2018].
The business world or economic structure of South Africa resembles that of many
industrialised countries, with a formal and informal sector. In the formal sector, large
businesses such as Standard Bank, Naspers, Vodacom, Anglo American, Tiger Brands
and many other large public corporations – 375 of which are listed on the Johannesburg
Securities Exchange (JSE) – are responsible for most of South Africa’s economic activity.
As market economies develop, they tend to become less dependent on primary
economic activities like mining and agriculture and more dependent on services. In
1920, for example, agriculture and mining combined contributed about 37 per cent to
the gross national product (GNP), compared to the 32 per cent contributed by the
