the business - qualityoperations...jul 01, 2019 · without this knowledge, your business will not...

Basic Economic & Business Principles 1 Importance of SMME’s

Before we can talk about who is an entrepreneur, we first need to understand what entrepreneurship is.

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Consider whether it is possible for business to exist in total isolation. Ask yourself if it is possible for a business to grow and exist if factors such as the customer and his or her needs, competitor activity and prevailing economic and political conditions are not taken into consideration. The answer to these questions should be no: of course it is not possible for any business large or small, to function in isolation. To be successful, a business must stay in contact with the market environment so that it remains up-to-date with changing customer needs, changing technology and competitor activities.

Every business functions within an environment (the business environment) where events and variables influence its activities. These events may pose opportunities or threats. Technological development is a good illustration. On the hand, technology offers opportunities because new products and services are created, while on the other hand, it can constitute a threat because it may result in products or services becoming obsolete.

As an entrepreneur or business owner, you must be aware of environmental variables and changes. With knowledge of these changes, you can develop a plan of action to deal with potential opportunities or threats. Without this knowledge, your business will not survive and will cease to exist.

It is important that you understand some basic business concepts such as the role business plays in a free-market system, how different entities are categorised into branches of industry and production, the different sectors of the economy and how raw materials and products move through these sectors to reach the customer.

THE BUSINESS

A business or enterprise can be described as an independent institution, established by an entrepreneur to make a profit by producing goods or providing


services that satisfy customers’ needs. Therefore, the entrepreneur identifies a customer need and creates a business to produce goods and / or provide services to satisfy that need. The motive for the entrepreneur’s action is to make a profit. In both cases the entrepreneur and the customer benefit from the creation of the business; the customer is able to satisfy his or her needs, while the entrepreneur makes a profit.

Classification of a business and its establishment in the economy

The different sectors in which a business can operate

There are three sectors in which a business can operate:

• The primary sector: This sector is responsible for the exploitation of natural resources in their raw, unprocessed form.

• The secondary sector: In the secondary sector, the exploited natural resources are processed and transformed into products demanded by customers.

• The tertiary sector: This sector is responsible for distributing the final products from the manufacturer to the customer.

Extraction of timber in plantations

Primary sector

Processing of wood pulp

Secondary sector

Manufacture of paper from pulp

Wholesalers

Retailers Tertiary sector

Customers


The business environment

The business environment is the sum total of all the factors and variables that influence the creation, growth and continued existence of the business either positively or negatively, thereby promoting or hindering the achievement of its objectives.

The business environment is usually divided into three components, namely the micro (the internal environment), the market and the macro environment (both part of the external environment). These three components each have a variety of variables that can influence the business either positively or negatively.

Macro Environment

Market Environment

Micro Environment


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The components and variables of the business environment

The micro environment This is the business itself. We can distinguish between the following variables:

• the mission statement and objectives of the business; • the functions of the business; and • the production factors of the business.

The market environment This surrounds the business and is part of the external environment. The main variables include:

• the market; • the competition; and • the suppliers of resources and services

The macro environment The macro environment surrounds the market environment and the business. We can distinguish between the following sub-environments:

• economic environment (economic conditions); • social environment; • technological environment • physical environment • political and statutory environment; and • international environment.

Acronym: PESTLE


The micro environment

The micro environment is the heart of the business. It indicates to what extent the business is able to utilise opportunities or oppose threats in the external environment.

The micro environment is the sum total of all the factors and variables which occur internally in the business and are influenced in a direct or indirect way by management decisions. These factors and variables have a fundamental influence on the establishment and on the growth and continued existence of the business.

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The mission statement and objectives of the business

This is what the business hopes to achieve and the way in which it can be achieved. The mission statement and objectives must correspond with the demands of the external environment.


The functions of the business

• General management: General management differs from the other functions in that it cannot be placed in a department on its own. General management concerns all the activities that are necessary to the very important task of management on all levels throughout the entire organisation.

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• Personnel management: Personnel management includes all the activities concerned with sourcing, development, compensation, integration and maintenance of the personnel of the organisation.

• Operations management: This refers to the management process used in both manufacturing and service operations. Operations management can be described as those management activities that take place so that products and services can be provided to satisfy the needs of the consumer.

• Purchasing management: The purchasing function deals with the procurement of all the resources an organisation needs to achieve its objectives. This includes, among others things, the determination of purchasing needs, the establishment of alternative suppliers who can satisfy these needs and the negotiation of agreements with them to the long-term advantage of the organisation.

• Marketing management: Marketing is the process of transferring goods and services to customers in order to satisfy their needs, as well as the activities that make the transfer possible. Marketing therefore entails more than just advertising products and services; it includes a variety of activities cutting across all functions of the enterprise.

• Administrative management: The administrative function can be defined as being concerned with the service of obtaining, recording and analysing information, and communicating the results to management, who then can safeguard the assets, promote the activities and achieve the objects of the organisation.

• Financial management: Financial management refers to the management of the business’s financial activities. The financial functions therefore include all the activities involved in


obtaining capital and the efficient use thereof. The financial manager is responsible for the effective planning, organising and control of all the financial activities of the organisation.

Production factors of the business

These include the resources available to a business, such as labour, raw materials, capital and entrepreneurship. With these resources the business must utilise opportunities to ward off threats in the external environment. For example, if a business has sufficient capital available, new markets and new products can be explored. On the other hand, a lack of capital may constitute a threat to the business because, unlike its competitors, the business is in a weaker position in the market.

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The influence of management on the micro environment

As the manager of your own business, you will exert a direct influence on the mission statement and the objectives of the business. You will decide where the business is going and what it will do to get there, and establish guidelines for its day-to-day operations.

The market environment

The market can be defined as the link between the business and the environment in which it functions. It surrounds the micro environment.

The market environment is the sum total of all the factors and / or variables which exist externally that cannot be controlled but can sometimes be influenced so that it will have a positive or negative effect on the growth and existence of the business.


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The market environment is surrounded by the macro environment. The market environment therefore does not exist in isolation but in fact influenced by both the micro and macro environments. We can explain this interaction by means of the following examples:

• A new energy drink is introduced to the market. Customers prefer this new energy drink to the existing products (in other words, it is preferred to the competitor’s products).

• A company changes its credit and collection policy. This has an influence on the customer because, for example, some people may prefer to buy on credit, even if they know that the prices are inflated to provide for credit risks (the possibility of bad debts). Some customers may therefore prefer to buy from a supplier like Edgars, which offers credit facilities, rather than Ooh La La, which does not.

The market environment is also influenced by the macro environment. During a downward trend in the economy, for example, customers have less money to spend on luxury items, which will lead to a reduction in the sale of luxury products, such as water features and exotic plants.

Three variables are peculiar to the market environment, namely:

• the market; • the competition; and • the suppliers of resources and services.

The market

Here we refer in an abstract sense to ‘the market’ which concerns the customer and his or her needs rather than the physical marketplace.


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The business manufactures of buys products and / or provides services with the idea of selling these (to either individual customers or other businesses or institutions). However, before a customer can become active in the market, he or she must have financial means (money). These financial means can be used to acquire the available goods and / or services.

The customer has to choose between different goods and services because he or she has limited financial means. It can also happen, however, that although the customer has the necessary financial means, he or she is not prepared to buy the available goods and services.


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Different segments of the market have been identified from this example. Here is a further breakdown.

• The consumer market: This market consists of the end-customers who carry out transactions in order to buy and consume items such as clothing, food or cars.

• The industrial market: In this market, goods and services are purchased and used for the manufacture of products or the provision of services to end-customers. As mentioned above, Croxley buys paper from a paper and pulp business such as Sappi in order to manufacture writing pads, envelopes and cards. A business that manufactures domestic irrigation systems also utilises the industrial market when it buys steel pipes from Steelbank to manufacture its products.

• The re-sale market: In this market, manufactured goods are purchased by businesses with the sole purpose of re-selling them to individuals or other businesses at a profit. Dunrobin Nurseries, for example, buys pot plants to sell at a profit to its customers.

• The international market: International markets exist outside the borders of a country to include all foreign customers, manufacturers, retailers and authorities. For example, European traders buy South African aloe plants on the international market.

• The government market: In order to provide services and carry out its functions, government and municipal authorities purchase a range of goods and services, such as:

o furniture and equipment for use in government schools; o system/s to pay salaries to teachers, the police and government officials; o fire-fighting equipment; or o medical supplies and services.

The Competition


Consider the variety products available today, as well as the number of dealers who sell these products: this is competition. The choice between the different products indicates that there is competition in the market.

Competition boils down to the fact that each business tries to convince consumers that its products and services are the best and that they should therefore buy from this particular business.

As a business, you must be aware of competitor activity because the actions of competitors may constitute a threat to your business. You must be aware of new or improved products on the market. Therefore, it is vitally important to be informed about the competition in the external business environment. You must know who your competitors are, where they are situated (the geographic distribution), the products they offer the market, the quality of the products, the specific markets they serve, what their share on the market is, their financial resources and their general image in the marketplace.

Over and above the fact that business compete with one another’s products and services, we can distinguish between the following types of competition:

The suppliers of resources and services

You must decide which products you are going to manufacture and market, the quantities you can produce and the capital necessary for the project. However, you will be dependent on other institutions in the external environment to carry out your activities because you will not necessarily have the raw materials to manufacture your products. You will therefore have to rely on external suppliers for many products and services.

Here is an example of a business that manufactures wooden planting boxes, which shows how the business interacts with the external environment.

• To manufacture its wooden planting boxes the company must buy wood, tools, glue, nails and various other products. All of these must be bought from external suppliers.

• The business uses water, electricity, communication and other services. All of these must be bought from the external environment, such as Eskom for electricity and Telkom for communication services.

• The business must make use of a bank or other financial institutions so that it can pay wages and salaries and pay suppliers. It may also need a loan at some stage, for instance it is going to expand and build new premises.


• The business managers decide to build a bigger factory. They must use the services of an external property broker to buy the land, and external builders and contractors to build the new premises.

• The larger factory needs additional staff. An external recruitment company is used to fill the new vacancies.

• Finally, the business must sell its wooden planting boxed. To do this, it uses an intermediary – in this case a wholesaler – who markets the product and sells it to a retailer (let’s say Builders Express), who then sell the wooden planting boxes to the end-customer.

The macro environment

The macro environment surrounds the business and its marketing environment. It is made up of a wide range of variables which can affect the business and its marketing activities, either positively or negatively.

The macro environment consists of all the variables and factors outside the business which have a positive or negative influence on the growth and continued existence of the business and which encourage or hinder the achievement of objectives.

The individual business has no control over the macro environment or the variables which operate within it. For example, a business has no control over a rise in interest rates or a change in the exchange rate. However, these changes impact every business in some way.

The macro environment consists of a number of sub-environments which are usually described as ‘variables’ or ‘forces’:

Economic environment (economic conditions)

The economic environment is part of the macro environment consisting of factors which influence the personal disposable income of the customer as well as his or her purchasing behaviour. (The term ‘customer’ is used here in its widest sense; it also includes other businesses). The customers have limited financial means to satisfy all his or her needs and are therefore forced to make choices.

The customer’s disposable income is influenced by many economic factors, for example interest rates and exchange rates, inflation, trade cycles and the economic growth rate.

a) Interest rates

An interest rate is an indication of the price at which money can be bought; in other words, the price at which money is available on the money and capital markets. It the interest rate is 20% per annum for a long-term loan of R100 000, this means that the borrower must pay R20 000 per year (20/100 X R100 000) to secure the loan of R100 000. This is there the price which the borrower must pay for money he or she wishes to borrow.


A rise in interest rates usually results in a decrease in spending. If someone wants to buy a car, for example, he or she will have to pay more to borrow the money and, ultimately, pay more for the car. Suppose the buyer buys a car through hire-purchase financing and interest rates subsequently rise. This means that the buyer’s monthly instalments will also increase and that he or she will pay even more for the vehicle. The bond on a home / land and buildings works in the same way; as soon as the interest rates rise, so do the monthly loan instalments. The opposite is also true.

The South African Reserve Bank is the government bank. Lesetja Kganyago is the current governor of the Reserve Bank. The governor, together with the deputy governors, determine the policy of the bank and lead its board of directors in the same way as does the managing director of a company. A large part of the responsibility of the bank’s activities is in the hands of these officials. They are appointed for a period of 5 years. The Reserve Bank does not render any services to the general public. This bank renders services to the government and provincial administrations only, and a number of general services in the interest of the country. The Reserve Bank renders almost the same banking facilities and services to the state and provincial administration that the commercial banks render to business and the public. The dangers of excessive credit are well known (i.e. inflation) and necessitate credit control measures. It is the function of the Reserve Bank to keep a close watch on the credit structure of the country as a whole and to control the amount of credit carefully. This is done by controlling the supply of money through interest rates. The interest rate which is set by the Reserve Bank is known as the repo rate. If the country wants to stimulate spending in the economy, the Reserve Bank will decrease the repo rate to make lending more attractive. On the other hand, if the country to curb inflation and / or reckless spending, the Reserve Bank will increase the interest rates. If the commercial banks have exhausted their own resources (for instance, when the commercial banks lack cash due to excessive withdrawals by the public), they will borrow money from the Reserve Bank (lender of last resort). The commercial banks will pay interest (repo rate) on the borrowed funds. In turn, the commercial banks will lend money to the public who will also be charged interest. But in this instance, the interest rate is referred at as the prime interest rate; i.e. repo rate + 3.5%.

b) Inflation

Inflation results in a continual rise in the prices of products. This has a depressing effect on the economy because the purchasing power of the rand, and therefore also the purchasing power of the customer, decreases as inflation rises. The customer is able to buy fewer products for the same amount because the value of the has decreased as a result of inflation.

c) Trade cycles


All economies are subject to certain cyclical changes. We can distinguish between different phases in the economic cycle, namely a period of prosperity, followed by a period of recession and depression and then a period of recovery. You should be aware of the phase through which the economy is moving as this influences the management, growth and continued existence of the business. Each phase makes its own demands on the business:

• During a phase of prosperity, the business (the marketing and production divisions) has the opportunity to manufacture and market new products. The business therefore has the opportunity to explore new markets and to expand its share of the market.

• In contrast, during a recession customers’ disposable incomes are lower and they therefore buy less. This has a direct influence on the demand for products and / or services and therefore also on the growth of a business.

• During the recovery phase, the business must prepare itself for the economic growth that will take place and should, for example, pay attention to personnel training programmes, the development of new products and ways to increase its sales and therefore its income.

Social environment

The social environment is governed by the demographics (culture, age, sex, income and occupation – acronym: CASIO) of the population and social and cultural values. We can distinguish between the following demographic variables, all of which have an impact on the market:

• Size and composition of the population

Population growth: The size of composition of the market is directly influenced by the population growth of the country. When considering the size of the population, remember that families have grown smaller over the past few years, and consider what effect this will have on future markets.

Market composition: The market is made up of different ethnic groups. Each group has a distinctive culture (food, clothes, art, traditions, ceremonies, music) and lifestyle.

Changing role of woman: Women make up a large proportion of the labour force today. This has a direct impact on the market because the working woman has different needs from the homemaker. For instance, more working mothers means a greater demand for crèches and nursery schools; families with two incomes have a higher disposable income; the clothing needs of the working women differ from the homemaker; and, finally, working women usually spend more money on time-saving goods such as ready-made foods.


Life expectancy: Life expectancy has increased as a result of better medical services and healthier lifestyles. This means that there are many customers over the age of 60, which presents definite marketing opportunities. For example, in the horticulture industry, they are opportunities to develop garden maintenance packages for this target group.

• Geographic location

Markets in the metropolitan areas are larger and more concentrated, therefore a wider variety of products and services can be marketed and sold in and around the cities. Urbanisation and the depopulation of the rural areas have a direct influence on the distribution of the market.

• Development level of the market

In South Africa today great emphasis is placed on training. Customers are more informed, which means they know precisely what they want and therefore make greater demands on business. The customer is aware of, and stands up for, his or her rights. In order to continue to exist and grow, every business must focus on the needs of customers.

• Other

Social and cultural forces from the macro environment, which must be considered, include the following:

Changing awareness: Customers today are well informed about quality and available options. They are aware of environmental concerns and consider such as aspects whether the manufacturer of the product contributes to pollution or uses scarce resources.

Time: in today’s busy world, the customer does not want to spend too much time on shopping, and will for products that are convenient and save time. Some examples include on-line shopping and the buying of already prepared products.

A further example is the appearance of convenience supermarkets in residential areas; people returning home from work want to be able to buy essentials as quickly as possible. The convenience and longer opening hours of the smaller supermarkets in suburban areas satisfies this need. The same principle applies to one-stop shopping centres: everything the customer wants is available under one roof.

Healthier lifestyle: The current trend towards fitness and a healthier lifestyle is further force the business must note. There is a greater demand for natural foods (without colouring agents and preservatives) and more and more people now growing their own vegetables.


Technological environment

The technological environment includes all aspects which give rise to new or improved products and services being made available on the market.

The combined harvester, today a common convenience, did not even exist 30 years ago. This product is the result of technological development which has influenced commercial farming.

New technological developments or improvements create definite opportunities but they may also constitute certain threats. For instance, the development of the combined harvester has forced the manufacturers of ox drawn ploughs to change their strategies

If a business does not keep abreast of changes taking place on the technological from, it could soon find its products obsolete. Therefore, the wise entrepreneur / manager would do well to make provision for research and development.

Physical environment

The physical environment refers to the natural resources in the country, and incorporates the total management of these resources. Natural resources include gold, coal, diamonds, water, natural forests, etc. The following variables in the physical environment should be taken into consideration:

• Limited and expensive resources

The world’s natural resources are limited and must be managed carefully. Customers today demand that manufacturers recognise these limitations.

This could also create opportunities in two ways:

• for the business to advertise its own environmentally friendly procedures and thereby attract customers; and

• for business opportunities – consider the following examples:

• South Africa currently has problems with the supply of electricity. Many entrepreneurial opportunities arise from this – solar heating for water, energy-saving light bulbs and wind generators.

• South Africa has limited water supplies. Suggestions for entrepreneurial opportunities include a sprinkler system using recycled water or grey water tanks for household use.

• Environment and pollution


Industry if often guilty of air, water and noise pollution resulting from its own manufacturing processes. The effects on this and the role played by industry in combating pollution are receiving worldwide attention.

Manufacturing businesses can play a role by considering such issues as packaging; packaging in plastic or glass is very convenient but has definite disadvantages for the environment.

From time to time poisonous waste products, which are extremely harmful to water and plant life, flow into rivers. The mining of minerals sometimes elicits strong opposition for conservationists, for example, the polemic regarding the mining of minerals in the St Lucia area.

Political and statutory environment

The government of the day influences business through its fiscal (government finances) and monetary policies.

For instance, interest rates have a direct effect on net income; municipal rates affect property tax, and of course the annual budget influences the total economy of the country. The budget is a useful document to study because it gives details of likely future spending and of how income will be generated. Some of the government’s income is obtained from taxed by individuals and businesses.

Variables which influence the individual business include the following:

• Statutory provisions

There are various statutory provisions which businesses must comply with. For example, every business must:

• have a trading licence before it can operate;

• register as taxpayer at the local Receiver of Revenue;

• comply with statutory provisions when concluding contracts; and

• comply with municipal health requirements if it is involved in the food industry.

There are also a variety of statutory provisions aimed at protecting the customer. For example, here are regulations regarding advertising:

• Advertising may not be misleading or contain false information. The Advertising Standards Association controls this aspect very strictly.

• The customer must be properly informed about the product and its composition. This information is usually contained on the packaging.


• The customer must be shown how to use the product, if applicable. For example, instructions for use must be included with all electrical products.

• The customer must be properly informed about product safety requirements.

• Trade unions

Every business has a responsibility towards its employees. There are various laws which help to maintain a smooth relationship between the employer and the employee. Although statutory provisions and regulations protect the rights of the employee, the existence of trade unions is an important variable in the macro environment.

The voice of individual employees can easily be ignored by management. Trade unions fight for the rights of workers who are in the same branch or industry. The employee acquires bargaining power through the trade union, which enables him or her to negotiate, for example, higher salaries or better working conditions. In South Africa there are numerous trade unions, for example trade unions for mine workers, the motor industry, the steel industry and bank officials. If disputes are not resolved or are unfairly resolved, the Labour Relations Act has made it possible to refresh such cases to external mechanisms, such as the Commission for Conciliation, Mediation and Arbitration (CCMA).

• Associations and institutes

In the same way as trade unions look after the interests of organised labour, many business associations and institutes campaign for the interests of businesses in their fields. Earlier we emphasised that a business as little, if any, influence over the macro environment. By means of associations and institutes, a business can promote its interests in the branch or industry in which it functions it if works with other businesses in the same branch of industry.

International Environment

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We have seen that the variables influencing individual business originate from the local sphere (the business itself) and the national sphere (the market and macro environment). Over and above these forces, the business must still keep abreast of variables operating in the international sphere.

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These influences originate in the environment outside the country’s borders and include the following:

a) International technology

South Africa is technologically developed in certain areas, such as the fields of synthetic fuels, mining and veterinary science. However, South Africa also imports technology from other countries.

For example, computer technology from the United States of America and engineering technology from Germany and Japan. This is phenomenon common to all developing countries.

b) International politics

South Africa felt the effect of international politics with the trade sanctions imposed in the mid-1980s. The country did not have access to foreign loan capital, for example, and this had a negative effect on economic growth and job creation.

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c) International economy


Economic factors and variables such as interest rates, exchange rates, the gold price, the economic growth rate, inflation, and the availability of capital and a scarcity of resources occur worldwide and influence the economic conditions of all countries. For example, thing of the effect inflation has had on the economies of Zimbabwe, Russia and Argentina. Amongst other things, high inflation rates resulted in very high food prices in these countries.

The rand-dollar and dollar-euro exchange rates have a significant influence on South African import and export activities. If the rand-dollar exchange rate is weak, the cost of importing goods becomes high for a South African business. An example of his is the cost of overseas textbooks, which are currently expensive because the rand-dollar exchange rate is unfavourable for South African booksellers.


All over the world it has been recognised that the small business sector plays an important, if not critical, role in the economic and social development of a country. The promotion and development of SMMEs is a key focus area of South Africa. The rationale for the promotion of small, micro and medium enterprises (SMMEs) is the potential this sector offers the economy in terms of economic growth and job creation. SMMEs are important to almost all economies in the world, but especially to those in developing countries and, within that broad category, especially to those with major employment and income distribution challenges.

South Africa is undoubtedly characterised by high unemployment and the country is actually facing an unemployment crisis; at least 25% of the population is jobless, with the number increasing to nearly 40% if one includes those that have given up the search for work (discouraged workers and those who are not economically active).

This has been made worse by the fact that over the last two decades, the formal economy (especially mining) has been shedding jobs and many workers were retrenched. As large enterprises have restructured and downsized small, medium and micro enterprises (SMMEs) have come to play an increasingly important role in South Africa's economy and development.

Furthermore, every year hundreds of thousands of new job seekers (the vast majority of them youth) join the army of the unemployed. Employment in eThekwini needs to grow by double the current rate of 2,01% in order to achieve its share of the national targets set by the New Growth Plan and National Development Plan. The unemployment rate for eThekwini was 20,6% in 2103. This will further be exasperated by the more than 150,000 matriculants that sat for their final exams in Kwa-Zulu Natal in 2014. The number of Unemployment Insurance Fund (UIF) applications received in 2014 was also higher than in 2013. This reflects a growing unemployment crisis in the City. It is accepted worldwide that the development and growth of SMMEs can play an important role in turning this situation around.


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http://www.hunterheadline.com.au/business-news/small-business-too-big-to-ignore

Entrepreneurship has proven to be a formidable driver of economic growth in South Africa, with 65% of jobs directly attributable to small business ventures.

The vital importance and positive contribution of entrepreneurship and an entrepreneurial culture in economic and social development cannot be overstated. Entrepreneurs create and bring to life new technologies, products and services and create new markets and jobs along the way. Entrepreneurs are smart risk takers, implementers, rule-breakers; or in a word: innovators. And like any emerging economy aiming to move ahead, in South Africa we need lots of them!

The question of whether large firms or SMMEs create more jobs is answered in the promotion and development of small businesses. SMMEs are more labour intensive than large firms and thus the growth of the SMMEs would result in higher levels of employment and accordingly the expansion of this sector would boost employment and reduce poverty. SMMEs have emerged as a tool for fighting poverty.

South Africa is losing manufacturing jobs to Japan and China. The BRICS agreement which the South African government has signed with China has resulted in an influx of Chinese goods for sale on the local market. This has had a negative impact on the clothing and footwear industry resulting in many of these factories being forced to shut down as they cannot compete with the low prices of the foreign products. This negative impact on big business is an opportunity for small business to fill the gap in the market. SMMEs contribute significantly to the GDP (Gross Domestic Product; i.e. the total value of goods produced and services provided in a country during one year) and take a leading role in creating employment. The SMME sector is a treasure trove of economic potential and job creation ability.

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The small business sector in South Africa has the potential to make a significant contribution to economic growth and employment.

1 SMMEs are numerous Purely from a numerical point of view, the value of SMMEs cannot be underestimated. According to an analysis of the statistic extent of SMMEs in various parts of the world, they represent an average of 92,8% of the total number of enterprises in 17 countries. Besides their numbers, SMMEs play an important part in the provision of jobs, gross domestic product and turnovers. Of more than 800 000 formal enterprises in South Africa, an estimated 91% or 720 000 can be considered to be SMMEs.

2 SMMEs provide employment and create job opportunities

http://www.whatamimissinghere.com/archives/37566/105961-job-creation-by-randall-enos-cagle-cartoons

Contrary to big enterprises which are characterised by mass production and need huge amounts of capital, SMMEs are particularly labour intensive. In South Africa, which has a high population growth and unemployment rate, a system of production by the masses is more beneficial that a system of mass production. International trends reveal that big business is no longer generating jobs. In fact large corporates have been forced to downsize to remain competitive. Big businesses in South Africa have been forced to follow the pattern of investing in high technology and employing fewer people in order to compete and survive. The ranks of the unemployed are thus, in fact, increasing through retrenchments. The prospects of employment for school leavers and the unemployed are not good and they will have to look towards self-employment for survival. SMMEs are taking over a big portion of the labour force, especially in outlying areas, where circumstances do not justify large enterprises. An analysis of the statistical data of various countries indicates the special capacity SMMEs have to provide jobs and create new job opportunities. SMMEs account for the majority of employment in the South African economy. SMMEs contribute about 40% of South Africa’s GDP and employ more than half of the private sector workforce. It is estimated that 80% of new jobs in world economies are being created by SMMEs, making small business a key player in the future growth of our country. Due to a more personal and intimate relationship between employer and employee, the labour relations in SMMEs are better than those in large enterprises. Employment and job creation by the SMME sector benefits socio-economic development and ensures a healthy balance of economic growth in urban and rural areas.

3 They promote economic stability and better distribution of activities

With an effective economic strategy, business cycle fluctuations can be lessened. A large number of SMMEs, which offer a wide variety of products and services, could make an important contribution to a decrease in business cycle fluctuations. SMMEs are usually widely spread which


http://mrshearingeconomics.weebly.com/economic-cycle.html

https://harleychua.files.wordpress.com/2012/04/inflation2.jpg

contributes to the economic stability of developing areas and the country as a whole. In the most basic terms, business cycles refer to fluctuations in the economic growth of a nation's economy. Sometimes, business cycles are simply referred to as ups and downs in the economy. These alternating periods of prosperity and hard times have taken place over a long period in which the trends in real output, employment, and the standard of living have been upward. During this long history booms and busts have occurred quite irregularly; their duration and intensity have been so varied that it is better to think of them as economic instability than regular business cycles. Two principal problems arise from the instability of the economy;

a) The unemployment that accompanies a downturn in the level of economic activity in the economy. The typical cyclical pattern is: 1) peak; 2) recession; 3) trough and 4) expansion. Economists think that the changes in the levels of output and employment are largely the result of unexpected changes in the level of total spending in the economy. These economic shocks require difficult adjustments to be made by households and businesses in the economy, but such adjustment are not easily or quickly made because prices tend to be sickly. For example, if total spending unexpectedly falls and prices are relatively fixed, business will not be able to sell their output and have to cut back on production. As a consequence, GDP falls, income falls, unemployment rises, and the economy moves in recession. Unemployment poses both an economic and non-economic costs.

b) The second major problem that results from economic instability is inflation. Inflations is an increase in the general (or average) level of prices in an economy. It does not have a unique cause; it may result from increases in demand and / or from increases in costs. Inflation may impose a real hardship on different groups in our society. Inflation arbitrarily redistributes real income and wealth in the economy. Unanticipated inflation hurts those on fixed incomes, those who save money, and those who lend money.

The widespread industrial action has come at a high cost to our economy and, in addition, the rand depreciation, sluggish Eurozone recovery and the projected slowdown in China’s economy is also impacting on South Africa’s economic growth.

4 SMMEs innovate and take initiative

http://www.teleanalysis.com/news/telecom-italia-leads-innovation-incubates-220-start-ups-11370.html

SMMEs have more freedom and initiative to realise their aims and this means that they can be innovators of new products, ideas and techniques. SMMEs service their own interests, are motivated and strive to improve. They constantly contribute to the product development of consumer goods and often show the way to new fields of development. The creative nature of a typical entrepreneur promotes this process. As a result of a shortage of capital, person power and equipment, many innovations are born from need. Economists consider innovation as a prerequisite for advancement in any country.

http://mrshearingeconomics.weebly.com/economic-cycle.html

http://www.engineeringnews.co.za/topic/china

http://www.engineeringnews.co.za/topic/south-africa


5 Sub-contractors for big industry

http://www.consumerbuild.org.nz/publish/trades/tradespeople-choosingsubbies.php

All enterprises, big and small, are interdependent. Manufacturers of mass products are largely dependent on SMMEs for servicing and distributing their products. In South Africa, the process of sub-contracting is gaining momentum. An example of co-operation between big and small enterprises is Toyota which purchases a large percentage of its parts from independent SMMEs such as Smiths Manufacturing (a Pinetown based manufacturer and assembler of automotive air-conditioning and engine cooling components), Toyota Boshoku, (based in Umbogintwini on the South Coast, supplies seats and door panels) and Corenet (a New Germany based manufacturer of copper/brass radiators). In Japan, 60%of all SMMEs are involved in sub-contracting by delivering components to large industries. Sub-contracting in Japan is promoted by the government by awarding orders to SMMEs. Many previously state-owned business such as Spoornet, Telkom and South African Airways have privatised. Private businesses are profit-driven which has resulted in large-scale retrenchments and the closure of certain departments. Although these departments have closed down, the services are still required which has resulted in them outsourcing to SMMEs.

6 SMMEs promote free competition

The large number of SMMEs contributes to healthy price competition. In no place is the operation of a free market system demonstrated better than in the freedom of the entrepreneur and SMMEs. Entrepreneurs have the opportunity to enter the business world of their own free will, developing, decreasing or even terminating their enterprise if they wish.

http://gerardlameiro.com/thoughts/characteristics-of-a-free-market

7 They fulfil a socio-economic role

All over the world it has been recognised that the small business sector plays an important, if not critical role, in the economic and social development of a country. SMMEs offer a wide choice and high standard of personal service and products. It is often difficult for bigger enterprises to fragment in such a way that they can meet all the requirements, tastes and preferences of consumers.

http://gerardlameiro.com/thoughts/characteristics-of-a-free-market


http://www.sedisa.co.za/contents/whatis.html

In providing employment SMMEs contribute toward the social upliftment of the inhabitants of a country by improving their standard of living.

8 SMMEs are flexible and adaptable

http://www.colinmcnamara.com/vspex-emcs-flexible-reference-architecture-explained/

Entrepreneurs and SMMEs can quickly react (flexible) to market changes, because of the smaller size and simplicity of SMMEs, they are able to adapt quickly and effectively to changes around them and make timeous decisions. They are usually able to adapt quickly to changes in demand and new production techniques.

New products and services have to constantly introduced and old products re-engineered as:

• fashion changes • technology changes • introduction of substitutes • cheap imports • people become more price sensitive due to a

more expensive standard of living, a larger variety of choices, inflation, etc.

• changes in tastes and habits • quality of products and services • after-sales service • product integrity • competition

9 Labour absorption capacity

http://www.nobelprize.org/educational/economic-sciences/trade/ohlin.html

Big business in South Africa are unable to support large work forces as in the past. SMMEs, however, being labour intensive, have the capacity to provide work for high numbers of people.

http://www.google.co.za/imgres?q=the+product+life+cycle&hl=en&biw=1366&bih=587&gbv=2&tbm=isch&tbnid=kLlAJdCNHIcdlM:&imgrefurl=http://www.12manage.com/methods_product_life_cycle.html&docid=BaDYznPkC3Sk_M&imgurl=http://www.12manage.com/images/picture_product_life_cycle.gif&w=447&h=302&ei=ZZGnT924DazZ4QT-6-m_CQ&zoom=1&iact=hc&vpx=548&vpy=145&dur=11404&hovh=184&hovw=273&tx=90&ty=88&sig=112951645268168050852&page=1&tbnh=105&tbnw=155&start=0&ndsp=21&ved=1t:429,r:3,s:0,i:77


http://www.businesspartners.co.za/media-room/posts/south-african-smes-confidence-slowly-mend-1520/

http://www.quotehd.com/quotes/words/initiatives

THE FUTURE FOR SMALL BUSINESSES


http://www.prnewswire.com/news-releases/ssi-quickpoll-reveals-business-optimism-for-2015-300018812.html

South Africa remains a land of opportunity for the entrepreneur that is prepared to do his homework and take a few calculated risks. It has been said that economic development is directly related to the level of entrepreneurial activity in any country. This is because there simply aren’t enough regular jobs to go around, and people who would otherwise be unemployed, have to make money to live. Not only that, entrepreneurial development also adds value to society as a whole. The future of South Africa's economy lies in the small business sector, as this is where the potential for job growth is highest.

The promotion of SMMEs are at the forefront of the South African government’s policy initiatives.

In conclusion, we can say that the small business sector in South Africa has the potential to make a significant contribution to economic growth and employment. It is through innovation that better service and increased employment becomes a natural consequence. The socio-economic importance of SMMEs cannot be underestimated; SMMEs must be nurtured, promoted and supported.

the business - qualityoperations...jul 01, 2019 · without this knowledge, your business will not...

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