BUSINESS STUDIES

GRADE 11
TERM ONE
CHAPTER 1
INFLUENCES AND CHALLENGES OF THE BUSINESS
ENVIRONMENTS
TABLE OF CONTENTS
TOPICS PAGES
Exam guidelines for business environments 2
Terms and definitions 2-3
The components of the micro, market & macro environments. (Recap) 4
The reasons why businesses has more control over the micro 5
environment/less control over market environment and no control over
macro environment.

Ways in which businesses can be involved in the macro environment 5

Benefits/ advantages of being involved in the macro environment 6

The challenges of the business environments from scenarios/case 6

studies/statements and examine the extent of control a business has
over these environments.

Explanation of the challenges of the business environment 6-7

Challenges of the market environment 8-9
Challenges of the macro environment 9-10

Examples of how challenges of the business environment can be 10-11

assessed using scenarios

Examples of contemporary legislation 11

This chapter consists of 11 pages

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 CONTENT DETAILS FOR TEACHING, LEARNING AND ASSESSMENT PURPOSES

INFLUENCES AND CHALLENGES OF THE BUSINESS ENVIRONMENTS

Learners must be able to:
 Outline the components of the micro, market & macro environments. (Recap)
 Explain the reasons why businesses has more control over the micro environment/less control
over market environment and less control over macro environment.
 Identify the challenges of the business environments from scenarios/case studies/statements and
examine the extent of control a business has over these environments.
 Discuss/Explain/Describe how businesses can control the business environments.
 Recommend/Suggest ways in which businesses can be involved in the macro environment.
 Outline/Name/Discuss/Explain the challenges of the micro environment.
 Identify these challenges from given scenarios/statements. Quote from scenarios/Statements to
support your answer.
 Differentiate between strikes and go-slows.
 Outline/Name/Discuss/Explain the challenges of the macro environment.
 Identify these challenges from given scenarios/statements. Quote from scenarios/Statements to
support your answer.
 Recommend ways in which businesses can overcome competition in the market.
 Identify the impact of socio-cultural factors on businesses from scenarios/case studies and make
recommendations on how businesses can address this challenge.
 Outline/Name/Discuss/Explain the challenges of the market environment.

Terms and Definitions

TERM DEFINITION
Control The power to influence or direct people’s behaviour or the course of
events.
Organisational structure Framework for managers which shows the division of responsibilities
and roles played by each stakeholder.
Organisational culture Controls and influences the way in which the business is conducted
Vision Reflects or predicts what the future will look like.
Mission statement Shows what one does best every day in the business and how one
should go about doing it.
Human resources The personnel of a business organization regarded as a significant
asset in terms of skills and abilities.
Suppliers Factories/providers of goods/services that businesses would
obtain/buy from in order to operate their businesses.
Competitors Businesses which sell the same/similar products/services
Deforestation Removal of trees to clear land to be used for another purpose, e.g.
industrialization
Redressing To make amends or to set right
Nepotism The practise of showing favouritism towards one’s family or friends in
economic or employment terms
Retrenchment Involuntary ending of a service contract of an employee by the
employer due to operational requirements.
Go- slows When employees work more slowly and with less effort than usual to
try to persuade an employer to agree to higher pay
Trade union An organized association of workers in a trade , group of trades, or
profession formed to protect their rights and interest

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Strike A work stoppage as a form of protest or to strengthen one’s
bargaining position
Industrial action These are actions that include strikes or go slows
Open market A market where there is no control over who may provide goods and
services or over the prices that can be charged

Demographics Statistical data relating to the population and particular groups within
it. Often incudes age, gender, income groups and occupation.
Psychographics The classification of people according to their attitudes, aspirations
and other psychological criteria.
Globalisation Greater trade and collaboration between businesses or people in
different countries which is enabled by technological advances and
communication.
Physical environment This is an environment that is comprising of the ecological elements
such as natural disasters, air pollution, water pollution, deforestation,
waste products or natural resources
Institutional environment These are private-public partnerships which are formed between
government and private enterprise
Redressing To make amends or to set right
Nepotism The practise of showing favouritism towards one’s family or friends in
economic or employment terms
Retrenchment Involuntary ending of a service contract of an employee by the
employer due to operational requirements.
Go- slows When employees work more slowly and with less effort than usual to
try to persuade an employer to agree to higher pay
Trade union An organized association of workers in a trade , group of trades, or
profession formed to protect their rights and interest
Strike A work stoppage as a form of protest or to strengthen one’s
bargaining position

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1 COMPONENTS OF THE MICRO, MARKET & MACRO ENVIRONMENTS. (RECAP)

Components of the Components of the market Components of the macro

micro environment environment environment
 The business mission  Customers/Buyers; are the  Physical/Natural environment
and objectives, final users of the  Economic environment
 its management product/services.  Social/Cultural/Demographic
structure,  Suppliers; include environment
 its resources and its factories/providers of  Technological environment
culture are primarily goods/services that  Legal/Political
controlled by the businesses would obtain/buy  Environmental/Global
enterprise’s from in order to operate their environment
management businesses.  Institutional environment
 Intermediaries/Agents; who
help to promote, sell and
distribute products to
consumers.
 Competitors; which sell the
same/similar
products/services may have
a greater impact on the
market of the business.
 A regulator ; is a
person/organisation with
official power to control an
activity and make sure that it
is done in a satisfactory
way/make rules by which
enterprises in the different
industries must abide.
 Strategic allies; refer to two
or more businesses that
work together to allow them
to obtain the expertise they
lack from another business.
 Unions; are the employee
organisations that aim to
improve working conditions
of the labour force.

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1.1 Reasons why businesses has more control over the micro environment/less
control over market environment and less control over macro environment

Micro environment
 Business owners and managers have a great deal of control over the internal/micro
environment of business, which covers day-to-day decisions.
 They choose the suppliers they purchase/which employees they hire/the products they sell,
and where they sell those products.
 They use their skills and resources to create goods and services that will satisfy existing and
prospective customers.

Market environment
 Market environment for a business includes company related influences
 The market environment refers to influences that have an impact on the success in forming
and keeping a sustainable business such as competition and suppliers.
 Businesses can influence their competitors by increasing the quality of their products in
relation with competitor prices.
 The opposite can also be that suppliers’ raw materials can influence the quality of business
products.

Macro environment
 The market environment refers to the major external and uncontrollable factors that influence
an organization's decision making.
 These factors include the economic/demographics/legal/political/social conditions/technological
changes and natural forces.
 The above mentioned factors affect business performance and strategies.
 The external environmental conditions that affect a business are generally beyond the control
of management and change constantly.

1.2 Ways in which businesses can be involved in the macro environment

 Influencing suppliers by signing long term contracts.
 Creating new uses for a product by finding new customers.
 Influencing regulators through lobbying and bargaining.
 Initiating bargaining sessions between management and unions.
 Influencing its owners using information contained in annual reports.
 Negotiating strategic alliance agreement through contractual processes.
 Knowing government regulations and operating within them.
 Keeping up with new technologies to improve production and marketing.
 Lowering its impact on the environment.
 Entering the global market by using the internet to source suppliers and customers.
 Working within the law to set up contracts.
 Taking advantage of economic changes such as exchange rate, tax breaks. .
 The business can stay informed about the challenges and developments in the macro
environment and can adapt to challenges quickly.
 Entering the global market by using the internet to source suppliers and customers
 Working within the law can assist the business to set up contracts.
 Getting involved in research/development so that they can continue to operate.

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1.3 Benefits/advantages of involvement in macro environment
 The business can more accurately predict future events, threats and opportunities that may
arise
 The business can contribute to a healthier, more skilled and productive workforce
 It can protect natural resources and meet consumer needs in a sustainable way
 The business can contribute to wealthier consumers.
 Reduced industrial conflict and increase productivity.
 The business can accurately promote a cause that is a concern to the society.
 The business can contribute its expertise and resources that can influence the public opinion.
This is called advocacy.

2 CHALLENGES OF THE BUSINESS ENVIRONMENTS

Challenges of the micro Challenges of the market Challenges of the macro
environment environment environment
 Difficult employees.  Competition  Change in income levels
 Lack of vision and mission  Shortage of supply  Political changes
 Lack of adequate  Changes in consumer  Contemporary legislation
management skills
behaviour  Labour restrictions
 Demographics and  Micro lending
 Unions psychographics  Globalisation/international
 Strikes and go slows  Socio-cultural factors challenges
 Skills shortages among  Social values and
employees demographics
 High employee turnover  Socio economic issues
 Employee absenteeism  Socio economic challenges.

2.1 Explanation of the challenges of the business environment

2.1.1 Challenges of the micro environment
Difficult employees
 Difficult employees may have a negative attitude on new employees.
 They need a lot of supervision to complete their tasks satisfactory.
 Difficult employees can do harm to the enterprise image if they say negative things about the
business.
Lack of vision and mission statement
 Lack of vision and mission statement will hamper meaningful guidance and leadership to
employees.
 When there is no mission the business will lack focus/direction and single long term
objective.

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 Lack of adequate managerial skills
 Lack of adequate managerial skills will result in the business not achieving its objectives.
 Managers may not be able to provide meaningful guidance and leadership to employees.
 Managers have different styles of managing and leading and this can be the source of
enormous conflict with other managers and with staff.
 Ineffective management can affect the productivity and profitability of a business.
The impact of unions
 Trade unions may create tension between management and employees.
 Businesses may not be able to meet the demands of the trade unions.
 Once employees have a grievance against their employers relating to payments/workers’
rights/work conditions they will declare an industrial dispute.

Strikes and go-slows

 Strikes and go-slows may affect the business negatively as it cannot meet its expected units
of production.
 Employees may not report to work due to a complete shutdown strike.
 Employees may report to work but work slowly so that the business cannot meet its targets
due to go slows.
Differences between a strike and go slow
STRIKE GO-SLOW
-Temporary collective refusal of -The employees still carry on with their
employees to work. work, but at a much slower pace than
normal.

-A collective, organised cessation of -The employees aim to disrupt the

work by employees to force the workplace production.
employers to accept their demands.

-Workers will not be fired if they -Workers participating in a go-slow are

participate in a protected strike often punished , sometimes fired

Skills shortages among employees

 Businesses sometimes find it difficult to find suitable employees with skills and experience.
 Some businesses end up employing workers who are not qualified to do the job.
 Unqualified employees may contribute to bad decision making.

High employee turnover

 Employee turnover means that employees resign from the frequently.
 High employee turnover affects productivity, continuity and the recruitment process.

Employee absenteeism
 Employees’ absenteeism reduces productivity and affects profitability.

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2.1.2 Challenges of the market environment
Competition
 Other businesses which sell similar substitute products pose a problem to/threaten the
success of a business.
 It is difficult to compete with businesses selling the same products and services in certain
countries.
 If a business is not able to match the quality of service/products and the price of its
competitors, it will be in real danger.
 The challenges around competitors can be industry rivalry where businesses aim to sell
more than competitors/new entrants with better products/cheaper or better substitutes.
 Businesses could find that they are unable to make sufficient profit when the demand is not
high enough to support the supply of the same goods/ services.
 Essential for a business to have a regular supply of all the materials that are inputs in the
production process.
 Dissatisfied customers can damage the reputation and threaten the future of the business.
Shortage of supply
 Businesses that experience shortage of supply may lose customers as they may buy from
other businesses.
 Raw materials may be unavailable when drought cause poor harvest.
 Imported goods may not arrive when the country of origin has transport/political problems.

Changes in consumer behaviour

 A business is dependent on its customers to purchase its products.
 Consumers are influenced by many factors and are mostly unpredictable in their buying
behaviour.
 Consumers' preferences and tastes can change as fashions change and as technology
advances.
 Changes in consumer behaviour, spending habits, tastes and preferences present an on-
going challenge to businesses.
 The challenges include keeping up with changes in consumer tastes and demand by doing
research, finding ways to influence consumer demand and conducting advertising
campaigns/consumer surveys.

Demographics and psychographics

 Consumers' attitudes, interests, opinions and lifestyles determine the characteristics of the
consumer.
 It is difficult to determine the demographics/psychographics of the target market because
they change frequently.
 The consumer market is diverse in the cultural and social background which has a direct
influence on the choices they make.
 The challenges include collecting/interpreting information about the target market and to use
the data to develop a marketing strategy.
 The demographics and psychographics can change quickly and businesses need to change
just as quickly if they want to retain their customers.

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 Socio-cultural factors
 Social-cultural factors describe the common behaviour and attitudes of a particular society.
 As society changes so will the cultural values and practices of individuals.
 Businesses must be aware of change and that they can avoid threats and take advantage of
the new opportunities that the change may present.
 Businesses should be aware of social trends and influential campaigns that promote buying.
 The challenge is to gather information about changes and to respond to them by adapting
practices to maintain and increase its customer base.

2.1.3 Ways in which businesses can overcome competition in the market

 Management must ensure that the business differentiates itself from the competitors by
tapping into what the customer wants.
 Offering more personal services by being responsive to the customer’s needs/ expectations.
 Offering low-cost extras such as improved credit terms/discounts/loyalty schemes etc.
 Charging the lower prices√ than that of the other businesses.
 Selling products of a superior quality/new products/services that the customers might be
interested in.
 By being the best employer that has well trained/knowledgeable staff members that create a
better working atmosphere.
 Stepping up the marketing of the business by using promotional ideas such as posters or
campaigns on social media.
 Updating the image of the business such as painting the front of the premises/ making the
business looking modern/ inviting.
 Keeping up with developments in the sector of the business sector, following consumer
trends/investing in new technology.
 Improving on customer services and keeping them happy.

2.1.4 Challenges of the macro environment

Change in income levels
 Factors such as unemployment/high interest rate can leave consumers with less disposable
income.
 Reduced in consumer spending will results in lower profit for businesses.

Political changes
 A change in government can result in political instability and scare away potential investors.
 A business that relies on imported/exported goods may be challenged by government’s
attitude on duties and tariffs to be imposed.
Contemporary Legislation
 The government has established the National Credit Act and Consumer Protection Act to
protect businesses and customers.

Labour restrictions
 The government has passed a number of laws which impose restrictions on businesses
labour practices.
 These restrictions pose a challenge to businesses that have to find the right candidate for
the job.
 These restrictions make it a challenge for business to employ suitable people locally and
internationally.

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 Micro lending
 Micro lending is granting of small loans to people who cannot obtain credit from banks.
 Micro-lending puts pressure on businesses since they want to support micro businesses, but
they are a big risk as many fail and cannot repay debt.
 Micro-lending puts pressure on businesses since they want to support micro businesses, but
they are a big risk as many fail and cannot repay debt.

Globalisation/international challenges
 Globalisation refers to the exchange of products/services/capital and labour across
boundaries/countries.
 Local businesses are competing with international businesses for local consumers
 Businesses should be aware of global networks and their effects.
 The overseas migration of skilled labour can results in local skills shortage.
 This means more competition for businesses that are already under pressure to compete
locally.
 Some international businesses dump their product lines in South Africa at the price lower
than those at which local businesses can afford to sell them.

Social values and demographics

 People’s values influence some of their buying behaviour habits as they buy products that
they identify with.
 Attitudes towards saving and brand loyalty can impact on consumers’ habits.

Socio economic issues

 Businesses are faced with many challenges of poverty, unemployment, inadequate
education, skills shortages, crime and HIV and Aids.
 All these make running a successful business very difficult.

2.1.5 Examples of how challenges of business environments can be assessed using

scenarios
VASHNIE FASHION DESIGNERS (VFD)

Vashnie Fashion Designers employ fashion designers who are always late for work despite
several warnings. The government has increased import tariffs, making it difficult for VFD to
continue importing designer clothing from China. VFD purchase their raw materials from
Ditebogo Clothing Manufacturers who are usually out of stock.

 You will have to identify the challenges that are faced by the international company and
motivate your answer by quoting from the scenario.
 Classify the identified challenges according to their business environment.
 The extent of control international companies have over EACH business environment
mentioned is also expected to be known.

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Suggested answers
CHALLENGE BUSINESS EXTENT OF CONTROL
ENVIRONME
VFD has employed designers NT
Micro-environment Full control
who are continuously late for
work despite several warnings.
VFD purchases their material Market environment Less/limited/partial/can influence
from Ditebogo Clothing
Manufacturers who is usually
out of stock.
The government has Macro environment No control
increased import tariffs,
making it difficult for VFD to
continue importing designs
from China.

2.1.6 Examples of contemporary legislation

National Credit Act
 This Act was established to protect both businesses and consumers from negligent lending
practices that results in over indebtedness for consumers,

Consumer Protection Act

 This Act promotes and advances the social and economic welfare of consumers in South
Africa.

Employment Equity Act

 This act is there to eliminate unfair discrimination in the business against race, colour, age,
gender, religion or disability.
 It ensures that the demographics make-up of the country is reflected at all levels in the
business

Broad Based Black Economic Empowerment Act

 This Act ensures that the previously disadvantaged people fully participate in the economy.

Basic Conditions of Employment Act

 It deals with the constitutional rights in the work place by addressing issues such as working
hours/leave/employment contracts pay slips and other working conditions in the business.

Labour Relations Act

It deals with labor justice and to bring healthy industrial relations in the business between the
employers and the employees

Skills Development Act

 The main aim of this Act is improve the skills of all people in South Africa and those
employed by business.

Compensation for Occupational Injuries and Diseases Act/COIDA

 It provides compensation for disablement or death caused by injuries or diseases contracted
by employees in the course of their employment

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 BUSINESS STUDIES
GRADE 11
TERM ONE
CHAPTER TWO
ADAPTING TO BUSINESS CHALLENGES OF THE BUSINESS
ENVIRONMENTS
TABLE OF CONTENTS

TOPICS PAGES
Exam guidelines for Adapting to 2
challenges of the business environments
Terms and definitions 2
Ways in which businesses can adapt to 3
challenges of the micro environment.
Ways in which businesses can adapt to 4
challenges of the market environment

Ways in which businesses can adapt to 4-7

challenges of the macro environment

Meaning of lobbying 7
Reasons why businesses lobby 7

Types of lobbying 7-8

Meaning of networking 8

Examples of networking 8

Importance/advantages of networking 9

Meaning of power relations 9

Ways in which businesses can form power 9

relations

This chapter consists of 9 pages

12
 CONTENT DETAILS FOR TEACHING, LEARNING AND ASSESSMENT PURPOSES

ADAPTING TO CHALLENGES OF THE BUSINESS ENVIRONMENTS

Learners must be able to:
 Explain/Discuss/Recommend ways in which businesses can adapt to challenges of the micro,
market and macro environment e.g.:
o Businesses can deal with difficult employees as a micro-environment challenge by
revisiting the recruitment & induction policies.
 Define/Explain/Discuss/Describe the following ways in which businesses can adapt to
challenges of the macro environment:
o Information management
o Strategic responses
o Mergers, takeovers, acquisitions and alliances
o Organisation design and flexibility
o Direct influence of the environment and social responsibility
 Give practical examples of mergers, takeovers, acquisitions and alliances.
 Identify these examples from given scenarios/ statements.Quote from these
scenarios/statements to support your answer.
 Suggest ways in which business can have a direct influence on the environment.
 Recommend projects that can be undertaken by businesses as part of social responsibility and
explain the benefits of these projects for businesses.
 Define the term lobbying
 Discuss /Explain the reasons why businesses lobby
 Explain/discuss/describe the following types of lobbying e.g.:
o Hedging against inflation
o Bargaining sessions between management and unions,
o Influencing supervisory body/regulators
 Explain the meaning and the importance of networking.
 Give practical examples of networking.
 Discuss/Explain/Describe the advantages of networking.
 Define the meaning of power relationships.
 Discuss/Explain/Describe ways businesses can form power relationships e.g.
o Strategic alliance agreements
o Persuasion of large investors,
o Company representatives’ influence
 Identify lobbying, networking and power relationships from given scenarios/case
studies/statements.

Terms and Definitions

Term Definition
Information The finding, recording, storing and retrieving of information from various
management sources so that it can be used effectively by the business.
Strategic response A reaction to a need by developing a system that will meet the long
term that has been identified.
Merger When two businesses of similar sizes willingly combine to become one.
Takeover The act of assuming control of something especially when one
company buys out another company against its will.
Alliances An association formed between organisations with similar interests,
nature or qualities for mutual benefit.
Hedging Is when one tries to invest his money in such a way that its value grows
faster than inflation.
Networking Interacting with others to exchange information and develop
professional contacts to help in gaining ne customers, better suppliers,
etc.
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1 Introduction
 Businesses operate in dynamic business environments that pose many challenges on their
operations.
 The profitability and success of businesses depend on how they respond to challenges
posed by the internal and external business environments.
 Businesses operate within the political context of the country, therefore changes in
governance of the country can have a negative impact on businesses.
 There is an increasing trend for people to move freely between countries and for businesses
to trade across international borders.
 Businesses need strong relationships to succeed in the market place.

2 Ways in which businesses can adapt to challenges of the micro, market and
macro environment.
Ways business can adapt to the challenges of the MICRO environment
CHALLENGES RECOMMENDATION
Difficult employees  Businesses can deal with difficult employees as by revisiting the
recruitment & induction policies.
 Businesses need to develop strategies to deal with different types
of personalities.
 Businesses must offer counselling sessions to employees with
personal problems.
Lack of vision and  Management must have a clear vision which is understood and
mission communicated this to all employees.
 The vision must and mission statement have to be implemented in
a way that shapes the internal environment.
 The vision and mission should direct the use of resources and
actions of employees.
 Businesses’ values must be evident in their ethical standards and
the way employees are treated.
 Management must be able to anticipate changes in the internal
environment so that they can plan goals and operations
proactively.
Lack of adequate  A business manager needs to be skilled in technical aspects of
management skills their job and in dealing with employees.
 Managers need good interpersonal and conflict resolution skills.
 Managers must attend management and leadership causes.
 Businesses may request mentors and coaches from successful
businesses to train their managers.
Unions, strikes and  Managers need to deal fairly and transparently with trade unions.
go slows  They need to build relationships with union representatives so that
through positive negotiations strikes can be avoided.
 The business can also make use of the CCMA to help reach an
agreement with the trade unions.
 Employers need a labour relations strategy where a business
engages positively and meaningfully with its employees before
tensions rise and strikes are threatened.
 Businesses must be able to manage employees in such a way
that good working relationships are maintained and disputes are
resolved timeously.

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15
3 Ways business can adapt to the challenges of the MARKET environment
CHALLENGES RECOMMENDATION
Competition  Businesses must take into account its entry into and operation
within the market.
 Conduct research and identify customer needs.
 Offer products or services
 Offer more personal services.
 Ensure that the staff is well trained and knowledgeable.
Shortage of supply  Select suppliers which are reputable/trustworthy and reliable
suppliers.
 Maintain a good relationship with suppliers.
 Enter into contracts with suppliers to secure raw materials of
good quality in sufficient quantities.
 Select suppliers which are reputable, trustworthy and reliable.
 Take over suppliers to ensure continuity of its supply. This is
called backwards integration.
Change in consumer  Marketing of the business should conduct an on-going research
behaviour to investigate the general behavioural patterns.
 The marketing manager must monitor and respond to changes
in consumer patterns of consumption.
Demographics and  Businesses need to ensure that their information is up-to date
psychographics and accurate.
 They need to interpret data accurately so that they can plan an
effective marketing strategy and plan.
 They need to keep track and study the attitude, taste and
desires of the market.
Socio cultural factors  The entrepreneurs need to remain informed of socio-cultural
changes.
 They must be able to respond to socio-economic factors by
adapting the internal environment of the business.
 Businesses must be able to modify the marketing strategy and
marketing plan accordingly.
 Business must employ people from diverse social and cultural
groups so that they can get an inside view on how to meet the
needs of the different groups.

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 4 Ways in which businesses can adapt to challenges of the MACRO environment

The following ways in which business can adapt to challenges of the macro-
environment will be discussed in detail below:
 Information management
 Strategic responses
 Mergers, takeovers, acquisitions and alliances
 Organisational design and flexibility
 Direct influence of the environment and social responsibility

4.1 Information management

• Information must be found/recorded/stored/easily retrieved and effectively used.
• Businesses need to implement an effective information management system which is
accessible and useful to all staff.
• They should invest large capital into information technology (IT) system to update business
operations.
• Modern IT solutions enable businesses to satisfy customer needs faster and better.
• Business may benefit from an increase in market share and profitability.

4.2 Strategic responses

• Management needs to design strategic responses to various challenges by analysing all
information, identifying stakeholders’ involved.
• Get a clear picture of each stakeholder’s viewpoints and requirements
• Businesses need to be aware of new competitors in the market and they must be able to
strategically respond to threats.
• They must make strategic plans to remain sustainable in a competitive market.
• Correct strategic responses assist businesses to identify the most important features of their
products.

4.3 Mergers, takeovers, acquisitions and alliances

 Business sometimes have to make quick decisions to survive as a result of challenges from
the business environments.
 They may implement mergers, takeovers, acquisitions and alliance as solutions to respond to
the challenges of the environments.

Mergers
 This occurs when two companies join together and form one new business.
 When two businesses, usually by agreement become one.
 If it is a public company, then the shareholders will swop their shares in one company for the
equivalent value of shares in the new merged company.

Takeovers
 The purchasing of a company (target) by another company (bidder) usually against the will
of their targets.
 Businesses that take over existing companies by buying out its shares until the business
has controlling interests.

Acquisitions
 A business buys another business at an agreed price.
 It usually occurs to private companies that are not listed.

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 Alliances
 These are agreements when two or more businesses work together to achieve their
objectives.
 Organisations with similar interest/nature/qualities choose to work together for the mutual
benefit of both organisations.
 They remain separate and merely co-operate with one another.
NOTE: You must be able to give practical examples of mergers, takeovers,
acquisitions and alliances.

4.4 Organisational design and flexibility

 Organisational design describes how a business sis structured and how it communicates its
culture.
 It is a process to integrate people/information/technology of an organisation so that
improves the profitability of the business.
 Businesses need to be flexible in their organisational design and strategies so that they can
compete in a changing market.
 They need to change the organisational design to adapt to a specific challenge.

4.5 Direct influence on the environment and social responsibility

 Direct influences on businesses usually results from legislation/trade agreements and
competitor strategies.
 Successful businesses and their environment adapt to the unavoidable influences by
creating a competitive environment.

4.5.1 Ways in which businesses can have a direct influence on the environment
• Businesses need to be flexible by getting involved in research/development so that they can
continue to operate.
• Influence its suppliers by signing long term contracts.
• Create new uses for a product by finding new customers.
• Influence regulators through lobbying and bargaining.
• Initiate bargaining sessions between management and unions.
• Influence its owners using information contained in annual reports.
• Negotiate strategic alliance agreement through contractual processes.

4.5.2 Social responsibility

 Increasing pressure in the business environment is forcing businesses to become more
socially responsible by giving back to communities.
 A business code of conduct should take into consideration the norms and values of the
community in which it operates.
 When a business makes a commitment to environmental and social responsibilities it will
deliver a tripple bottom line which includes planet, people and profit.

Projects that can be undertaken by businesses as part of social responsibility

 Businesses must allow employees to get involved in social development.
 Managers must protect the environment and participate in community upliftment programs.
 Environmental friendly campaigns
 Making donations to charity organisations
 Engaging in economic development
 Charity community projects
 Benefits for the business Increased sales due to customer loyalty.
 HIV and Aids awareness programs

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 Benefits of CSI projects for businesses
 Increases employees’ morale and job satisfaction when they are involved in social
responsibility programmes.
 CSI projects may be used as a marketing strategy to promote their products.
 CSI projects promote teamwork within businesses.
 CSI helps to attract investors because of increased profits/income
 Promotes customer loyalty resulting in more sales.
 May attract experienced employees/increase the pool of skilled labour which could
increase productivity.
 Positive/Improved image as the business looks after employees/conducts itself in a
responsible way.
 A business may have a competitive advantage, resulting in good publicity/an improved
reputation.
 The business enjoys the goodwill/support of communities.

5 Lobbying, networking and power relations

5.1.1 Meaning of lobbying

 Lobbying refers to the process of trying to influence legislation or parliamentary decision
making.
 It involves acquiring public support for an issue such as children or animal rights.
 It is an organised process where individuals, business and organisations use their
influence to change government policy. .
 Lobbying specifically applies to law-makers and government officials and it is a
participatory approach to government.
 It is done by various people with similar motives, beliefs or commercial positions.

5.1.2 Reasons why businesses lobby

 Businesses lobby their regulator or supervisory body in order to try influence prices,
policies, regulations and other decisions made by the regulator or the supervisory body
 Businesses or people lobby or change laws like, child labour laws, clean air and water
laws, municipal regulations, etc.
 Their views are important and heard, thus making a difference and giving solutions to
business challenges.
 Lobbying advances business men’s cause and builds public trust.

5.1.3 Types of lobbying

Hedging against inflation
 Businesses use hedging to protect their financial investments by spreading the risk.
 Businesses invest surplus fund so that its value grows at a faster rate than inflation.
 They can hedge against inflation by investing their surplus assets/money in investments with
intrinsic value e.g. gold/oil/property etc.
 The business use hedging by buying bonds, shares, property or buying precious metals like
gold to protect capital from the effects of inflation.
 It is a method that businesses try to reduce the risk when unsure about possible price
fluctuations.

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 Bargaining sessions between management and unions
 These sessions enable employees to negotiate with employers as a group to protect
employees’ rights.
 Bargaining sessions prevent labour strikes and provide critical information to people in
power
 Businesses make sure that their representatives are trained/skilled to negotiate own their
behalf.
 The purpose of bargaining sessions is to find a win-win situation for all parties.
 Management will try to convince the union to accept its proposal and the union will try to
persuade management to accept their demands.
 The outcome of a successful bargaining session can protect the business from the negative
impact of strikes caused by loos in productivity.
 Businesses need to be fair/transparent to establish trust and good communication with
unions.

Influencing supervisory body/regulators

 There are large number of supervisory bodies and regulators who operate in the business
environment.
 Businesses take an active role in professional bodies.
 Through their membership/advocacy/submissions they may be able to influence changes to
existing regulations.
 Business managers are involved in debates and discussions that shape public policies.
 Businesses influence and negotiate with these regulators to protect their own sustainability.
 It is in the best of interest of businesses to adhere to the guidelines and restrictions of these
bodies in order to stay in businesses

5.2 Networking
5.2.1 Meaning of networking
 It refers to a coordinated activity where people who have a similar objective meet and
exchange information and ideas.
 The goal of networking is to reach as many people as possible and to make every
connection count.
 It is a tool that is used by businesses to increase sales
 Businesses can become a member of chambers of commerce and industry/
professional business clubs/ informal social groupings to meet new-contacts.

5.2.2 Examples of networking

 Formal networking: Organised local, provincial and national chambers of business, industry
and commerce.
 Informal networking: Social and less organised coordination.
 For instance business managers often network while playing golf, attending sports events or
getting involved in social programmes.
 Social media and the internet: New and cheap ways of businesses to network via on line
forums and business groups

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5.2.3 Importance/Advantages/Benefits of networking
 Businesses can be attract new customers resulting to increased market share and
profitability.
 Networking can be an excellent source of new perspectives and business ideas.
 Allows managers to build new businesses relationships and generate new business
opportunities.
 Plays a role in the marketing and expansion of a business.
 Assists businesses in making future business decisions.
 Businesses can gain support when representation to various authorities is planned.

5.3 Power relations

5.3.1 Meaning of power relationship
 Power relations can be described as a measurement of a business‘s ability to control its
environment and the behaviour of other businesses.
 A business forms relationships with its environment and markets.
 The power that the business has on the environment determines the status it holds
within its industry.

5.3.2 Ways businesses can form power relations

Strategic alliance/Partnership agreements
 Businesses form partnership agreements in order to benefit each in each other’s
involvement.
 These partnership alliances help parties involved to benefit in infrastructure development
and scarce skills.
 These alliances are designed to build on the expertise of each partner and on the way and
on the way in which they complement each other.

Persuasion of large investors

 If a business has a powerful investor, the business can often benefit from the relationship so
that it can gain credit more easily and better deals from suppliers.
 Businesses invite powerful influential people to sit on their board of directors in order to get
advice from those people.
 Having such powerful as part of the business may have a positive influence √ on the
reputation and image of the business.
 If a business has a large/powerful investor, the business can gain credit more easy/get better
deals from suppliers.

Company representatives’ influence

 This representative fulfils an important function in trying to persuade investors to invest in a
particular business practice.
 People will make decisions based on the company’s image, personality, communication style
and power of persuasion.
 Businesses must invest time and energy to recruit the right person for this job.

21
 BUSINESS STUDIES

GRADE 11
TERM ONE
CHAPTER 3
CONTEMPORARY SOCIO- ECONOMIC ISSUES
TABLE OF CONTENTS

TOPICS PAGES
Exam guidelines for business environments 2
Terms and definitions 3

Meaning and impact of contemporary socio- 4-9

economic issues on businesses

Solutions to piracy 9

Meaning of industrial action 10

Types of industrial actions 10

Purpose of the Labour Relations Act 10

Meaning of trade unions 11

Reasons for the establishment of trade unions 11

Roles of trade unions 11

Functions of trade unions 11

This chapter consists of 11 pages

22
CONTEMPORARY SOCIO-ECONOMIC ISSUES

Learners must be able to:

 List/Name/Give examples of contemporary socio-economic issues that pose a challenge
to businesses.
 Identify socio-economic issues from scenarios/case studies/statements.
 Discuss the impact of contemporary socio-economic issues on business operations.
 Discuss/Explain/Describe types of ethical misconduct e.g. sexual harassment,
corruption, mismanagement of funds etc.
 Discuss the impact of piracy on business operations.
 Define the following concepts and suggest ways in which businesses can deal with
piracy e.g.
 Copyright
 Patent
 Trademark
 Identify copyright/patent and trade mark form scenarios/case
studies/statements/pictures.
 Define/Explain the meaning of industrial relations.
 Define the following concepts:
o Strikes
o Go slows
o Lockouts
 Discuss/Explain/Describe the purpose of the Labour Relations Act.
 Define the term trade unions and the reasons for the establishment of trade unions. (Do
not focus on the history of trade unions).
 Outline/Mention/Discuss/Explain/Describe the roles of trade unions, e.g. addressing
poverty reduction, job creation challenges etc.
 Outline/Discuss/Explain the functions of trade unions.
 Evaluate the functions of trade unions from scenarios/case studies and make
recommendations for improvement.

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 Terms and Definitions
TERM DEFINITION
Economic crime Known as white collar crime and committed in business for personal financial gain, e.g.
fraudulent transactions.
Inefficient use of Wasting of scarce resource through negligence or incorrect production methods.
natural resources
Population growth Percentage change in the population resulting from births, deaths and migration
Strikes Refusal to work by two or more employees in an effort to pressurize employers to give in
to their demands.
Corruption This involves dishonest activities in which a person entrusted with authority in a business
abuses his/her position of trust in order to achieve some personal gain
Dumping It is when other countries dump their excess products on the SA market to dominate the
local market. Dumped products are usually very cheap
Sexual harassment Involves unwelcome or unwanted attention of a sexual nature from someone at work that
causes discomfort, humiliation, offence etc that interferes with the job.
Piracy Unauthorised use/reproduction or copying of original music, films, books or computer
software, patent rights and trademarks without the consent of the rightful owner.
Ethical conduct Acting in ways that are consistent with a person’s values of the organisation and society.
Patent Exclusive right granted for a new invention
Copyright Exclusive right given to the creator of an original work
Trade mark A symbol, word, or combination of words legally registered by use as representing a
company or a product.
Workplace forums Representative of employees in a business of 50 employees upwards who are delegated to
act on behalf of employees within the business.
inflation General increase in the prices of goods and services in the country
Retrenchment Involuntary ending of a service contract of an employee by the employer due to
operational requirements.
Patent Exclusive right granted for a new invention
Trade union An organized association of workers in a trade , group of trades, or profession formed to
protect their rights and interest
Strike A work stoppage as a form of protest or to strengthen one’s bargaining position
Lock-out When the employer keep their employees from their places of work until certain terms of
a negotiation are agreed upon.
Industrial action These are actions that include strikes or go slows
Trade union An organized association of workers in a trade , group of trades, or profession formed to
protect their rights and interest
Strike A work stoppage as a form of protest or to strengthen one’s bargaining position
Lock-out When the employer keep their employees from their places of work until certain terms of
a negotiation are agreed upon.

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1 CONTEMPORARY SOCIO-ECONOMIC ISSUES

Meaning and impact of contemporary socio-economic issues on businesses

1.1. Low income levels

Meaning of low Income levels
 South Africa has one of the greatest inequalities in income in the world.
 This is due to the largest differences in salaries between high earnings and low earners.

Impact of low income levels on businesses

 Leads to a decrease in the demand for goods and services resulting to a fall in turnover
and lower profits for businesses.
 People who earn low salaries and wages may become disheartened this will influence
productivity in a negative way.
 Consumers shift to cheaper brands of certain products.
 Poverty can lead to crimes such as shoplifting and robberies
 Businesses will have fewer profits and will not have money to expand.
 Income level affects the morale of the workforce and could lead to lower productivity
which impacts on the business turnover.

1.2 Inflation
Meaning of Inflation
 Inflation refers to the general increase in the prices of all products in the country.
 It leads to a decrease in the purchasing power of money.

Impact of inflation on businesses

 Inflation increases the costs of raw materials and other inputs.
 This leads to optimum productivity whereby businesses has to produce the maximum
possible output using the least possible input.
 It decreases consumer spending resulting to decreased sales and profitability.
 Employees may be retrenched which increases unemployment and decreases buying
power even further.

1.3 Social, cultural and demographic issues

Meaning of social, cultural and democratic issues
 Social and cultural factors have an impact on the market environment because they shape
the way people live/work/produce/consume etc.
 Demographic factors are defined as the characteristics of the population of a country e.g.
age distributions, the gender ratio and the racial composition of the country.

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 Impact of social, cultural and democratic issues on businesses
 Different groups of people with different cultures will behave differently as consumers,
which will affect the business marketing strategy and sales.
 New fashion and cultural trends create different kinds of consumers which may result
in the reduction of sales for existing products.
 Some businesses may not keep abreast with current trends and they may lose their
market share.

1.4 Economic crime

Meaning of economic
 Economic crime is also known as white collar crime, it includes the following criminal
activities:
o Fraud which refers to the unauthorised use of funds.
o Money laundering which refers to hiding the source of money that was obtained
illegally.
 A key feature of economic crime is that money is stolen from a business through the
use of intellectual skills and deception.
Impact of economic crime on businesses
 Loss of income if the money was stolen from a business
 Loss of jobs if a business closes down.
 Businesses lose investors.
 Leads to a decrease in investors’ confidence resulting poor economic and business
growth.

1.5 Ethical misconduct

Meaning of ethical misconduct
 These are socio-economic issues that occur inside the business that also present
threats and challenges to businesses.
 Ethical can be defined as acting in ways that are consistent with a person’s value.
 Ethical misconduct can be defined as any behaviour by employees of the business
that is not consistent with the values of the business.

Types of ethical misconduct

Sexual harassment
 Sexual harassment in the workplace involves unwelcome or unwanted conduct of
a sexual nature from someone at work that causes discomfort

Corruption
 Refers to any act of dishonesty such as bribery/theft/collusion/kickbacks etc.
 It occurs when two parties enter into an illegal but mutually beneficial agreement.

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 Mismanagement of funds
 Mismanagement of funds refers to the wrongful use of funds that do not belong to a
person/employee e.g. irregular expenses.
 This involves dishonest activities in which a person entrusted with authority in a
business abuses his/her position of trust in order to achieve some personal gain.

Impact of ethical misconduct on businesses

 Employees who have been victims of sexual harassment may experience a lack of
concentration/anxiousness/productivity.
 Corruption and mismanagement of funds will lead to a loss of income.
 Corruption undermines businesses and negatively influences investment.
 Mismanagement of funds can cost a business to lose a large amount of money through
direct fraud and theft.
 Business owners involved will face criminal charges.
 There is a high staff turnover due to people leaving because they were sexually
harassed.
 It may result to bad publicity and loss of customers/potential investors.

1.6 Population growth

Meaning of population growth
 The word population refers to the number of people in a country.
 A population experiences growth when the number of people are born in a particular
year exceeds the number of people who dies during the same year.
 It is a percentage change in the population resulting from births, deaths and migration.

Impact of population growth on businesses

 Excessive growth increases unemployment and crime.
 The municipal and health services may be expensive resulting in the consumer having
less money to spend on other products.
 More land will be used to build houses which mean a decrease in agricultural land and
a decrease in basic food supply.
 Consumers will have less income and business will have a decrease in sales

1.7 Illiteracy
Meaning of illiteracy
 Illiteracy refers to a person who cannot read or write.
 Many illiterate people cannot find work as most jobs require some reading and writing
skills.

Impact of illiteracy on businesses

 Business sometimes needs to employ people even though they do not have the correct
skills.
 Training of these employees can be very costly and the business suffers a financial
loss.

27
  Employees without the correct skills can also be the cause of accidents in the
workplace and this could impact on the image of the business.
 Difficult to market products to people who cannot read or write.

1.8 Lack of skills

Meaning of lack of skills
 South Africa is currently experiencing severe skills shortages in some fields such as
education, medicine, engineering and the finance industry.

Impact of lack of skills on businesses

 Businesses cannot find candidates with adequate skills and experience.
 Businesses end up appointing a candidate who lacks certain skills resulting in poor
products and services.
 Training employees is expensive and productivity will be affected as it takes time for
newly trained employees to learn his/her new jobs.
 The cost of labour becomes expensive as some businesses recruit candidates from
abroad.

1.9 Unavailability of natural resources

Meaning of unavailability of resources
 Some natural resources such as oil/coal/ water/gold are scarce.
 The above mentioned natural resources may be used up if they are not monitored.

Impact of unavailability of resources on businesses

 The unavailability of coal has led in part to a shortage of electricity in South Africa.
 Many businesses lose millions of rands because of load shading and power failure.
 The lack of transport due to the scarcity of oil which is used to manufacture fuel may
affect businesses.
 When the supply of natural resources is threatened it may have negative impact on
the operation of businesses and hampers the production processes.
1.10 Inefficiency in the use of resources
Meaning of inefficiency use of resources
 Inefficient use of resources implies that resources are being wasted.
 The wasting leads to further depletion of the natural environment and threatens the
future supply of natural resources.
 More resources are used as the population grows.

Impact of inefficiency in the use of resources on businesses

 Businesses cannot continue with their operations if natural resources are depleted.
 Loss of productivity if business operations come to a halt due to unavailability of natural
resources.

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1.11 Exhaustion of natural resources
Meaning of exhaustion of natural resources
 This refers to the over-use of natural resources leading to exhaustion.
 Resource depletion occurs mostly in relation to farming, mining and fossil fuel.

Impact of inefficiency exhaustion of natural resources on businesses

 The supply and quality of natural resources may decline.
 Some natural resources may be scarce and possible be exhausted in future.
1.12 Dumping
Meaning of dumping
 It is when goods enter South Africa from other countries at a price that is cheaper than
the normal value of the goods because more was produced than what that country
can use.
 When companies in a developed world send goods that they have been unable to sell
in their own countries, to countries in a developing world where they are sold below
the normal asking price.
 Dumped products are usually cheaper than South African products.

Impact of dumping on businesses

 Loss of profits as some local producers cannot compete with cheaper prices.
 Businesses may lose revenue and be forced to shut down their operations.
 Can lead to a decrease in local production and loss of jobs.
 Local businesses are unable to produce the same products at an equal or lower price.
1.13 Strikes
Meaning of strikes
 A strike can be defined as a collective, organised stopping of work by employees to
force their employers to accept their demands.
 Strikes is usually the results of a labour dispute and it takes place when employees
refuse to work.
 The most reasons why employees usually strike include wages, working hours and
working conditions.

Impact of strikes on businesses

 Strikes scares off potential investors.
 Businesses may be forced to close down especially those located in townships.
 May results in losses of production as employees stay absent from work during strikes.
 Many businesses suffer losses as a result of damage to property.
 They can lead to violence/assaults/looting/destruction of property and intimidation of
workers who do not strike.
 Employees can lose their pays for all the days that they strike.
 Economy can be jeopardised since production is lost.
 Expense of increased salaries and wages is often passed on to the consumer, which
causes inflation.
 Businesses loose income because productivity is low.

29
1.14 Piracy
Meaning of piracy
 Piracy is the unauthorised use/reproduction of another person’s original work.
 Products that are associated with piracy are computer software/DVD/CDs etc.
 Many people download music from the internet without being aware that they are
infringing someone else’s intellectual property right.

Impact of piracy on businesses

 It can undermines the music/movie industry as they lose money.
 Drives up the prices of products in order to compensate for the loss in sales.
 Leads to job losses in the industry
 The music industry feel reluctant to develop new talents as the element of risk is too
high.
 May cause damage to the value of the businesses.
 The businesses loses out on sales and income which in turn threatens industry
 The businesses loses out on productivity and profits.

2 Possible solutions to piracy/ Ways in which businesses can deal with piracy
Patent
 A patent prevents other businesses/people not to produce and sell the same product/
specific service.
 Businesses can take out a patent for new inventions and include a sample of their
invention with application.
 They must register a patent with the patents office in South Africa.
 The invention must comply with Patent Act No. 57 of 1978.
 They can bring legal proceedings against anyone who uses the invention. √√

Trademarks
 Businesses can trademarks to identify themselves and their products.
 They must register their trademarks with the register of trademarks at the companies
and intellectual property registration.
 A registered trademark is protected forever provided it is renewed every ten years and
a renewal fee is paid.
 Claim damages from someone who infringes the trade mark.

Copyright
 Businesses can sue someone who infringes the copyright.
 They can also sue someone who sells or distributes works that he/she knew were
infringements of copyright.
 They can take legal action against people who copy their products.
NOTE: You must be able to identify copyright/patent and trade mark form
scenarios/case studies/statements/pictures

30
3 Meaning of industrial relations
 Industrial relations refers to the relationship between the employer and employees.
 It influences the way in which businesses are guided by the Labour Relations Act.

3.1 Types of industrial actions

Strikes
 A strike is when employees stop working completely.
 Employees do not get paid for the days spent on strikes.
 Strikes represent the final stage of dispute/disagreement between management and
employees.
 The purpose of a strike is to force employers to agree to the demands of the strikers.

Go-slows
 Go slow is a collective industrial action taken by workers in protest against an
employer.
 Workers work slowly as possible or reduce production output.
 Employees still have to be paid as they are doing their work whereas they do not get
paid when they go on strike.

Lockouts
 A lockout occurs when an employer locks employees out of a workplace.
 Employers often lock employees out during a strike to ensure the safety of their
premises, equipment and working conditions.
 A lock out is legal if it complies with the requirements of the Labour Relations Act.

4 Purpose of the Labour Relations Act

 Provides a framework where the employees, trade unions and employers work
together to discuss matters relating to employment, e.g. wages, conditions of
employment.
 Promotes orderly negotiations and employee participation decision making in the
workplace.
 Promotes resolution of labour disputes.
 Promotes fair employment practices.
 Outlines the relationship between employees and employers.
 Provides simple procedures for the registration of trade unions and
employers' organizations.
 Regulates the rights of trade unions and facilitates collective bargaining.
 Regulates the effectiveness of bargaining councils and statutory councils.
 Establishes workplace forums to promote the interest of all employees in the
workplace whether they belong to the trade union or not.
 Allows workplace forums where employees may participate in decision making.
 Establishes the Commission for Conciliation, Mediation and Arbitration (CCMA) to
resolve labour disputes through statutory conciliation, mediation and arbitration.
 Endorses the right to strike against retrenchments, and facilitates labour disputes.
 Clarifies the transfer of contracts of employment procedures.
 Establishes Labour Courts and Labour Appeal Courts to deal with labour issues.

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5 Trade unions
5.1 Meaning of trade unions
 A trade union is an organisation that protects and lobbies for the rights of workers and
represent their interest in negotiations with employers.
 It is a group of employees who associate together in a particular industry such as
mining/steelworks/etc. with the purpose of protecting the rights of their members.

5.2 Reasons for the establishment of trade unions

 Engaging in industrial action such as protests and strikes.
 Taking a political action to influence the government strategy.
 Establishing minimum economic and legal conditions.
 Providing protection for their members.
 Engaging in collective bargaining for better terms and conditions.
 Assisting workers who have grievances such as disciplinary action/victimization.
 Negotiating with employers for decent working conditions/remuneration/
benefits in order to improve the standard of living.
 Negotiating recognition of the union and shop stewards by the employer.
 Protecting workers against unfair labour practices and dismissal.
 Take legal action on behalf of members when necessary.
 Educating shop stewards and other members’ on how to carry out their tasks in the
union.

5.3 Roles of trade unions

 Serves as mechanism through which employees have a collective voice in the
workplace.
 Unions communicate to the company’s management the members’ grievances such
as unfair dismissal, low wages and conditions of services.
 They ensure that the employers include employees in the decision making process.
 They ensure that employees are treated fairly and respected.
 Unions are involved with social dialogue regarding poverty alleviation, job creation
and wealth distribution.

5.4 Functions of trade unions

 Improves conditions of employment.
 Ensures that all employees are treated equally in the workplace
 Representing the interest of general society and minority groups through media and
negotiations.
 Influencing government decisions.
 Representing employees corporately and individually.
 Improving material benefits of their members.
 Establishing minimum economic and legal conditions/influencing economic policy and
law.
 Playing a role as moral institutions that will uplift the weak and oppressed and give
them the dignity and justice they deserve.
 Protecting workers from unfair labour practices and unfair dismissal.
 Take legal action on behalf of members when necessary.

32
 BUSINESS STUDIES
GRADE 11
TERM ONE
CHAPTER FOUR
BUSINESS SECTORS
TABLE OF CONTENTS
TOPICS PAGES
Exam guidelines for business environments 1
Terms and definitions 2
Meaning of the primary, secondary and tertiary 2-3
sectors.
Relationship between the primary, secondary and 4
tertiary sector

This chapter has 4 pages

33
 CONTENT DETAILS FOR TEACHING, LEARNING AND ASSESSMENT PURPOSES

BUSINESS SECTORS
Learners must be able to:

 Explain the meaning of the primary, secondary and tertiary sectors.

 Visit any local business enterprise and establish the link/relationship between these
sectors
 Discuss/Explain/Describe the link/relationship between the primary, secondary and
tertiary sector.

Terms and Definitions

TERM DEFINITION
Forestry The industry that serves the processing of wood and related
processes including preservation of indigenous forests.
Mining Extraction of valuable minerals from the earth.
Forward link Enterprises from a sector sells goods to other enterprises in the
same sector or another sectors.
Backward link Enterprises from a sector buys goods from other enterprises in
the same sector or another sectors.
Manufacturing Transformation of raw materials into something useful.
Insurance Two parties sharing a risk in the event of a financial loss being
incurred and where some form of compensation is paid to the
suffering party.
Interdependent Two businesses, sectors or industries that rely on each other to
achieve their best outputs.
Interrelated Two businesses, sectors or industries are connected.

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1 Meaning of business Sectors
Business sectors are sub divisions/subsets of economic activities, e.g. primary,
secondary and tertiary.

1.1 Meaning of the primary sector

 The primary sector is responsible for the extraction of raw material from the nature.
 This sector deals with extraction of raw materials and natural resources
 Natural resources which are not man made like coal, gold, fish and livestock are
extracted from this sector
 The resources that they extract are forwarded to the secondary sector of the
economy for the production of goods.
 Examples the primary sector industries; mining, mining, fishing, agriculture, forestry
and farming
1.2 Meaning of the secondary sector
 This business sector is responsible for changing the raw materials acquired from the
primary sector into useful products.
 It includes the manufacturing factories, construction and energy generation.
 The secondary sector will involve the actual manufacturing on the furniture.
 This business would buy the raw material (The timber) from the suppliers and turn
them into finished products.
 Examples of the secondary sector industries; manufacturing, clothing, food
processing, building and construction are found in this sector.

1.3 Meaning of tertiary sector

 This sector renders services to the public and businesses.
 Provides services and bring finished products to the final consumer.
 It includes services from transport, banking, legal and health.
 Examples of the tertiary sector industries; distribution, banking, insurance, tourism,
transportation, entertainment, retail and legal services.

2 The relationship between the primary, secondary and tertiary sector

 The primary sector depends on the secondary sector for manufactured goods such
as machinery/equipment/fertilisers e.g. a farmer may require seeds from another
farm
 The primary sector is dependent on the tertiary sector for its customer needs.
 The secondary sector processes the raw materials obtained from the primary sector
into more useful products.
 The secondary sector depends on the primary sector for raw materials and products.

35
  The secondary sector depends on other secondary industries e.g. BMW needs tyre
from DUNLOP another secondary sector player
 Secondary sector needs the tertiary sector to sell their processed or manufactured
goods and also for services such as banks, insurance, transport and communication
 The tertiary sector depends on the primary sector for raw materials that do not need
processing by the secondary sector.
 The tertiary sector depends on the secondary sector for manufactured goods such
as office machines/office furniture/stationery etc.

3 Examples of statement on business sectors.

Primary sector
Duka Mines specialises in the extraction of platinum

Secondary sector
Super Energy Enterprise produces maize meal and instant soft porridge

Tertiary sector
Timothy Distributors has employed four drivers to deliver goods to various customers.

4 Example of a scenario on the relationship between the business sectors

TENDANI FURNITURES (TF)

Tendani Furnitures sells exclusive launch suits and tables to consumers. Tendani buys his furniture from
Andries Manufacturers who buys his raw material from Kobus Timbers.

Example of questions that may be asked on the scenario above.

 Identify THREE business sectors from the scenario above. Motivate your answer by
quoting from the scenario.
Use the table below as a guide to answer this question.
BUSINESS SECTOR MOTIVATION

1.

2.

3.

 Explain the relationship between the business sectors identified from the scenario
above.

36
 BUSINESS STUDIES
GRADE 11
TERM ONE
CHAPTER FIVE

BENEFITS OF THE COMPANY OVER OTHER FORMS OF

OWNERSHIP

37
 TABLE OF CONTENTS
TOPICS PAGES
Exam guidelines for forms of ownership 3
Terms and definitions 4
Characteristics, advantages & disadvantages of a sole trader 5 -6
Characteristics, advantages & disadvantages of a partnership 6-7
Characteristics, advantages & disadvantages of Close 7
Cooperation
Characteristics, advantages & disadvantages of a private 7-8
company
Characteristics, advantages & disadvantages of a Personal 8-9
Liability Company
Characteristics, advantages & disadvantages of public 9-10
company
Characteristics, advantages & disadvantages of a state owned 10-11
company
Difference between the private and public company 12
Difference between the private and a Personal Liability 12
Company
Characteristics, advantages & disadvantages of cooperatives 12
Benefits of establishing a company over other forms of 13-14
ownership
Challenges of establishing a company over other forms of 14-15
ownership
Procedure for the formation of companies 15
Legal requirements of the name of the company 15
Memorandum of incorporation/MOI 15
Notice of Incorporation 15
Prospectus 15-16
This chapter consists of 16 Pages

38
CONTENT DETAILS FOR TEACHING, LEARNING AND ASSESSMENT PURPOSES

BENFITS OF A COMPANY OVER OTHR FORMS OF OWNERSHIP

Learners must be able to:

 Discuss/Explain/Describe the characteristics, advantages and disadvantages of the forms of
ownership. (Recap)
 Distinguish/Differentiate/Tabulate the differences between forms of ownership.
 Discuss/Explain the benefits of establishing a company versus other forms of ownership e.g.:
o Legal status and liability.
o Profit sharing
o Ownership and management
o Capital and cash flow
o Life span and continuity
o Taxation
 Discuss/Explain the challenges of establishing a company versus other forms according to the
above mentioned benefits.
 Explain/Describe/Discuss the procedure for the formation of companies.
 Discuss/Explain the legal requirements of the name of the company, e.g.:
o A company is not allowed to use a misleading name,
o A name reservation is valid for six months, etc.
 Define the following concepts:
o Memorandum of incorporation
o Notice of incorporation
o Prospectus, i.e. initial & secondary offer
 Outline the aspects that must be included in the prospectus.

39
TERMS AND DEFINITIONS
TERM DEFINITION
Form of ownership The legal position of the business and the way it is owned.
Continuity Continue to exist even if a change of ownership takes place, e.g. a
member or shareholder dies or retires.
Securities Shares and bonds issued by a company.
Limited liability Loses are limited to the amount that the owner invested in the business.
Unlimited liability The owner’s personal assets may be seized to pay for the debts of the
business.
Memorandum of The document that sets out the rights, responsibilities and duties of
Incorporation (MOI) shareholders and directors.(serves as a constitution of a company).
Sole Trader /Sole A business is owned and controlled by one person who takes all the decisions,
proprietor responsibility and profits from the business they run.
Partnership An agreement between two or more parties that have agreed to finance and
work together in the pursuit of common business goals.
Co-operative society Autonomous association of persons united voluntarily to meet their common
economic/ social needs/aspirations through a jointly owned and democratically
controlled enterprise.
Company A company is a legal person who has capacity and powers to act on its own.

Public company A public company is a voluntary association of ONE or more persons,

governed by the company Act 71 of 2008, incorporated in terms of the
Memorandum of Incorporation.
Private company A private company is a voluntary association of 1 or more persons.

Personal liability A personal liability company is a voluntary association of 1 or more person.

company
State-Owned A state-owned company (SOC) is a legal entity that is created by the
company government in order to participate in commercial activities on its behalf.
Partnership Article A document that contains exhaustive provisions with regards to the
matters concerning the business and the partners.
Prospectus Prospectus is a document inviting the public to buy securities/shares.
Annual General A meeting held once a year where the shareholders receive a report
Meeting (AGM) stating how well the company has done.
Directors People elected to the board of a company by the shareholders to
represent the shareholders’ interests.

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1 CHARACTERISTICS, ADVANTAGES AND DISADVANTAGES OF THE FORMS OF
OWNERSHIP. (RECAP)

1. SOLE TRADE /SOLE PROPRIETOR

Definition
A sole trader is a business that is owned and managed by one person.

Characteristics of a sole trader

 One person can form a sole trader and is easy to start.
 It is inexpensive to start and the owner does not have to pay tax.
 There are no legal and administrative formalities in the formation of a sole trader.
 The profit of the business is belongs to the owner as there is no distinction between the
owner and the business.
 A sole proprietor is not a legal entity and agreements are entered into by the owner in his\her
personal capacity.
 Business has unlimited liability and the private possessions of the owner can be used to pay
the debts of the business
2 Advantages and disadvantages of a sole trader
ADVANTAGES DISADVANTAGES
-Owner makes all decisions. -Unlimited liability which means the owner is
responsible for all debts incurred by the business
-Requires little capital to start. -Cash flow is often a problem.
-All profits belong to the owner -Growth of business can be restricted due to lack of
capital.
-Simple management structure. -Not a legal entity and no continuity
-Can easily adapt to the needs of the -Difficult to attract highly skilled and knowledgeable
client/customer. employees.
-No legal process and requirements. -The owner is responsible for providing all the capital
needed.
-The assets of the business belong to the -If the owner does not have enough
owner. knowledge/experience the business may fail.
-There is personal encouragement and
personal contact between the owner and
customers.

2 PARTNERSHIP

2.1 Definition
 A partnership has two or more partners who own the business.
 These owners share the responsibility of the business and they share the financial and
management decision of the business.

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 2.2 Characteristics of a partnership
 An agreement between two or more people who combine labour, capital and resources
towards a common goal.
 Partners combine capital and may also borrow capital from financial institutions.
 No legal requirements regarding the name of the business.
 Partners have unlimited liability and are jointly and severally liable for the debts of the
business.
 Profit is shared according to the partnership agreement.
 Partnership does not pay tax partners pay personal income tax.
 Auditing of financial statements is optional.
 Partners share responsibilities and they are all involved in decision making.
 No legal formalities to start, only a written partnership agreement is required.
 The partnership does not pay income tax, only the partners in their personal capacities.
 Diversity, specialisation and different skills of the partners can be used.
 Partnership has no legal personality and therefore has no continuity.
 Partners share responsibilities and they are all involved in decision making.

2.3 Advantages and disadvantages of partnership

ADVANTAGES DISADVANTAGES
-The partners able to put their knowledge and skills -A partnership has unlimited liability so all the
together to collectively make the best decisions. partners are liable for the debts if the business
becomes insolvent.
-The workload and responsibility is shared between -Each business partner is legally responsible for
partners. the joint liability of the partnership.
-Partners are able to share resources. -Different personalities and options of partners
can lead to conflict it disagreements.
-Partners are only required to pay tax in their personal -Partners might not all contribute equally.
and individual capacity.
-The partners have a personal interest in the business. -Loss in profits and stability of the business can
occur if a partner resigns/ dies/loses interest in
the business or is declared bankrupt.
-Can bring in extra partners at any time. -There can be lack of capital and cash flow.
-Attract prospective employees with the option or
incentives of becoming a partner.
-Partnerships are relatively easy to establish.
-Partners contribute new skills and ideas into a business
-Partners share responsibilities for decision making and
managing the business
-Partners share any profits and are therefore motivated
to work hard.
-Raising additional capital to finance further business
expansion is easy as there is no limit on the number of
partners.
-Partners are taxed in their own capacities, which could
lead to lower taxation.

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3 CLOSE CORPORATION

3.1 Characteristics of a Close Corporation

 Can have a minimum of one and maximum of ten members who share a common goal.
 The word ‘close’ means that all members are involve and participate in its management.
 Each member makes a contribution of some/assets/services towards the corporation.
 The name must ends with the suffix CC.
 Members have unlimited liability except where the CC has had more ten members for six
months or longer.
 A CC has its own legal personality and therefore has unlimited continuity.
 Auditing of books is optional as members only need an accounting officer to check financial
records.
 Transfer of a member’s interest must be approved by all other members.
 Profits are shared in proportion to the member’s interest in the CC.
3.2 Advantages and disadvantages of a Close Cooperation
ADVANTAGES DISADVANTAGES
-There are few legal requirements e.g. auditing -Limited growth and expansion since a CC cannot
of financial statements/regular annual general have more than ten members.
meetings.
-A CC is a legal entity and has continuity of -A member of a CC can be held personally liable
existence. for the losses of CC if the member acts is
incompetent.
-Can be converted to a private company and -Audited financial statements may be required
members may become shareholders. when applying for a loan.
-Members have limited liability -A CC is taxed as if it were a company, which may
be higher than personal tax rates.
-Owners’ interest in the CC does not need to be -Difficult for members to leave the CC as all
in proportion to their capital contribution. members must agree to dispose of a member’s
interest.
-CC may be exempted by CIPC from auditing its -A CC is taxed on its income and Standard Tax of
financial statements. Company (STC) based on member’s dividends/
Double taxation.

4 Private Company
4.1 Definition
It can be a small or large company and has one or more directors.

4.2 Characteristics of a private company

 Requires one or more directors and one or more shareholders.
 It needs a minimum of one shareholder and there is no limit on the number of shareholders
that a private company may have.

43
  Register with the registrar of companies by drawing up Memorandum of Incorporation.
 The company name ends with letters (PTY) Ltd.
 A private company is not allowed to sell shares to the public.
 Investors put capital in to earn profit from shares.
 The company has a legal personality as well as unlimited continuity.
 The auditing of financial statements is optional.
 Profits are shared in the form of dividends in proportion to the share held.
 Shareholders have a limited liability and will not lose their initial capital invested if the business
goes bankrupt.
 Shareholders have limited liability and a separate legal entity.
 Raises capital by issuing shares to its shareholders.
 Profits are shared in the form of dividends in proportion to the number of shares held.

4.3 Advantages and disadvantages of a private company

ADVANTAGES DISADVANTAGES
More opportunities to pay less taxation -Requires a lot of capital
-Good long-term growth opportunities -The more shareholders, the less profits
-Own legal identity and shareholders have -More taxation requirements
no direct legal implications/ limited
liability.
-Board of directors with expertise -Directors do not have a personal interest
/experience can be appointed to take
decisions
-Not required to file annual financial -Annual financial statements must be reviewed by a
statements with the commission. qualified person, which is an extra expense to the
company.
-It is a legal person and can sign contracts Difficult and expensive to establish as the company is
in its own name. subjected to many legal requirements
-The new Act forces personal liability on -Pays tax on the profits of the business and on declared
directors who knowingly participated in dividends/Subject to double taxation.
carrying out business in a
reckless/fraudulent manner.
-Financial statements are private and not -Must prepare annual financial statements.
available to the general public.
-A company has continuity of existence -
-It is possible to sell a private company as
it is a legal entity in its own right.
-It can easy raise capital by issuing shares
to its members.

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5 PERSONAL LIABILITY COMPANY
5.1 Definition
 Very similar to a private company, the difference is that the directors of a Personal Liability
company are jointly and severally liable for all the debts and liabilities of the company. This
means that the directors have unlimited liability.
 The name of the personal liability company ends in INC and the name of the private company
ends in (PTY) Ltd.

5.2 Characteristics of a personal liability company

 The company name must end with letters INC
 Directors have unlimited liability and they are jointly liable for the debts of the business even if
they are long out of office.
 The memorandum of Incorporation should state that it is a personal liability company.
 They must at least have one director on their board of directors.
NOTE: Other characteristics of a personal liability company are the same as the
private company except the above mentioned two characteristics.

5.3 Advantages and/or disadvantages

NOTE: The advantages of a personal liability company are the same as the private company.
The disadvantages are also the same as the private company except the directors of
the personal liability company have unlimited liability

6 PUBLIC COMPANY
6.1 Definition
 A public company is a company that is registered to offer its stock and shares to the general
public. This is mostly done through the Johannesburg Securities/Stock Exchange (JSE).
 The public company is designed for a large –scale operation that require large capital
investments.

6.2 Characteristics of a public company

 A minimum of one person is required to start a public company.
 Requires three or more directors and three or more shareholders.
 Register with the Registrar of Companies by drawing up Memorandum of Incorporation.
 The company name ends with letters Ltd.
 Has legal personality and therefore has unlimited continuity
 Raises capital by issuing shares to the public and borrowing capital by issuing a debenture.
 A prospectus is issued to the public to raise capital.
 Shareholders have a limited liability
 The new Act forces personal liability on directors who knowingly participated in carrying out
business in a reckless/fraudulent manner.
 The company has a legal personality as well as unlimited continuity.

45
 A public company is required to hold an AGM (Annual General Meeting).
 Auditing of financial statements us compulsory and audited statements are available to
shareholders and the public.
 Profits are shared in the form of dividends in proportion to the share held.

6.3 Advantages and/or disadvantages

ADVANTAGES DISADVANTAGES
-The business has its own legal identity -Must disclose all financial information
-Easy to raise funds for growth through the -Large amount of funds are spent on financial audits.
sale of shares.
-Shareholder is only liable for the amount -Stocks have to be traded publicly.
which is invested/Shareholders have
limited liability.
-Can appoint a knowledgeable board of -A full report must be submitted to the major
directors. shareholders each year.
-Buy and sell shares freely. -Difficult and expensive to establish as the company is
subjected to many legal requirements
-Shareholders can sell/transfer their shares -The more shareholders, the less profit.
freely.
-The public has access to the information -Shareholders may be allowed little or no input into the
and this could motivate them to buy affairs of the company.
shares from a company.
-Additional shares can be raised by issuing -Due to legislation, decisions take longer and there may
more shares or debentures be disagreements.
-Strict regulatory requirements protect -Financial affairs must be known to publicly, this
shareholders. information could be used to competitors’ advantage.

7 State owned company

7.1 Definition
 A state owned company has the government as its major shareholder and falls under the
department of Public Enterprise.
 These businesses take on the role of commercial enterprise on behalf of the government.

7.2 Characteristics of a State Owned Company

 Requires three or more directors and one or more shareholders.
 Register with the Registrar of Companies by drawing up Memorandum of Incorporation.
 It is owned by the government and operated for profit.
 SOC is listed as a public company.
 The name ends with letters SOC.
 State –owned companies support private businesses by providing infrastructure such as
communication service /Post office and supply of electricity/Eskom.

46
7.3 Advantages and disadvantages
Advantages Disadvantages
-Profits may be used to finance other -May result to poor management as
state departments government is not always as efficient
as the private sector.
-Offer essential services which may not -Inefficiency due to the size of the
be offered by the private sector business
-Prices are kept reasonable/Create -Often rely on government subsidies
sound competition with the private
sector to make services affordable to
more citizens.
-Wasteful duplication of services is -A lack of incentive for employees to
eliminated perform if there is no absence of other
motivator such as productivity bonuses.
-Planning can be coordinated through -Government can lose money through
central control. the business.
-Generates income to finance social -A lack of incentive for employees to
programmes. perform if there is no share in the profit.
-Jobs are created for all skills levels. -Losses must be met by the tax payer.
-Shares are not freely tradable making
it difficult to raise capital.
-SOC must follow strict regulations for
operations to raise capital.
-Financial statements must be audited

8 Differences between the private and public company

PRIVATE COMPANY PUBLIC COMPANY
- May no offer shares to the - Trades its shares publicly on the
general public. Johannesburg Securities Exchange.
- Shares are not freely transferable - Shares are freely transferable.

- Minimum of one director. - Minimum of three directors.

- Name must end with Proprietary - Name must end with Limited/Ltd.
Limited/(Pty) Ltd.
- Annual financial statements need - Annual financial statements need to be audited
not be audited and published. and published.
- Does not need to publish a - Have to register and publish a prospectus with
prospectus as it cannot trade its the Companies and Intellectual Property
shares publicly. Commission/CIPC.
- The company is not required to - Must raise a minimum subscription prior to
raise the minimum subscription/ commencement of the company.
issue minimum shares.

47
 9 Differences between the private and a personal liability company
PRIVATE COMPANY STATE OWNED COMPANY
The name ends with (PTY) Ltd The name ends with INC
The directors are not personally liable for The directors are personally liable for the debts
the debts of the business. of the business.

10 Cooperatives
10.1 Definition
 A cooperative is a traditional way of a group of interested parties getting together and sharing
resources/infrastructures and costs to achieve a better outcome.
10.2 Characteristics of cooperatives
 Minimum of five members is required to start a cooperative.
 Register with the Registrar of Companies
 Legal entity and can own land and open bank accounts.
 Members own and run the business together and share equally in its profits.
 Decisions are taken democratically
 They are motivated by service rather than profit
 Must register with the Registrar of Cooperatives Societies
 The word ‘Cooperative Limited’ must appear at the end of its name.
 They are managed by a minimum of three directors.
 The objective of a co-operative is to create mutual benefit for the members.
10.3 Advantages and/or disadvantages of cooperatives
ADVANTAGES DISADVANTAGES
-Access to resources and funding -Decisions are often difficult to reach and time
consuming.
-Decision making is by a group -Difficult to grow a co-operative.
-Each member has an equal share in the -Very few promotion positions for staff.
business.
-A co-operative can appoint its own -It can be difficult to get a loan because their
management. main objective is not always to make a profit.
-Members have limited liability -The success of cooperatives depends on the
support of the members.
-The decisions are democratic and fair -Shares are not freely transferable
-Members are motivated because they are -All members have one vote regardless of the
working for themselves number of shares held.
-Can gain extra capital by asking its members
to buy shares.
-Co-operatives have continuity of existence
-Resources of many people are pooled
together to achieve common objectives
Profits are shared equally amongst members.

48
 11 Benefits of establishing a company versus other forms of ownership

11.1 Legal status and liability

 A company has its own legal status, trading name and owns its assets.
 Shareholders' private assets are protected as they have limited liability.
 The shareholders have no direct legal responsibility.
 Companies have their own names and these are protected.

11.2 Profit sharing

 Shareholders share in the profits of the company through dividends

11.2 Ownership and management

 Shareholders are able to buy and sell shares freely in a public company.
 The company is managed by qualified and competent board of directors
 A company is less likely to use consultants as it has a larger pool of skills and expertise
 Directors are more likely to take risks and allow growth opportunities for the business.
11.3 Capital and cash flow
 A company may has more investor’s to fund the setting up of the business.
 Companies have a better cash flow than sole traders.
 A company is not limited to the individual contribution of the members’ capital.
 The long term growth opportunities for companies are really good as there are always
possibilities of getting in more investors.
 Directors do not have to take out personal loans to grow the business
11.4 Life span and continuity
 A company has continuity of existence.
 Company shares can be transferred/bought/sold.

11.5 Taxation
• Companies have tax benefits other enterprises do not have
 They may obtain tax rebates if they are involved is social responsibility projects.

12 Challenges of establishing a company versus other forms of ownership

 Directors may not have a personal interest in the business and this could prevent the
business from gaining maximum growth and profits.
 Directors who do not have a personal interest in the business may not attract investors.
 There may be conflict between the owners of the company and management in control.
 The more shares there are the less profit per share.
 A company is required to submit a full report to all stakeholders each financial year.
 The limited liability aspect of the company generates more paper work in the registration
process.
 The owners of the company have more liability.
 When directors change there could be a lack of continuity in management.

49
 Companies have more taxation requirements and other taxes are high.
 They are required to disclose all financial information which could provide their
competitors with an unfair advantage.
 Politics can get in the way and managers are appointed for the wrong reasons.
 State owned companies often deliver non-profitable services that lead to government
losing money through the business.
 A company can stop existing if deregistered by the Registrar of Companies.
 A large amount of money of funds is spent on financial audits and accounting fees due to
government regulations.

13 Procedure for the formation of companies

 Determine the people establishing the company
 Reserve a company name with the Registrar of Companies
 Prepare a memorandum of incorporation
 File a notice of incorporation
 Obtain a unique registration number
 All companies must be registered with the Registrar of Companies.
 Open a bank account and register for taxation.
 Draw up a prospectus for potential investors.
14 Legal requirements of the name of the company
 The name of a company must be original and must not be misleading.
 A company's name must appear on all company documents, e.g. on letterheads.
 Reserving a name for a company is the first step to register a company ,
but it is not compulsory.
 Names can be reserved for a period of 6 months by the CIPC.
 The name must not be similar/same as any other company unless it is part of the group.
 The name must not imply/suggest/mislead a person to believe that the company is part of
another person/business/the state.
 The name must not be offensive/promote violence/hatred and cause any harm.
 The name must not be shortened and translated.
 The name of a company must indicate the type of company as follows: The name of a company
must end with.

50
15 Memorandum of incorporation/MOI
15.1 Meaning of memorandum of incorporation/MOI
 MOI serves as the constitution of a company.
 Companies are governed according to the rules stated in the MOI.
 Each company must provide a copy of its MOI to the Companies and Intellectual
Property Commission (CIPC).
 MOI describes the relationship between the business and its stakeholders.
 MOI describes the rights, responsibilities and duties of the shareholders and directors.
 Provides details about incorporation, the number of directors and the
share capital.
 Includes information about a company's name/registration office and records.

15.2 Aspects that must be included in the memorandum of incorporation

 Incorporators
 Nature of the company
 Securities of the company
 Shareholders and meetings
 Directors and officers
 Name of the company
 Main objectives of the company
 Number of shares each incorporator will purchase
 Amount of share capital registered
 Rules and regulations of the company
 Name of the auditor

16 Notice of incorporation
 The notice must be lodged together with the Standard Form of Memorandum of
Incorporation and it contains the following information
o Type of company
o Financial year-end
o Numbers of directors
o Incorporation date
o Registered address
o Company name

17 Prospectus
17.1 Meaning of a prospectus
 A prospectus is a written invitation to the public to buy the securities offered by a public
company.
 It is a formal legal document giving details about investment offerings to the public.
 A prospectus can only be issued by a company and it must be within three months after the
date of its registration.
 It gives information about the business.

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17.2 Meaning of the Initial order offer/IPO
 This is when the company issues shares to the public for the first time.
 The company must produce a prospectus before undertaking the initial offering.
 Most companies undertake an IPO with the assistance of an investment banking firm acting
in the capacity of an underwriter.

17.3 Meaning of the secondary offering

 A secondary offering is an offering of securities by a shareholder of the company as
opposed to the company itself, which is a primary offering
 A secondary offering is the sale of new or closely held shares by a company that has already
made an initial public offering (IPO)

17.4 Aspects that must be included in the prospectus

 Company overview, including the vision, mission and goals of a business
 Product or service portfolio
 Market analysis and strategy
 Management team
 The risk and potential of the business
 Available financial and share information
 Company's assets and liabilities
 Financial position
 Profits and losses
 Cash flow
 Prospects for growth
 Pre-incorporation contracts that have been signed
 Date of registration of the prospectus
 The minimum subscription

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 BUSINESS STUDIES
GRADE 11
TERM ONE
CHAPTER SIX
BUSINESS VENTURES
AVENUES OF ACQUIRING A BUSINESS
TABLE OF CONTENTS
TOPICS PAGES
Exam guidelines for avenues of acquiring a 1
business
Terms and definitions 3
Reason why entrepreneurs may decide to 4
purchase an existing business.
Meaning, advantages, disadvantages and 4-5
contractual of franchising
Meaning, advantages, disadvantages and 6-7
contractual of outsourcing
Meaning, advantages, disadvantages and 7-9
contractual of leasing
Identifying business avenues from scenarios/case 9
studies/statements

This chapter consists of 9 pages.

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CONTENT DETAILS FOR TEACHING, LEARNING AND ASSESSMENT PURPOSES

AVENUES OF ACQUIRING A BUSINESS

Learners must be able to:

 Explain/Discuss/Justify/Motivate the reason why entrepreneurs may decide to purchase

an existing business.
 Outline/Mention/Discuss/Explain/Describe the advantages, disadvantages and
contractual implications of the following business avenues:
o Franchising
o Outsourcing
o Leasing
 Identify/Name business avenues from scenarios/case studies/statements.
 Conduct research on the viability and benefits of franchising, outsourcing and leasing

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 Terms and Definitions

TERM DEFINITION
Royalties Payments made to the franchisor by the franchisee based on
the turnover of the business.
Vendor A person or a business to whom a function is outsourced.

Franchising When a person or a business gives another business or person

the right to sell the same goods or services subject to certain
criteria or regulations.
Franchisee Individual who purchases the right to use the trademark or
business model.
Franchisor Individual who sells the right of the trademark or business
model in return for franchise royalty fee. (
Leasing Method where a business can pay for the use of an asset rather
than buying it outright for itself.
Lessor Person or business who owns the assets
Lessee Person using the assets.
Outsourcing When a business buys goods or services from another business
or pays another business to carry out a function instead of it
doing it itself.
Goodwill The amount of money the business owner wants for the good
trade name he or she has built up, the customer base, the
branding of the business, etc.
Solvent The value of the company’s assets exceeds that of the
liabilities.
Liquid The company has enough cash to pay daily expenses.
Profitable Income exceeds expense

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1 Reason why entrepreneurs may decide to purchase an existing business
 Easier to raise finance if the business has a good history/image.
 Immediate cash flow as there are already established customers.
 Market research has already been done and there is an established
customer base.
 Distribution/Supply links/Staff/Network is/are already established.
 A market for business products or services has already been established.
 Existing employees and managers may have experience they can share.
 Many business problems have already been solved.

2 Types of avenues of acquiring businesses

2.1 Franchising
2.1.1 Meaning franchising
 Franchising refers to the purchase of a business idea.
 The entrepreneur will obtain premises and the right to offer the same
products/services, with specific rules and regulations as per the agreement.
 Franchising is the practice of using another person’s business model and it can be
seen both as a marketing and a distribution.
 Franchising involves two parties:
o Franchisor-the person who sells the right to trade in the products/services.
o Franchisee-the person who purchase the right to reproduce the idea by offering
the same products/services.
 The franchisor grants the franchisee the right to distribute its products and trademarks
for a percentage of gross monthly sales and a royalty fee.

Examples of a franchise
 McDonalds
 Kentucky Fried Chicken (KFC)
 Fish & Chips
 Food lovers
 Filling stations

2.1.2 Advantages and disadvantages of franchising

Advantages of franchising
 It allows businesses to buy a well-known brand which guarantees sales and good return.
 Purchasing a franchise is cheaper than starting a new business.
 Franchising reduces long-term financial risk.
 A business is based on a proven idea and the product and service are tried and tested.
 A franchisee can get support from the franchisor, which often includes training, advice,
and marketing.
 Forms of financing that are not available to the public are often available to franchisees.

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  Purchasing a franchise could be cheaper than starting your own business.
 Businesses are able to use a recognised brand name and registered trademark, which
helps with advertising and marketing.
 The systems/operations/goods and services are well established.
 There is often access to group support from other franchisees and a network of
communication and legal advice.
 Established suppliers give bulk discounts as they form part of a larger group.
 The marketing and advertising costs are shared so they are often lower than for a non-
franchised business.
 Management advice is often provided, so it is not necessary to be a business
expert.
Disadvantages of franchising
 Acquiring a franchise can be an expensive initial layout
 There are often restrictions in the agreement and terms of how the business should be
operated.
 Many creative entrepreneurs feel limited as to how much they can grow/expand their
ideas.
 One poorly performing outlet may risk the reputation of the entire franchise.
 A large portion of profits is paid in royalties, and often the franchisors do not deliver on
their promises.
 It is often difficult to sell a franchise/terminate a contract.
 The start-up cost many be a challenge without assistance from the franchisor.
2.1.3 Contractual Implication of franchising
 The franchisor and franchisee must sign a franchise agreement which is legally
binding on both parties. The agreement must cover the following aspects:
o Confidentiality clause.
o Tax requirements.
o Disclosure documents
o Settlement of disputes
o How to sell or transfer the franchise
o Total investment
o How to deal with trademarks, patents and logos.
o Advertising policies
o The initial duration of the franchise and any renewal rights.
o The policies that govern the product or service.
o Royalties and service fees payable.
o Termination clause and its consequences
o Training and operational support provided by the franchiser
o The obligations of the franchiser and franchisee
o The nature and extent of the rights granted to the franchisee.
o The form of ownership that the franchise will operate under

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2.2 Outsourcing
2.2.1 Meaning of outsourcing
 Outsourcing is when a business buys goods/services from another business to do the
job instead of the business performing the function themselves.
 One of the reasons for outsourcing is that a business may not have sufficient capital to
purchase the equipment to perform a specific function.

Examples of outsourcing
 IT outsourcing
 Legal outsourcing
 Security
 Cleaning
 Recruitment
 Transport
 Staff training
 Call centres
 Computer installation and maintenance
 Accounting functions such as managing salaries and wages.
 Catering services

2.2.2 Advantages and disadvantages of outsourcing

Advantages of outsourcing
 Outsourcing allows the business to focus on important business activities rather support
activities.
 A business has access to resources and equipment for a specific function.
 The production team is often shortened and quality is often improved because
specialists are performing the function for the business.
 A company is able to reduce costs as outsourcing can lead to a decrease in staff,
remuneration, control and operating costs.
 The business can focus on its vision /goals and to apply its staff more effectively in its
core business.
 Improved access to skilled people as the outsourced work will be done by highly skilled
people without the company having to employ them.
 Fixed cost and overhead costs are lower for the business.
 Outsourcing will provide continuity during periods of high staff turnover.

Disadvantages of outsourcing
 Risk of losing sensitive data and the loss of confidentiality
 Risks such as bankruptcy and financial loss cannot be controlled
 Lack of Organizational Learning and innovative capacity.
 Managing the outsource provider could be more difficult than managing employees.

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  Confidential issues could be at risk if the information is given to another company who
performs the function that is outsourced.
 Outsourcing can create a crisis for the business if the outsource provider suddenly
terminates its contract.
 There may be a lack of personal care/quality as the business is not personally involved
in the execution of the function
 Hidden costs and legal problems may arise if the outsourcing terms and conditions are
not clearly defined.
 Losing management control of business functions mean that the business may no
longer be able to control operations
 Not understanding the culture of the outsourcing provider and the location where you
outsource to may lead to poor communication /lower productivity.
 Problems with quality can arise if the outsourcing provider doesn't have proper
processes
 If important functions are being outsourced, an organization is mightily dependent on
the outsourcing provider.
 Outsourcing provider may work with other customers, they might not give full time/
attention to a single company resulting in delays and inaccuracies in the work output.
 Labour unions are opposed to outsourcing, especially where labour brokers are used.

2.2.3 Contractual implications of outsourcing

 A contract will protect and regulate the rights and responsibilities of both parties
involved. Some aspects that may be included in the contract are:
o An exact description of the service/product.
o Duration of the contract
o A detailed description of the duties and the responsibilities of both parties.
o Confidentiality
o Payment terms and conditions.
o Penalties for not delivering the agreed services

2.3 Leasing
2.3.1 Meaning of leasing
 Leasing is the method whereby a business pays for the use of an asset e.g. equipment,
land, material etc.
 The person who owns the asset is known as the lessor
 The lessee is the person who uses the asset.
 The lessor will make the asset available to the lessee, who lease the asset in return for
an agreed amount called leasing charges.
 The leasing fee usually includes a maintenance fee and insurance fee.
 The lessor has to repair /replace the asset if needed.
 This is a method gives businesses the option of obtaining the use of an asset for a
certain period, instead of buying the asset

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 Examples of leasing
 Office equipment
 Vehicles
 Trailer
 Machines
 Clothing rental businesses

2.3.2 Advantages of leasing for the lessor

 Leasing improves the cash flow of the business.
 Leasing is regarded as an expense for the lessee and is therefore not
regarded as debt.
 The lessor receives a continual rental income.
 The lessor can get quantity discount by buying goods in bulk to supply various
lessees.
 The lessor receives a continual rental income.
 The asset can be returned to the lessor when it is no longer needed.
 Makes budgeting and planning easier and it provides better control over cash flow.
 Retains ownership of the asset, which can be sold to recover money at the end of the
lease
 There is no large financial outlay as the cost is spread over a number of months/years.
 The lessor normally covers the maintenance/ replaces any damaged parts or
equipment.
 There are tax advantages as rental payment are calculated as operating costs and
therefor tax deductible.
 It is easy to lease a better/ newer version of the product without the capital outlay.

Disadvantages of leasing
 The lessee does not own the asset.
 The lessor has control over the financial obligation of the lessee.
 Some leases require the lessee to maintain and repair the asset.
 A large amount of money is spent on an asset every month, the total of which is a lot
more than what the asset is worth.
 Maintenance agreements are usually expensive and non-negotiable.
 The agreement cannot be ended without a penalty.
 The lessee is responsible for maintenance even though they do not own the item.
 The total monthly cost can be increased.
 The lessor may not be able to sell the asset after the lease if it has not been kept in
good condition.
 The lessor is committed to the contract and may not reclaim the asset before the lease
expires.
 The lessee is committed to the contract and may have to pay for the lease even if they
have no further use for the item.

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2.3.3 Contractual implications of leasing
 The lease agreement will indicate whether the lessee becomes the owner of the asset
after the lease period for a fee or not.
 The following details must be stated on the lease agreement:
o Names of the parties entering the lease agreement/contract.
o Duration/Period of the lease
o Detailed description of what is being leased.
o Conditions of renewal
o The monthly amount payable
o Any conditions such as deposits, insurance and security
o Details of how the instalment will be calculated.
o Any specific conditions for renewing the lease at the end of the contract period.
o The procedure and liability for legal costs if a dispute arises.
o The procedure if the lessor or lessee become insolvent
o Detail of insurance, maintenance and restrictive use, up-front payment and
instalments.

Example of a scenario on acquiring business avenues

WISE LWAZI VENTURING
Lwazi and his sons have realized that it is not always necessary to start a business from scratch. They
approached an existing business and concluded a contract to be given a right to sell their similar
products within some regulations. The younger son became smarter when he realised that their small
items that require regular maintenance can make money for them by contracting it to another
business. But his billionaire daughter proved to the world that it is effective when a business decides
to focus on its vision and improve their quality by allowing specialists to perform other duties on their
behalf.

 Identify THREE ways of acquiring a business avenue from the scenario above.
Motivate your answer by quoting from the scenario
Use the table below as a guide to answer this question
BUSINESS AVENUE MOTIVATION
1.
2.
3.
 Outline THREE contractual implications of EACH type of acquiring business avenues
identified above
 Discuss the advantages of EACH type of acquiring business avenues identified
above.

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